MONITORing measures to end base erosion and profit shifting by TRANSNATIONAL CORPORATIONS

What is BEPs?

Responding to widespread public concerns and pressures, the G20 world leaders in July 2012 called for action to reform the international tax system. The task was referred to the Committee on Fiscal Affairs of the Organization for Economic Cooperation and Development (OECD), which set up a project on Base Erosion and Profit Shifting (BEPS). The Committee was expanded to create an Inclusive Framework, in relation to work on this project, first to include all G20 members, then some developing countries, and finally any country accepting the commitments resulting from the project.

In February 2013, the OECD produced its Action Plan to address Base Erosion and Profit-Shifting. The BEPS Action Plan was approved by the G20 summit in Russia. The Tax Annex to the St Petersburg Declaration stated the following mandate for the BEPS project:

First, changes to international tax rules must be designed to address the gaps between different countries’ tax systems, while still respecting the sovereignty of each country to design its own rules.

Second, the existing international tax rules on tax treaties, permanent establishment, and transfer pricing will be examined to ensure that profits are taxed where economic activities occur and value is created.

Third, more transparency will be established, including through a common template for companies to report to tax administrations on their worldwide allocation of profits and tax.

Fourth, all the actions are expected to be delivered in the coming 18 to 24 months.

Developing countries must reap the benefits of the G20 tax agenda.

The OECD Action Plan contained 15 Actions. Discussion drafts were issued for all these, and the BMG submitted response to all of them, available on this site. The first package of outputs was released in September 2014, and in response the BMG published a BEPS Scorecard, also available here. The final package was published on 5 October 2015, and the BMG published a General Evaluation of the BEPS Project at the same time, also available here. Work was not completed on some major action points, and we published comments on these also. No conclusion was reached either on the main problem, which was Action 1 of the BEPS project, on the tax consequences of digitalisation of the economy, and we have continued to issue comments on this key issue. 

This work has now focused on the two key principles underlying international tax: (i) the threshold for taxable presence in a country, defined historically as a ‘permanent establishment’, and (ii) the methods for allocating the income or profits of transnational corporations (TNCs) according to where they have real activities. In our view, this should be based on treating TNCs in accordance with the reality that they operate as unitary enterprises under centralised control and direction, and apportioning their income by both supply-side production factors (employees, physical assets) and demand-side consumption factors (users, sales to customers). Our reports explain how a transition to such a system could be devised, based on a mixture of goal-setting principles and pragmatic cooperation between tax authorities.