Base erosion and profit shifting (OECD project)

The Base Erosion and Profit Shifting (BEPS) Project is an ongoing project headed by the OECD that aims to set up an international framework to combat tax avoidance by multinational enterprises (MNEs). The project, under the jurisdiction of the OECD’s Committee on Fiscal Affairs, began in 2013 and originally only involved OECD and G20 countries. Currently, the contents of the framework are complete; the project is now in its implementation phase, and more than 100 countries are involved.

The aim of the project is to mitigate tax code loopholes and country-to-country inconsistencies so that corporations cannot shift profits from a country with a high corporate tax rate to countries with a low tax rate, known as tax havens. The practice is usually legal, but often involves complex maneuvers within tax law. BEPS is costly for all parties involved, save the firm. A conservative estimate has annual tax revenue losses at 240 billion USD due to profit shifting around the globe. A study by the Tax Justice Network estimated that around 660 billion USD of corporate profits were shifted in 2012. In developed countries like those comprising the OECD, BEPS undermines the integrity of tax systems. In developing countries, where there is heavy reliance on corporate taxes, revenues are trimmed, leaving states underfunded and underinvested.

Furthermore, the project serves as an alternative to the deterioration of international tax norms. The project’s Action Plan states that a failure to address BEPS would spawn “the emergence of competing sets of international standards, and the replacement of the current consensus-based framework by unilateral measures, which could lead to global tax chaos marked by the massive re-emergence of double taxation." In this respect, the BEPS project serves as an example of cooperation in game theory. The project prevents both double taxation and double non-taxation, as well as countries undercutting others by lowering tax rates to attract business. Countries cooperating yields a better outcome than noncooperation.

In October 2015, after two years of negotiations and development, a 15-point Action Plan was announced by the OECD and G20 to address BEPS. However, at a conference in 2016, it was deemed necessary that for an effective international tax framework, developing countries must be involved. To gain membership, non-OECD/G20 countries must commit to the BEPS package, a plan to “equip government with domestic and international instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.” All countries in the framework work on equal footing to set minimum standards for the international tax framework. The package consists of 15 action plans that standardize tax codes, treaties, and data sharing, among other provisions. A fee must be paid for membership as well (discounted for developing countries). As of April 2017, 96 countries had signed on to the project.

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