BEPS Action 3 – Strengthen CFC Rules
BEPS Action 3 “Designing effective controlled foreign company rules” aims to develop recommendations regarding the design and strengthening of controlled foreign company (CFC) rules, to address concerns over the possibility of creating affiliated non-resident taxpayers and routing income of a resident enterprise through the non-resident affiliate to reduce or avoid taxation.
The Final Report on BEPS Action 3 sets out best practices (and not minimum standards) in the form of six building blocks for the design of effective CFC rules:
- Definition of a CFC;
- CFC exemptions and threshold requirements;
- Definition of income;
- Computation of income;
- Attribution of income; and
- Prevention and elimination of double taxation.
Australia’s response BEPS Action 3
The Australian CFC rules are considered stronger than the OECD standards. No action is expected.
This report sets out recommendations in the form of building blocks for effective CFC rules. The recommendations are designed to ensure that jurisdictions that choose to implement them, have rules that effectively prevent taxpayers from shifting income into foreign subsidiaries. The report sets out the following six building blocks for the design of effective CFC rules: (1) definition of a CFC, (2) CFC exemptions and threshold requirements, (3) definition of income, (4) computation of income, (5) attribution of income, and (6) prevention and elimination of double taxation. Because each country prioritises policy objectives differently, the recommendations provide flexibility to implement CFC rules that combat BEPS in a manner consistent with the policy objectives of the overall tax system and the international legal obligations of the country concerned.