KPMG launches Economic Substance Tool to assist local businesses

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KPMG have launched a new software tool designed to assist organisations with a significant number of client entities in dealing with the requirements of the recently introduced economic substance rules.

This comes hot on the heels of the Isle of Man Income Tax Division releasing both the updated online company income tax return form and accompanying guidance notes, the content of which mainly deals with the impact of these new rules.

The guidance notes make clear that when filing tax returns for periods ending on or after 31 December 2019, Isle of Man tax resident companies within the scope of the substance rules are required to confirm whether they consider themselves to have had adequate substance in respect of the period.  Where such a company is found not to have had adequate economic substance, either in the company’s own opinion or as a result of an investigation by the Income Tax Division, penalties of up to £10,000 (or £50,000 for high-risk IP companies) may be applied, with the level of potential penalties increasing in cases of repeated failure to comply with the rules. Other potential sanctions include the automatic exchange of certain company information with tax authorities in other jurisdictions and, ultimately, company strike-off.

“Economic substance is here to stay and with the Isle of Man Income Tax Division now having released the new company tax returns it is imperative that affected businesses understand how they should complete them and what this means for them in the context of the economic substance rules. As many companies will now be in their second period to which the rules apply, the stakes are getting higher”, warns Robert Rotherham, Tax Director at KPMG LLC. “As well as the new tax returns earlier this month, the Income Tax Division issued their final guidance on the application of the substance rules themselves in November, such that we wouldn’t expect there to be any further formal guidance published any time soon – companies should thus ensure that they understand their position and take any necessary action without delay.”

Economic substance rules have also been introduced in other low and no tax jurisdictions, such as the Channel Islands, the British Virgin Islands, Bermuda and the Cayman Islands.

“Our new Economic Substance Tool has been designed to assist businesses in monitoring and recording their client entities’ status under the applicable substance legislation whilst also providing a central location in which to store all related supporting evidence”, said Clare Kelly, Senior Tax Manager. “Compliance with the economic substance rules is tested annually and therefore businesses are required to regularly review their clients’ position. Being able to demonstrate an ongoing audit trail whilst keeping up with ever-changing regulation across multiple jurisdictions can be an onerous task for businesses, so ensuring they are well-equipped to meet the challenge is key.”



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