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.The project headed by the OECD 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."

Key issues include:

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.

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. 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:

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.

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