Base erosion and profit shifting

Base Erosion and Profit Shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. This practice erodes the tax base of high-tax jurisdictions, leading to significant revenue losses for governments worldwide.

Overview

BEPS strategies are employed by multinational enterprises (MNEs) to minimize their tax liabilities. These strategies take advantage of differences in tax laws between countries, allowing companies to shift profits to jurisdictions with favorable tax regimes. The OECD and the G20 have been at the forefront of efforts to address BEPS, recognizing its impact on global tax fairness and economic stability.

Key Concepts

Profit Shifting

Profit shifting involves the allocation of income and expenses between different parts of a multinational group to reduce the overall tax burden. This can be achieved through:

• Transfer pricing manipulation
• Strategic location of intellectual property
• Use of intra-group financing arrangements

Base Erosion

Base erosion occurs when taxable income is reduced through excessive interest deductions, royalty payments, or other financial arrangements that shift profits out of high-tax jurisdictions.

OECD BEPS Project

The OECD BEPS Project was initiated to develop a coordinated international response to BEPS. The project resulted in the BEPS Action Plan, which includes 15 actions designed to:

• Ensure coherence of corporate income taxation at the international level
• Reinforce substance requirements in international standards
• Improve transparency and certainty

BEPS Actions

Some of the key actions include:

• Action 1: Addressing the tax challenges of the digital economy
• Action 5: Countering harmful tax practices
• Action 13: Transfer pricing documentation and country-by-country reporting

Impact on Developing Countries

Developing countries are particularly vulnerable to BEPS due to their reliance on corporate income tax and limited capacity to address complex tax avoidance strategies. The OECD has worked to include these countries in the BEPS discussions and provide support for implementing BEPS measures.

Criticism and Challenges

While the BEPS initiative has been widely supported, it faces criticism and challenges, including:

• Complexity and cost of implementation
• Potential for increased tax disputes
• Concerns over national sovereignty in tax matters

Conclusion

Addressing BEPS is crucial for ensuring that tax systems are fair and that MNEs pay their fair share of taxes. The OECD BEPS Project represents a significant step towards achieving these goals, but ongoing international cooperation and commitment are essential for its success.

See Also

• Tax avoidance
• Transfer pricing
• International taxation

References

• OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing.
• OECD (2015), Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing.