What's the issue?
Base erosion and profit shifting (BEPS) is a long phrase for a succinct tax problem: multinational enterprises exploit gaps and mismatches in the international tax rules to artificially shift profits to low or no tax jurisdictions, and avoid paying their fair share of tax. Examples involving famous brands have filled the headlines in recent years, spurring public and political outrage. But these tax avoidance strategies were in most cases legal, and largely overlooked until the OECD/G20 BEPS Project. Multinationals were taking advantage of tax rules that were not well co-ordinated across countries and which had not been updated for a global and digitalised economy.
However, BEPS is bad for everyone: governments, citizens and business alike. Governments lose much needed funds: conservatively estimated at around 4-10% of global corporate income tax revenues, or USD 100-240 billion annually; money that could be spent on education, health care, infrastructure, pensions. Citizens lose out either by having to foot the bill through higher taxes for services that would otherwise have been funded by corporate income tax revenues, or going without those services. Purely domestic businesses have a hard time competing with multinational enterprises that can lower their tax bills by shifting profits offshore.
How are we addressing it?
The OECD/G20 BEPS Project was born in the wake of the global financial crisis, shrinking public budgets and growing public outcry over BEPS. In 2015, OECD and G20 countries – along with other stakeholders – created a package of 15 actions and related solutions to tackle BEPS. Since then, the work has continued and the number of countries involved has grown, with over 135 jurisdictions today working together on an equal footing in the Inclusive Framework on BEPS. They are now tackling the tax challenges of the digitalisation of the economy and expect to deliver a solution by the end of 2021.
Key areas of action to tackle BEPS include:
- Stopping the inappropriate transfer of profits between multinationals’ subsidiaries in different countries[video]
- Helping countries to collect VAT more effectively in today’s digital world [video]
- Providing a template for multinationals to report, country by country, where their profits, sales, employees and assets are located, and where they pay tax [video]
- Eliminating treaty shopping between jurisdictions [video]
- Facilitating swift implementation of the BEPS measures through a new multilateral instrument [video]
The OECD’s base erosion and profit shifting (BEPS) project has made unprecedented progress in tackling all such practices of transferring activities for tax purposes.Emmanuel Macron President of France
What's the impact?
The OECD/G20 BEPS Project is the most ambitious multilateral international tax policy initiative ever undertaken. Ensuring fairness, coherence, transparency and that taxation is aligned with where economic activity takes place, in the vastly complex space of international tax provisions covering virtually all of the world’s economic activity requires enormous effort and commitment.
Significant milestones have been reached, leading to an important shift in practices both by policy makers and multinational corporations.
More than 135 countries and jurisdictions are taking part on an equal footing in the Inclusive Framework on BEPS, and 90+ countries and jurisdictions have signed the Multilateral Convention to Implement Tax-Treaty Related Measures to Prevent BEPS. The Convention saves governments time by eliminating burdensome one-on-one negotiations, which take years to finalise, and helps countries to effectively implement the recommendations of the BEPS Project, closing loopholes in thousands more tax treaties.
Information is increasingly being exchanged on a regular basis across borders. More than 2 500 bilateral relationships are already in place for Country-by-Country reporting which has resulted in tax administrations worldwide collecting and sharing detailed information on all large MNEs doing business in their country. Exchanges of information on 30 000+ previously secret tax rulings have also taken place, ensuring greater transparency of the arrangements between tax administrations and taxpayers.
Harmful preferential tax regimes have also been addressed, with legislative changes made to amend/abolish 150+ of these regimes, representing a major step forward in tackling artificial profit shifting.