Big Changes Coming for BEPS

By Shea Fanelli

The Organization for Economic Development (OECD) is an international organization which promotes policies to help stimulate economic progress and world trade across borders. The OECD has attempted to accomplish these goals by improving international tax cooperation between countries. By identifying trends in tax planning, the OECD assists governments in recognizing risks and countering international tax avoidance and evasion.

Base erosion profit shifting (BEPS) refers to “tax planning strategies that exploit gaps” in the architecture of the international tax system to artificially shift profits to places where there is little or no economic activity or taxation. In other words, these tax planning strategies “move” profits across borders to reduce or avoid taxation on the earned income. The OECD estimates that nearly USD 100-240 billion of revenue derived from corporate income tax is lost on an annual basis.  While a number of the tax structures are illegal, most employed are not. Irrespective of its legality, BEPS strategies undercuts both integrity and fairness in tax systems because multinational businesses that implement BEPS achieve a competitive edge over businesses operating strictly within a single country. Because companies are capable of legally avoiding income taxation through its tax structure, BEPS also has the derivative effect of discouraging voluntary compliance by all taxpayers.

The Inclusive Framework on BEPS includes over 100 signatory countries that have banned together in an effort to minimize BEPS through the implementation of OECD’s BEPS package. The BEPS package includes 15 actions that provide governments with domestic and international instruments necessary to tackle BEPS. The BEPS package ensures individuals and businesses pay tax on the income in the jurisdiction in which economic activities were performed or the value was created. The implementation of the BEPS package is especially vital for developing countries because the corporate income tax derived from multinational companies is a heavily relied upon source of income.

The Multilateral Convention to Implement Tax Treaty Related Measure to Prevent Base Erosion and Profit Shifting (the “Convention”) will be effective beginning July 1, 2018. The treaty officially implements the BEPS package and helps strengthen existing bilateral tax treaties without the burdensome process of renegotiating existing treaties. The Convention will be a significant move in improving and updating the current bilateral tax treaty network by closing the gaps that allow tax avoidance by multinational businesses. Its entry into force demonstrates the collective efforts of countries in tackling BEPS. Within the last year, Slovenia, Austria, the Isle of Man, Jersey, and Poland have ratified the instrument and deposited their instruments with the OECD. The creation of this tax treaty is expected to transform the way in which future agreements are made, facilitates a unification amongst developing and modern countries, and makes a significant step toward the creation of an international tax system.

References

OECD, Milestone in BEPS implementation: Multilateral BEPS Convention will enter into force on 1 July following Slovenia’s ratification, OECD(Mar. 3, 2018), available athttp://www.oecd.org/ctp/milestone-in-beps-implementation-multilateral-beps-convention-will-enter-into-force-on-1-july-following-slovenia-s-ratification.htm (last visited Apr. 15, 2018).

OECD, Aggressive Tax Planning, OECD(2018), available athttp://www.oecd.org/ctp/aggressive/ (last visited Apr. 15, 2018).

OECD, About the Inclusive Framework on BEPS, OECD(2018), available athttp://www.oecd.org/tax/beps/beps-about.htm (last visited Apr. 15, 2018).