GBGC wrote recently about the new global trends in taxation which are being introduced by governments to ensure that companies’ profits are taxed. Governments’ intention, through organisations like the OECD, is to prevent companies creating structures that let them avoid tax by claiming to be based in a jurisdiction that offers a tax advantage. One central concept in these new tax initiatives is that of “substance” and it could determine how the world’s offshore tax jurisdictions will look in the future.

A key question in determining where a company should pay various taxes will be “Does a company have substance in the jurisdiction where it claims to be based?” Substance could be measured by numbers of staff, real operations, economic activity or value creation – the last two of which could be open to interpretation and dispute. If a company is not deemed to have substance in a jurisdiction where it claims to be based then other governments could arbitrarily take the view that it is avoiding tax and instead has a permanent establishment in the country where it is actually “doing business” and will be liable for local taxes accordingly. 

Such tax decisions could have a serious impact on the offshore, island economies which are often home to a large number of companies but sometimes not so much substance (or employees) behind those companies. If “substance” is to be a crucial determining factor, it will be more difficult for some island economies to create substance than for others. Certain offshore jurisdictions simply don’t have the infrastructure to support physical business operations or more employees, whilst others currently have restrictions on residency. In the future, lifestyle decisions for prospective employees could be as important as an offshore jurisdiction’s tax rates. 
Ibiza is one island economy that has taken steps to attract more entrepreneurs and a recent article in the Financial Times (23 March 2015)* highlighted some of the reasons for the island’s success.
Firstly, the article states that part of the success has come because the local government “has made an effort to take Ibiza upmarket and encourage high-end enterprises”. 
The introduction of direct flights between Ibiza and London’s City airport means that it is now possible “to fly to London on Sunday afternoon, work the week and fly back on Friday in time for supper by the pool.”
The modern lifestyle of the entrepreneur is also being aided in Ibiza by the building of “new lock-up-and-leave properties” in the island as well as international schools and colleges, including one that teaches the UK curriculum and the Collège Français d’Ibiza, which is partly funded by the French government. 
Of course, Ibiza’s location in the Mediterranean and its average of 300 days’ sunshine per year do boost its attraction as a place in which entrepreneurs wish to be based but as the FT article comments, “the culture, the weather, the sheer buzz of the place give it immense appeal to those who want to live outside the metropolis”. But if governments continue to increase the pressure on company tax structures and demand “substance” in a company’s location, then the lifestyle offered by a jurisdiction will be ever more important to corporate decisions. 
*Ibiza’s houses for all seasons
Caroline McGhie, 23 March 2015