Base erosion and profit shifting or “BEPS” as the OECD (Organisation for Economic Co-Operation and Development) calls it, is when firms, multinationals and corporations transfer their profit before being subjected to taxation across borders.
The rationale behind this move is to take advantage of the preferential tax regimes of the other countries than that of the country where the profit was initially made.
The international framework governing taxation is generally effective in ensuring that companies are not subject to double taxation with the signing of double taxation agreements but however BEPS takes advantage of the loopholes in the rules and regulations to avoid paying tax.
This may be termed as “double non taxation” where tax is payable in two or more countries making it less than what companies would have paid in a single country. At times the worst scenario is that tax may even not be paid at all.
BEPS stratagems take advantage of the interaction between the numerous tax treaties and rules of different countries thus creating a barrier for a country on its own to fully deal with the issue of profit shifting.
Effects on the development of a country
One of the major disadvantages of BEPS is that there is a huge loss of income for the national revenue authorities and thus as a result causing the cost to ensure compliance to be sky-high. It is widely known that the money collected by the revenue authorities is invested in the welfare system, developing infrastructure and also used to boost economic growth and trade. Lower income for the country will lead to severe under-funding of public infrastructure, future development being put on the hold and the economic growth being hampered.
Effects on individual taxpayer
Another disadvantage of BEPS is that the individual taxpayer himself is being harmed. This is so because when the tax rules allow businesses and companies to reduce their tax burden by shifting their revenue away from the home country where the business activities and transactions are being conducted, other taxpayers in that jurisdiction will bear a greater share of the burden.
The perception that multinationals are not contributing to the level of their profits and thus not providing a fair contribution of tax in the home country is actually well founded but again it is important to point out that BEPS is not in itself an illegal process.
Effects on local businesses
For corporations operating only within the domestic sphere they may face serious problems competing with multinationals that have the ability to move their profits across borders to avoid or reduce their tax. This situation develops an unlevelled field where the multinationals will always have a “war chest” which will be substantially huge when compared to the local companies resulting fair competition and practice being harmed. The causality is the distortions triggered by BEPS.
The OECD is perfectly aware of the prevailing situation and this is the reason why the BEPS Action Plan has been developed. This plan’s ultimate objective is to ensure and maintain an equitable and fair global tax architecture.