What is BEPS?
Base erosion and profit shifting (“BEPS”) refers to tax planning strategies that exploit loopholes in tax rules to make profits disappear for tax purposes or to shift profits to locations where there is little or no real activity but where they are lightly taxed, resulting in little or no overall corporate tax being paid.
Are BEPS strategies illegal?
In most cases they are not. They are largely due to a number of contributing factors among which the fact that current rules are still grounded in a bricks and mortar economic environment, rather than today’s environment of global players, characterised by the increasing importance of intangibles and risk management. That said, some of the schemes used can also be illegal and tax administrations are active in fighting them.
Why is this relevant if it is all legal?
It is relevant for a number of reasons. First, because it distorts competition: because businesses that operate cross-border may profit from BEPS opportunities, this gives them a competitive advantage compared with enterprises that operate mostly at the domestic level. Second, it may lead to an inefficient allocation of resources by distorting investment decisions towards activities that have lower pre-tax rates of return, but higher after-tax rates of return. Finally, it is also an issue of fairness: if other taxpayers (including ordinary individuals) think that multinational corporations can legally avoid paying income tax, it will undermine voluntary compliance by all taxpayers – upon which modern tax administration depends.
Why worry about BEPS now?
Work in this area started a while ago and will continue. As the world tries to pull itself out of this crisis, it is critical that all taxpayers – companies and average citizens – trust that taxation rules are transparent, and not place unnecessary or unfair burdens on some and not others. Political attention has grown recently as it is hard for politicians to explain why some profitable companies would pay small levels of tax at a time where taxes on individuals or SMEs have dramatically increased almost everywhere (e.g. VAT rates have increased in 25 out of 33 OECD countries having a VAT system).
Why is the OECD addressing BEPS?
Because many BEPS strategies take advantage of the interaction between the tax rules of different countries, it may be difficult for any single country, acting alone, to fully address the issue. There is thus a need to provide an internationally co-ordinated approach, which will not only facilitate and reinforce domestic actions to protect tax bases, but will also be key to provide comprehensive international solutions that may satisfactorily respond to the issue. Unilateral and uncoordinated actions by governments responding in isolation could result in the risk of double – and possibly multiple – taxation for business, resulting in a sort of tax protectionism. This would have a negative impact on investment, and thus on growth and employment globally. The BEPS project is thus part of the OECD’s ongoing efforts to ensure that the global tax architecture is equitable and fair.
What is the cause of BEPS?
BEPS strategies take advantage of a combination of features of tax systems which have been put in place by home and host countries. Corporation tax is levied at a domestic level. The interaction of domestic tax systems means that an item of income can be taxed by more than one jurisdiction thus resulting in double taxation. The interaction can also leave gaps, which result in an item of income not being taxed anywhere. Corporations have urged bilateral and multilateral co-operation among countries to address differences in tax rules that result in double taxation but at the same time have exploited them so that income goes untaxed everywhere. Addressing Base Erosion and Profit Shifting, identifies a number of instances that, combined in different forms, give rise to opportunities for BEPS.
What are the next steps?
The Report calls for the development of an initial comprehensive action plan to address BEPS by June 2013. The action plan will (i) identify actions needed to address BEPS, (ii) set deadlines to implement these actions and (iii) identify the resources needed and the methodology to implement these actions. The action plan will also consider the best way to implement in a timely fashion the measures governments can agree upon. A comprehensive approach will also consider possible improvements to eliminate double taxation, such as increased efficiency of mutual agreement procedures and arbitration provisions.
What options are being considered to address BEPS?
There is no magic recipe to address BEPS, but the Report calls for the action plan to include proposals in a numbers of areas, such as hybrids, preferential regimes, transfer pricing and anti-avoidance measures, with an eye on the issues posed by the increased digitalisation of the economy.
Is the BEPS project against business?
No, it is not. Governments cannot blame business for using the rules that governments themselves have put in place. It is therefore governments’ responsibility to revise the rules or introduce new rules. We must ensure the fairness of the corporate tax system. The goal of the BEPS project is to provide a co-ordinated, comprehensive approach that prevents double taxation, but that also prevents double non-taxation, and creates a level playing field for all taxpayers.
How much tax revenue is lost to BEPS?
It is difficult to reach solid conclusions about how much BEPS actually occurs given the existing data and studies. Existing studies do provide abundant circumstantial evidence, however, that BEPS behaviours are widespread. There are several studies and data showing that profits are reported for tax purposes in locations different from where the actual business activities and investment takes place.
What is the appropriate level of corporate income tax?
Every jurisdiction is free to set up its corporate tax system as it chooses. States have the sovereignty to implement tax measures that raise revenues to pay for the expenditures they deem necessary. The OECD is not about any kind of harmonisation and it favors low taxes to facilitate investments. The OECD is a unique platform where countries can exchange views and co-ordinate their action with a view to eliminate double taxation but also to address double non-taxation. A co-ordinated, comprehensive approach is needed to prevent countries from taking unilateral action that could result in double taxation.
Where can I get more information on BEPS?