Impact on clients
Despite these variations, for many of the jurisdictions with substance legislation, the regulations have been bedding into the consciousness of practitioners and clients for some time, with first reporting now taking place.
Nonetheless, says Carey, ‘The challenges brought about by economic substance are primarily in the form of additional compliance hurdles and the costs associated with them, which can be extensive and time-consuming.’
She adds, ‘For those entities that have determined they will not meet the new requirements, further steps in order to do so will be required, also at great cost and inconvenience if the entities have not previously had strong connections with the jurisdiction [in which they are proving economic substance].’
Indeed, experts have speculated that requirements may lead to companies migrating between jurisdictions as businesses are looking to which jurisdiction is the easiest in which to demonstrate substance, given their operations, their directors’ geographical locations and their intellectual property assets.
Brown also notes the cost of the additional compliance burden, but comments that there is a further challenge in the very basis of economic substance requirements itself.
‘In my opinion, two of the largest challenges are the somewhat antiquated views of how businesses operate and what constitutes substance,’ he says. ‘At a time of increasing globalisation and virtualisation of business, it is perverse to introduce measures based on bricks and mortar or physical staff locations as the sole arbiter of substance.’
Compliance during COVID-19
These issues have, however, recently paled in comparison with the major hurdle of 2020: the COVID-19 pandemic. Especially in terms of providing evidence of physical presence in a particular jurisdiction, many businesses have been hampered by global travel restrictions resulting from the health crisis, which has seen months of an almost-global lockdown.
As a consequence, many jurisdictions have been forced to re-examine their requirements and, in some cases, introduce emergency legislation, taking into account the impact of COVID-19. Carey comments that the Cayman Islands government moved to reassure businesses: ‘The Department for International Tax Cooperation acknowledged that COVID-19 may affect the ability of some entities to hold their board of director meetings in Cayman during the year. It confirmed that where board of director meetings are required to be held virtually during this period of uncertainty, it would take that into consideration on a case-by-case basis when determining whether an entity has passed or failed the economic substance test in its 2021 reporting.’
In March, Bermuda, Guernsey and Jersey all announced pragmatic approaches to reporting during the pandemic, advising companies to maintain and retain relevant records showing what their policy was in respect of restrictions on travel for the company officers and the period of time for which that policy was in place.
The BVI International Tax Authority issued guidelines to help businesses based in the jurisdiction meet the requirements, advising companies to appoint alternative directors in the BVI where possible, noting that not all directors had to attend board meetings in the BVI and allowing virtual meetings.
In August, the Bahamas’ Ministry of Finance announced that entities subject to the rules would be regarded as compliant with the ‘direction and management’ test if they could show that board meetings could not be held physically in the jurisdiction due to related travel restrictions, with adequately documented virtual board meetings sufficing.
‘The impact has been less on regulation and more on working practices,’ says Alasdair McLaren TEP, Head of Private Wealth at IQ-EQ Guernsey. ‘We have all embraced the use of electronic signatures and the flexibility that can come from homeworking. The authorities have accepted that physical board meetings are simply not practical, nor necessary, in an era of homeworking and the pandemic has fast-tracked such efficiencies.’
Ultimately, the trends show that requirements such as economic substance regulation are likely to expand to cover the majority of jurisdictions globally, and, regardless of the impediments of the current global situation, clients and practitioners will need to adjust their compliance and reporting accordingly.
But the pandemic has certainly raised new questions, says Brown: ‘It has illustrated the flaws in the logic of looking to physical presence as a measure of economic substance, where remote working practices have become the norm. They have in no way weakened the degree of management and control that a board can exercise over a company, regardless of where individual board members happen to be physically located at any one time.’
News Source：【STEP 2021/01/13】