Base Erosion and Profit Shifting (BEPS) is a technical term indicating the tax avoidance strategies of MNCs that reduces the tax bases for countries. The terms base erosion and profit shifting are closely related. Usually, a company has to pay tax for its profit or income. This profit is the tax base for the government as tax is imposed as a percentage of this profit. Once profit is shifted to other countries or to tax havens, the tax base is eroded and there is no tax payment by the company in the concerned country. In recent years, Multinational Corporations (MNCs) are innovating sophisticated tax planning practices to avoid taxes by shifting profits to other countries especially to tax havens. This has resulted in the erosion of tax base.
Governments hence are at the receiving end as their tax revenues are reduced. There is a growing concern with regards to the significant losses of national tax revenues because of BEPS. In the same manner, academicians and social activists are criticizing governments for going soft on companies that are not paying taxes. This has led to the launching of the so called BEPS project by the OECD. It has designed a fifteen point action plan to bring tackle the problem of profit shifting.
How profit shifting becomes possible?
The MNCs utilizes the loopholes or opportunities available with domestic tax laws as well as shifting income to tax havens to minimise taxes. Hence, tax avoidance is practiced by them to escape from taxes. There are many ‘gaps and inadequacies’ of domestic laws, insufficient controlled foreign company rules, transfer mispricing, double taxation avoidance treaty abuses by MNCs to avoid taxes.
What is the BEPS project?
The BEPS (Base Erosion and Profit Shifting) initiative is an OECD effort, approved by the G20, to design a globally standardized rules to check tax avoidance practices by the MNCs so that there will be no tax base erosion. OECD has set the December 2015 target to finally bring out the new standard rules that need international cooperation to check base erosion and profit shifting.
As a part of the BEPS project, OECD has developed an action plan at the request of the G20 to counter the tax avoidance practice by corporate. The Action Plan includes fifteen detailed actions that governments can take to reduce the tax avoidance by MNCs. The Action Plan is scheduled to be completed in three phases: September 2014, September 2015, and December 2015.
Some of the actions will require coordination and information sharing between governments, and potentially the amendment of existing tax treaties.