Base erosion and profit shifting (BEPS)

Definition

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 undermines the tax base of higher-tax jurisdictions, leading to significant revenue losses for governments. BEPS is closely linked to international tax issues and transfer pricing, as multinational companies often use complex structures and transfer pricing arrangements to minimize their overall tax liabilities across different countries.

5 Must Know Facts For Your Next Test

1. BEPS strategies often involve shifting profits from high-tax jurisdictions to low-tax jurisdictions through techniques like transfer pricing manipulation and the use of intangible assets.
2. The OECD launched the BEPS project in 2013, resulting in a comprehensive action plan that outlines specific measures for governments to combat BEPS practices effectively.
3. Countries are increasingly implementing domestic laws that align with the OECD's BEPS recommendations, aiming to protect their tax bases from erosion.
4. BEPS has significant implications for tax compliance and transparency, as it pushes multinational companies to adopt more responsible tax practices and disclose their tax arrangements.
5. The fight against BEPS is an ongoing global effort, with countries working together to strengthen international tax rules and ensure that profits are taxed where economic activities occur.

Review Questions

• How do transfer pricing practices relate to base erosion and profit shifting, and what impact do they have on international tax systems?
  • Transfer pricing practices are a key component of base erosion and profit shifting (BEPS), as they allow multinational companies to allocate profits across different jurisdictions in a way that minimizes their overall tax liabilities. By setting prices for intercompany transactions at non-market levels, companies can shift profits to low-tax countries, eroding the tax base of higher-tax jurisdictions. This manipulation creates significant challenges for international tax systems, which struggle to maintain fairness and equity in taxation while ensuring that profits are taxed where economic activity occurs.
• What are some of the main actions proposed by the OECD in response to BEPS, and how do these actions aim to curb profit shifting by multinational corporations?
  • The OECD's BEPS action plan includes several key actions designed to address profit shifting by multinational corporations. These actions focus on improving transparency through country-by-country reporting, revising transfer pricing guidelines to align with economic substance, and strengthening rules around the taxation of digital economies. By implementing these recommendations, countries aim to create a more equitable tax environment that reduces opportunities for profit shifting while ensuring that businesses contribute their fair share of taxes in the jurisdictions where they operate.
• Evaluate the effectiveness of international cooperation in combating BEPS practices, considering both successes and ongoing challenges in achieving fair taxation globally.
  • International cooperation has shown effectiveness in addressing base erosion and profit shifting (BEPS) through initiatives led by organizations like the OECD. The development of a unified action plan has prompted many countries to implement reforms aimed at closing loopholes and enhancing transparency. However, ongoing challenges remain, such as the varying implementation rates among countries and differing national interests that can hinder collective efforts. Additionally, rapidly evolving business models, particularly in digital markets, continue to complicate the landscape, highlighting the need for ongoing collaboration and adaptation of global tax rules to ensure fair taxation practices worldwide.

Related terms

Transfer Pricing: The pricing of goods, services, and intangibles between related entities within a multinational corporation, which can be manipulated to shift profits across jurisdictions.

Tax Havens:

Countries or jurisdictions with low or no taxes, where businesses and individuals often relocate profits to reduce their overall tax burden.

OECD Guidelines:

Recommendations developed by the Organisation for Economic Co-operation and Development aimed at addressing BEPS issues and promoting fair tax practices among countries.