What is Base Erosion and Profit Shifting (BEPS) and how are policies addressing BEPS? Our Business & Family Solutions team at Lighthouse Canton takes us through an overview of what is BEPS.
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By definition, Base Erosion and Profit Shifting (BEPS) refers to strategies used by multinational enterprises to take advantage of gaps and disparity in tax rules to avoid paying tax in the country where the revenue is actually earned.
Multinational companies draw out profits from countries where they operate to generate said profits and reduce taxation in these countries, thus denying these countries the tax revenues that are used by them for fund public goods and services, such as schools and student loans, age pensions, defence force personnel and equipment, fresh water, roads and bridges, infrastructure, to name a few.
While most BEPS tools or structures are used are within permissible legal boundaries, it is nevertheless found to undermine fairness and integrity of tax systems because companies that operate across multiple countries have an added competitive advantage over businesses that operate in a single country on a domestic level. It also discourages and undermines voluntary compliance by all taxpayers, whereby tax payers on the domestic level feel treated unfairly as opposed to the huge multinationals who pay much lesser in proportion to them.
The biggest users of BEPS are the U.S. multinationals. This use is often related to the system of "worldwide corporate taxation" applied in the United States.
Most other countries have low to no tax rates for foreign income and so the need for their multinationals to apply tax planning strategies such as BEPS to shift profits between jurisdictions, does not arise. It is for these reasons that U.S. multinationals have also been found to use such low tax countries (corporate tax havens) more so as opposed to multinationals from other countries.
Statistics show the U.S. is far ahead of any other non-haven OECD country in respect to foreign profits recorded in tax havens. At least 50% of the global profits have been shifted by U.S. multinationals. To draw a parallel, records show that the 25% of such profits is attributed to EU, 10% to the remaining OECD countries and 15% to developing countries.
Developing countries have a higher reliance on corporate income tax as a revenue stream and this means they suffer disproportionately from the effect of BEPS compared to OECD countries.
BEPS activity is most commonly associated with industries working with/in intellectual property such as technology, life sciences etc. because intellectual property is mobile and can shifted with minimal cost and effort. In that respect, because this intellectual property is then €˜shifted' to corporate tax havens, these corporate tax havens have had to develop and maintain incredibly advanced intellectual property tax legislation.
The largest global BEPS income flows are attributed to BEPS tools built around intellectual property as the raw material traded by the multinationals. This is already being reflected in recent reports where economic recovery is attributed to the spike in life sciences intellectual property development due to the pandemic. Likewise, the OECD estimates that BEPS tools result in countries losing tax revenue between US$100 to US$240 billion annually.
The OECD and G20 countries (over 135 countries and jurisdictions) have collaborated to create the OECD/G20 Inclusive Framework on BEPS to implement measures to address tax avoidance, improve the mismatches between international tax rules and ensure that profits are taxed where economic activity and value creation occur with a more transparent tax environment.
Most developing countries are also being engaged by OECD countries to implement anti-BEPS international standards and so they can effectively participate in this process and address their specific needs.
 OECD, BEPS, Mission and Impact, What is the Issue?, accessed at https://www.oecd.org/tax/beps/about/
 National Bureau of Economic Research, United States, The Missing Profit of Nations, June 2018, Revised April 2020
 U.S. Chamber of Commerce 2021 International IP Index
 OECD, BEPS, What is BEPS?, accessed at https://www.oecd.org/tax/beps/about/
 See 5 above.
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