Labuan Urged to Adapt to BEPS by Removing Harmful Tax Offerings

(Tax-News) -- Muhammad bin Ibrahim, the Governor of the Central Bank of Malaysia, has stressed the need for Labuan to review its international tax framework in light of the OECD's work on Action 5 of the base erosion and profit shifting project, on harmful tax practices.

Speaking on October 27 at the Labuan Industry Annual Dinner 2017, he said: "There have been significant advancements with respect to international taxation practices. Authorities are now more proactive in seeking to mitigate the distortionary effects of harmful tax competition on the allocation of resources and its negative implications on national tax bases."

He added: "In addition to that, work has commenced on reviewing respective jurisdictions' preferential tax regimes against the standards outlined, to combat harmful tax practices. The standard [under Action 5], which forms one of the four BEPS minimum standards, will require authorities to step up on transparency and substance rules for geographically mobile activities, such as financial services. It seeks, for one, to prohibit the shifting away of income into preferential tax regimes where businesses have little or no economic activity. Such international developments will directly influence IBFC's business model going forward."

He was discussing proposals from the OECD that countries should offer tax incentives to taxpayers only to the extent that substantial economic activities take place within their territory, under Action 5 of the BEPS Action Plan. The BEPS Action 5 standard covers tax incentives – preferential tax regimes – that apply to mobile business income, such as financial and services income and income from intellectual property, which multinationals can shift with relative ease.

In an October 2017 progress report, which took stock of countries' reforms to implement reform in this area, the OECD said, so far, 102 members of the BEPS Inclusive Framework have made significant commitments to ensure that their tax regimes meet the standard. 164 regimes have been reviewed by countries party to the peer review framework, with just nine that were deemed non-compliant and still to be amended. 93 countries' regimes were found to have been aligned with the BEPS standard.

He said that the purpose of aligning Labuan's tax framework with the BEPS Action 5 standard "is not only to ensure alignment with international best practices, but to confirm the continued relevance of such incentives in catalyzing new growth areas." He said reviewing the tax incentives would preserve Labuan's international business financial center's reputation and competitiveness.

"Tax incentives for businesses, which have become irrelevant should be rationalized," he said. "The allocation of any preferential tax treatment must be supported by clear value propositions that are systematically measured across the qualifying period."

He stressed that "the intended outcome of the revised tax structure would enhance the economy of Labuan with balanced development. The revised tax regime should also improve regulation, compliance, and prevent tax leakages." He concluded: "The world that we live in – since the creation of offshore Labuan in the 1990s – has drastically changed. What was relevant then is no more relevant now. We have no choice but to change with it."

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