Base erosion and profit shifting (or BEPS) refers to corporate tax planning strategies used by multinational companies that artificially "shift" profits from higher-tax locations, to lower-tax locations, thus "eroding" the tax-base of the higher-tax locations.
In terms of scale of BEPS, it is mainly associated with U.S. multinationals, in intellectual property heavy industries, shielding profits from the pre-Tax Cuts and Jobs Act of 2017 U.S. 35% worldwide tax rate, to locations such as Ireland, the Netherlands and the Carribean.
However, while the U.S. tax base is the biggest loser from BEPS schemes, the use of Irish-based intellectual property schemes, for example, has also enabled U.S. multinationals to materially erode the emerging tax base of developing economies (most of whom have bi-lateral Irish tax treaties).
The Tax Cuts and Jobs Act of 2017 has changed the calculus on whether the U.S. has lost from BEPS schemes. The TCJA repatriation tax of 15.5% is greater than the difference between the old 35% U.S. corporate tax rate, and the simple average OECD corporate tax rate of 25%. Thus it can be argued the U.S. has actualy gained from BEPS schemes, at the expense of the EU and other developing nations (who have received no taxes).
The strategies used for BEPS are legally complex and involve advanced accounting techniques (i.e. intellectual property BEPS schemes) to encourage high-tax locations to allow the BEPS systems operate in their juristiction. A 2017 study published in Nature identified leading BEPS-hubs as conduit OFCs. These are first-world onshore financial centres, with the credibility, and BEPS tools, to extract untaxed profits from higher-taxes locations and send them on to tax havens.
Key strategies to artificially shift profits include:
While BEPS strategies move profits to lower rate locations, they also try to move expenses to where they are relieved at higher tax rates. The result is a tendency to associate more profit with artificial intellectual property accounting structures (mobile assets and can be moved to smaller zero-tax locations), but reduce the share of profits associated with the substantive commercial operations, where the bulk of the cost-base and talent pool lies, and are usually higher-taxed locations.
An example of a BEPS strategy is Facebook who host 1.9 billion, or 83%, of their 2.3 billion global accounts in Ireland, where they pay an Irish effective tax rate of <1%, using a double Irish scheme. Yet Ireland employs less than 10% of Facebook's circa total 25,000 workforce, who reside in the higher-taxed U.S. system, which is also their talent pool. Facebook's BEPS system relies on intellectual property accounting rules, which the U.S. IRS is investigating.
The OECD initiated the Base Erosion and Profit Shifting project following the 2012 G20 Summit. It's lack of success however, particularly in countering Irish BEPS, has seen the U.S. and the EU Commission advance their own anti-BEPS legislation and tax regimes, in 2017-18:
- U.S. Tax Cuts and Jobs Act of 2017, which has several anti-BEPS regimes, including GILTI tax, BEAT tax and interest deductibility limits.
- EU Commission 2018 Digital Services Tax, which is less advanced than the U.S. TCJA, but does seek to impose a minimum tax rate via a quasi-VAT.
The departure of the U.S. and EU Commission from the OECD BEPS project is attributed to frustrations with the rise in intellectual property (or IP), as the key BEPS tool, which the OECD has spend decades developing and protecting as a legal and accounting concept. Ireland, who have some of the most advanced IP BEPS tools, have been supporters of the OCED BEPS project (see Feargal O'Rourke opposite), however, the U.S. and EU Commission's new tax regimes deliberately "override" the effect of intellectual property-type BEPS tools.
"It is hard to imagine any business, under the current [Irish] IP regime, which could not generate substantial intangible assets under Irish GAAP that would be eligible for relief under [the Irish] capital allowances [for intangible assets scheme]." "This puts the attractive 2.5% Irish IP-tax rate within reach of almost any global business that relocates to Ireland."
Video Base erosion and profit shifting
Scale of BEPS
A study by the Tax Justice Network estimated that around USD 660 billion global corporate profits were shifted in 2015.
The OECD estimated in 2016 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.
Acclaimed author on tax havens and offshore financial centers, Gabriel Zucman, focused on macro-data of national statistical accounts. In theory, the total assets in a system should equal the total liabilities. By aggregating national account data, Zucman can identify an excess of liabilities over assets, implying that the missing assets (to balance the equation), are hidden in tax-havens (from BEPS schemes). On this basis, in 2015, he estimated that 8% of the world's wealth (or $7.6 trillion) was "missing" in offshore tax-havens, and had been routed there by BEPS tax schemes.
Zucman's analysis also highlights the special case of Ireland and why most studies underestimate Ireland's scale as one of the world's largest corporate tax avoidance hubs.
Maps Base erosion and profit shifting
Key Issues
Key issues around BEPS include:
BEPS Project
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:
- Action 1: Addressing the Tax Challenges of the Digital Economy
- Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
- Action 3: Designing Effective Controlled Foreign Company Rules
- Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
- Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
- Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
- Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
- Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation
- Action 11: Measuring and Monitoring BEPS
- Action 12: Mandatory Disclosure Rules
- Action 13: Transfer Pricing Documentation and Country-by-Country Reporting
- Action 14: Making Dispute Resolution Mechanisms More Effective
- Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties: the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting
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.
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS
In November 2016, the main text on the MLI was agreed - this is a single instrument by which countries will be able to amend up to 3,000 bilateral treaties. It includes clauses which relate to the BEPS minimum standards on treaty abuse and dispute resolution, as well as other opt-in/opt-out provisions and options where there are multiple ways to address BEPS. The convention was signed by 78 jurisdictions, 5 of which have ratified it. The convention enters into force on 1 July 2018.
Controversy
Causes for controversy around this issue can be found in "gaps and inadequacies of domestic laws, insufficient controlled foreign company rules, transfer mispricing, tax treaty abuses or problems arising from hybrid mismatch arrangements". The effect on countries hosting investment from multinational companies is laid out in, for example, comments made by Oxfam South Africa to the UN: "The negative impact of base erosion and profit shifting (BEPS) on South Africa is evident in the escalating rates of poverty, inequality and unemployment. This continues despite some impressive developmental strides taken by the government. The reason for this is that only 1.6 out of 2 million registered companies in South Africa are active and pay their tax revenue". "Despite these sycophantic attempts to hide the truth, BEPS only contributes in an insignificant way to these economic conditions, mismanagement and plundering of state resources by corrupt officials in every single office of the post apartheid government has and continues to systematically destabilize the South African economy and enrich the elitists whilst starving the people who elected them to power, truly such a stereotypical African condition" ~ Quote from an South African realist
In India the ways that intellectual property rights (IPRs) and accountability and compliance costs are handled in BEPs have been assessed by a columnist in daily Business Standard.
The November 2014 G-20 summit in Brisbane, Australia, demonstrated that the chances are slim for schemes to make any additional multinational companies' tax information public. Thus any proposals more ambitious than the OECD's BEPS appear impractical for now, like the Global Legal Entity Identifier (LEI) for financial markets that was established after recommendations by the international Financial Stability Board and on which the G-20 has been working since 2012, or Gabriel Zucman's idea for a world financial registry. Zucman gave the keynote address at the two-day event on "Human Rights and Tax in an Unequal World" at NYU's CHRGJ from September 22 to 23, 2016.
At the November 2015 G-20 Antalya summit, the action plan released by the OECD in early October was adopted.
BEPS is said to have failed by Alex Cobham, research director, Tax Justice Network, in a blog posting with audio interview.
See also
- Conduit and Sink OFCs
- Double Irish, Single Malt, and Capital Allowances
- Corporation tax in the Republic of Ireland
External links
Source of article : Wikipedia
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