Earlier this month, the new Toolkit on the Taxation of Offshore Indirect Transfers (OIT) launched that has the potential to plug loopholes, which deprive developing countries of billions of dollars each year.

The toolkit was produced by the Platform for Collaboration on Tax (PCT)—a joint initiative of the United Nations, the International Monetary Fund, the Organisation for Economic Cooperation and Development and the World Bank Group.

What is an "Offshore Indirect Transfer" and why does it matter?

An offshore indirect transfer is any arrangement where the full or partial interest in an asset switches hands via an intervening entity that does not reside in the country where the asset is located.

When such transfers occur offshore, multinational companies can accrue capital gains while escaping taxation. By not taxing their profits, host countries risk losing out on billions in capital gains tax. This is particularly true for resource-rich developing countries whose economies rely heavily on extractive industries.

International treaties can motivate efforts to tax offshore indirect transfers, but ultimately only domestic law can put them into force. There is no one approach that would fit all, but practical guidance is needed to enhance tax certainty and coherence. Otherwise, developing countries leave a critical source of revenue untapped.

Enter the new Toolkit on the Taxation of Offshore Indirect Transfers. The specifics of the toolkit are not meant to be binding. Rather, it presents two models of taxation that countries can implement.

The toolkit also examines instances when countries took unilateral action to tax offshore indirect transfers. In three highly publicized cases involving India, Peru and Uganda, tax authorities of these developing countries claimed $2 billion, $482 million and $85 million respectively in capital gains tax revenue. Although each source country effectively lost in court, the cases demonstrate growing efforts to confront offshore indirect transfers.

The middle ground between international and domestic tax law is tricky to navigate. This toolkit, however, will prepare any tax authority interested in amending its legal system to counter evasive tax behaviour.