Base erosion and profit shifting

Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational companies, that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.^[1]The project headed by the OECD^[2] was initiated by the G20 in 2012.

BEPS concerns strategies which aim to move profits to where they are taxed at lower rates and expenses to where they are relieved at higher rates. The result is a tendency to associate more profit with legal constructs and intangible rights and obligations, and reduce the share of profits associated with substantive operations involving the interaction of people with one another. "While these corporate tax planning strategies may be technically legal and rely on carefully planned interactions of a variety of tax rules and principles, the overall effect of this type of tax planning is to erode the corporate tax base of many countries in a manner that is not intended by domestic policy."^[3]

Key issues include:

• International mismatches in the way entities and instruments are characterised by different jurisdictions
• Digital delivery of goods and services, and how this relates to tax treaty rules
• Inter-group financial transactions such as related party loans and captive insurance
• Transfer pricing, in particular in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group, and transactions between such entities that would rarely take place between independents;
• The effectiveness of anti tax avoidance measures
• Preferential regimes^[4]

Scale

The OECD estimates that overall, international tax planning reduces the effective tax rate of large multinationals by an average 4-8½ percentage points relative to comparable non-multinational firms. Amongst OECD and G20 countries this ranges from 4% to 10% of overall corporate tax revenues, or around USD 100-240 billion overall.^[5]

BEPS Project

The 2012 G20 Los Cabos summit referred to "the need to prevent base erosion and profit shifting" in their final declaration and tasked the OECD to develop an Action Plan. The G20 Leaders endorsed the BEPS Action Plan at the 2013 G-20 St. Petersburg summit.^[6] The BEPS Package consisting of reports on 15 actions designed to be implemented domestically and through tax treaty provisions. was agreed at the 2015 G20 Antalya summit:

• Action 1: Addressing the Tax Challenges of the Digital Economy
• Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
• Action 3: Designing Effective Controlled Foreign Company Rules
• Action 4: 2 Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
• Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
• Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
• Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
• Actions 8–10: Aligning Transfer Pricing Outcomes with Value Creation
• Action 11: Measuring and Monitoring BEPS
• Action 12: Mandatory Disclosure Rules
• Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
• Action 14: Making Dispute Resolution Mechanisms More Effective
• Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties^[7]

There are 4 minimum standards on BEPS relating to Countering Harmful Tax Practices (Action 5) Treaty Shopping (Action 6), Transfer Pricing Documentation and Country-by-Country Reporting (Action 13) and Dispute Resolution (Action 14). Each of the four BEPS minimum standards is subject to peer review.^[8]

In November 2016, the main text on the Multi-Lateral Instrument (MLI)) was agreed – this is a single instrument by which countries will be able to amend up to 3,000 bilateral treaties. It includes clauses which relate to the BEPS minimum standards on treaty abuse and dispute resolution, as well as other opt-in/opt-out provisions and options where there are multiple ways to address BEPS.

Inclusive Framework

The BEPS Package was developed mainly by G20 and OECD countries, but international tax issues effect other countries. At the 2015 G20 Antalya summit it was agreed to open the process to all interested countries and jurisdictions including developing countries by developing an 'Inclusive Framework'. To join the framework countries and jurisdictions are required to commit to the comprehensive BEPS package and its consistent implementation and to pay an annual BEPS Member fee (reduced when applied to developing countries). All members of the Inclusive Framework on BEPS commit to implementing the minimum standards and participating in the peer reviews.

As of April 2017 96 countries had joined the Inclusive Framework.^[9]

Controversy

Causes for controversy around this issue can be found in "gaps and inadequacies of domestic laws, insufficient controlled foreign company rules, transfer mispricing, tax treaty abuses or problems arising from hybrid mismatch arrangements".^[10] The effect on countries hosting investment from multinational companies is laid out in, for example, comments made by Oxfam South Africa to the UN: "The negative impact of base erosion and profit shifting (BEPS) on South Africa is evident in the escalating rates of poverty, inequality and unemployment. This continues despite some impressive developmental strides taken by the government. The reason for this is that only 1.6 out of 2 million registered companies in South Africa are active and pay their tax revenue".^[11]

In India the ways that intellectual property rights (IPRs) and accountability and compliance costs are handled in BEPs have been assessed by a columnist in daily Business Standard.^[12]

The November 2014 G-20 summit in Brisbane, Australia, demonstrated that the chances are slim for schemes to make any additional multinational companies' tax information public.^[13] Thus any proposals more ambitious than the OECD's BEPS appear impractical for now, like the Global Legal Entity Identifier (LEI) for financial markets that was established after recommendations by the international Financial Stability Board and on which the G-20 has been working since 2012,^[14] or Gabriel Zucman's idea for a world financial registry.^[15] Zucman gave the keynote address at the two-day event on "Human Rights and Tax in an Unequal World" at NYU's CHRGJ from September 22 to 23, 2016.^[16]

At the November 2015 G-20 Antalya summit, the action plan released by the OECD in early October was adopted.^[17]

Nonetheless, speaking after world leaders had left the G20 summit in Turkey, a spokesperson for the anti-poverty charity ActionAid said the G20 countries had failed to take the "bold action needed to end tax avoidance in developing countries".^[18] In 2015 ActionAid became one of the partners in the new Independent Commission for the Reform of International Corporate Taxation.^[19]

BEPS is said to have failed by Alex Cobham, research director, Tax Justice Network, in a blog posting with audio interview.^[20]

See also

• Advance tax ruling

External links