Part 5/8:
The core of these reforms hinged on the enforcement of economic substance rules. Under this new framework, companies establishing offshore entities faced questions about the legitimacy of their business operations. For instance, tax authorities now demanded clear evidence of operational presence, such as physical offices and local employees, to justify tax breaks.
Additionally, transfer pricing rules came into play, controlling how businesses charged between their subsidiaries to avoid artificially inflating expenses. Auditors would compare intercompany transactions with market rates to ensure legitimacy, effectively nullifying previous manipulation tactics.