Different countries implement taxes differently, and in a global economy, these differences create gaps and mismatches in tax rules. Some multinational companies use these differences as a means to shift profits to low or no-tax locations. These tactics are referred to as base erosion and profit shifting (BEPS).
In order to combat this worldwide issue, the Organisation for Economic Cooperation and Development (OECD) developed the BEPS Project. It is an ongoing collaboration of more than 100 countries (including the United States) to mitigate tax code loopholes and inconsistencies that provide corporations with the opportunity to shift profits from a country with a high corporate tax rate to one with a low rate. The Project addresses issues such as vulnerabilities in the digital economy, treaty abuse, transfer pricing documentation, and reporting requirements. The issue is no small matter: A conservative estimate has annual tax revenue losses at $240 billion USD due to profit shifting around the globe.
Some BEPS schemes are illegal, but because of intricate loopholes, most are not. Businesses operating across borders can use BEPS to gain a competitive advantage over enterprises that operate on a domestic level. And when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers. BEPS hits developing countries particularly hard, as they rely heavily on corporate income tax from multinational businesses. Engaging developing countries in the international tax agenda is important to ensure they receive support to address their unique needs.
We are seeing a significant shift in the overall dynamics of international tax planning and compliance. While the BEPS Project will primarily affect large multinational enterprises, its development and implementation send a strong message to the global economy. As an example, the recently passed U.S. Tax Cuts and Jobs Act included provisions aimed at reducing the loss of U.S. tax revenues from BEPS. As more countries continue to get involved and the task force digs into its Action Plan, it is important for businesses of any size to be aware of the potential issues that arise when conducting business internationally. Our International Tax Group is available to help you understand what kinds of activities fall into BEPS. It is always best to err on the side of caution and to understand the implications of your business and tax activities.