As highlighted by the Panama Papers, Paradise Papers, and Pandora Papers, offshore structures and shell entities have long been used by individuals and multinational groups to reduce their effective tax burden. According to OECD estimates, between USD 100 and 240 billion in tax revenue is lost each year globally through base erosion and profit shifting (BEPS), representing 4–10% of global corporate income tax revenues. In response, the OECD and G20 launched the BEPS initiative to address these structural weaknesses in international taxation.
Through the OECD/G20 Inclusive Framework on BEPS, now comprising over 140 jurisdictions, governments continue to collaborate on the implementation, monitoring, and refinement of BEPS standards. These efforts have moved decisively from policy design into ongoing enforcement, peer review, and data-driven supervision.
The BEPS package consists of 15 Actions that provide jurisdictions with tools to curb tax avoidance, improve transparency, and ensure that profits are taxed where economic activity and value creation occur. For businesses, the framework aims to reduce uncertainty by clarifying expectations and harmonizing reporting obligations across jurisdictions.
One of the key components of BEPS Action 5 focuses on the substantial activities requirements in no- or only-nominal tax jurisdictions (NTJs), commonly referred to as economic substance rules. These requirements assess whether entities established in low- or no-tax jurisdictions have genuine economic activity or exist primarily to shift profits.
Under the Action 5 standard, NTJs must collect information on entities engaged in geographically mobile activities, such as intellectual property holding, financing, headquarters functions, and other service activities. Where certain risk conditions are met, jurisdictions are required to spontaneously exchange information with relevant tax authorities, including those of the immediate parent, the ultimate parent, or the ultimate beneficial owner.
The objective is straightforward: to identify situations where entities are established in NTJs without sufficient people, premises, expenditure, or decision-making capacity, and to ensure that this information reaches jurisdictions where tax consequences may arise.
Historically referred to as “tax havens” in the OECD’s 1998 report Harmful Tax Competition: An Emerging Global Issue, no or only nominal tax jurisdictions were identified based on four key factors:
As of 2026, 12 jurisdictions remain within the scope of the NTJ substantial activities framework:
Since 2019, all of these jurisdictions have introduced economic substance legislation, and since 2020, they have been required to conduct spontaneous exchanges of information under the OECD’s Common Transmission System (CTS). The Forum on Harmful Tax Practices (FHTP) conducts annual monitoring to assess both legal frameworks and effectiveness in practice.
The fourth annual monitoring results, approved in January 2025, confirm that all 12 jurisdictions meet the legal standard, with targeted follow-up focusing on compliance programmes, statistical data, and exchange timeliness in a limited number of cases.
Entities subject to NTJ reporting and potential exchange generally fall into two broad categories:
IP assets such as patents, trademarks, or software are transferred to an entity in an NTJ. Licensing or royalty income is then routed through that entity, potentially reducing taxation in higher-tax jurisdictions unless substance requirements are met and information is exchanged.
These include activities that can be relocated with limited physical presence, such as financing, fund management, headquarters functions, or certain service centers. Without sufficient personnel, expenditure, and governance locally, these structures are considered higher risk under Action 5.
The NTJ framework operates through spontaneous exchange of information (SEOI) under BEPS Action 5. When an entity:
the jurisdiction must prepare and exchange structured information using a standardized XML schema and transmit it through the OECD Common Transmission System (CTS).
Exchanges may occur:
In many scenarios, exchanges follow a two-step approach: an initial dataset is transmitted to allow recipient jurisdictions to identify the entity, followed by additional information upon request where foreseeably relevant.
Despite significant progress, several operational challenges remain:
These challenges are acknowledged by the OECD and reflected in ongoing refinements to guidance, templates, and peer review criteria.
Jurisdictions have generally adopted one of two strategies:
Entities submit detailed substance information every year, allowing authorities to capture changes in ownership, activity, or risk profile, but creating processing bottlenecks.
Information is collected upfront and updated only when circumstances change, reducing annual reassessment burdens while increasing reliance on accurate change-of-circumstance reporting.
Both approaches are subject to ongoing peer review, with particular emphasis on effective monitoring and timely exchanges rather than formal compliance alone.
The key shift by 2026 is that NTJ is no longer experimental. According to the OECD’s 2025 peer review results:
NTJ has effectively become part of the standard global tax transparency infrastructure, alongside CRS, CbC reporting, and exchange of rulings.
As NTJ reporting under BEPS Action 5 moves into a phase of routine enforcement, tax authorities face a growing operational challenge: collecting economic substance data at scale, reviewing it consistently, and exchanging it securely and on time with partner jurisdictions.
Trans World Compliance (TWC) supports tax authorities in reporting and exchanging NTJ information through a fully automated NTJ (Economic Substance) module, designed specifically to align with OECD requirements and the Common Transmission System (CTS).
TWC’s NTJ module enables tax authorities to:
The NTJ reporting process supported by TWC typically follows a structured flow. By automating the steps, the NTJ module helps tax authorities reduce manual processing, improve data consistency, and meet OECD expectations around effectiveness in practice, particularly in relation to timely and accurate exchanges of information.
In this sense, NTJ reporting becomes part of a broader transparency infrastructure, sitting alongside CRS, CbC reporting, and other BEPS-related exchanges, rather than operating as a standalone or ad-hoc process.
The OECD’s work on NTJ under Action 5 has significantly reduced the scope for purely paper-based offshore structures. While implementation remains complex, the framework has succeeded in forcing substance considerations into jurisdictions where they previously did not exist.
As BEPS enters its second decade, NTJ should be viewed not as a standalone regime, but as a complementary risk-identification layer that supports domestic enforcement, CFC rules, and anti-avoidance measures globally.
The remaining challenge is not whether NTJ works, but how efficiently it integrates with other data streams and how jurisdictions continue to refine it without creating unnecessary administrative friction.
If your jurisdiction is reviewing its economic substance processes, strengthening exchange readiness, or preparing for ongoing peer review, our team can support a practical assessment of your NTJ reporting and exchange framework.