KPMG have designed a dynamic Economic Substance Tool in order to assist clients to assess their requirements under the new economic substance rules in a number of jurisdictions.
The KPMG Economic Substance Tool (“the Tool”) has been designed to assist the user to:
- Determine whether a certain entity satisfies the gateway conditions to be subject to the economic substance requirements and identify the relevant activities (if any) that apply.
- For entities subject to the economic substance requirements, the Tool will ask a tailored series of questions to assess the likelihood the entity will pass the applicable test. The results will be presented with a form of risk rating identifying any areas of concern.
- It will provide you with the option to upload back up information to support the answers provided which will assist with your internal review process.
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The Tool can be completed on an estimated basis at any point during a year, then updated multiple times throughout (and after) the year with additional data as it becomes available.
A dashboard displays the current position for all entities, enabling it to be used as a management tool in conjunction with the policies in place to ensure compliance with the requirements for each entity.
Risk Categories
For each entity, the Tool will identify the following risk categories:
Green
These are the entities that are outside the scope of the economic substance requirements.
Light Amber
These are entities that are within scope of the economic substance requirements, however, based on the answers provided are likely to pass the applicable economic substance tests, i.e. pass the directed and managed test, pass CIGA test (performs CIGA in relation to each relevant activity undertaken and has supporting evidence of this) and pass the adequacy test. These entities of course need to be monitored as there will be a reporting requirement.
Dark Amber
These are entities that are within scope of the economic substance requirements but based on the answers provided there are certain aspects of the applicable tests that the entity does not meet, e.g. pass CIGA (performs one CIGA in relation to each relevant activity undertaken and has supporting evidence of this) but fails an aspect of the directed and managed test. The Tool will identify the issues so that you can rectify matters where possible. The expectation is that you will be able to help your clients to resolve these matters without having to receive substantial third party advice, although we will always be available to assist.
Red
These are entities that are within scope of the economic substance requirements but fail the tests or are other very high risk entities, e.g. High Risk IP companies. It is anticipated that these entities will need to engage external advisers to provide appropriate guidance on the next steps.
By using the Tool it will be possible to target the Dark Amber and Red entities, in order to make the necessary remediations to improve the likelihood of these entities meeting the economic substance requirements.
The Tool will provide an audit trail of the changes that occur throughout the year and a report can be prepared at any time setting out the analysis for each entity along with its risk rating. A dashboard will present this information in real-time, facilitating an appropriate controls environment.
The introduction of economic substance rules marks a major change in the tax obligations falling on entities in the so-called '2.2 jurisdictions'. Entities need to engage with these rules to ensure they meet their obligations or risk facing significant penalties. The KPMG Economic Substance Tool helps entities meet the practical challenges of the economic substance rules - identifying their obligations, assessing the likelihood of compliance and collating relevant information for subsequent submission of returns - all housed within a software tool that has management review and control processes built into it's core.
