Base erosion and profit shifting

Definition

Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations, thereby eroding the tax base of higher-tax jurisdictions. This practice raises ethical concerns about fairness in the global financial system, as it can lead to significant revenue losses for countries and undermine public trust in tax systems.

5 Must Know Facts For Your Next Test

1. BEPS activities are often carried out by large multinational corporations that use sophisticated strategies to minimize their global tax obligations.
2. The OECD has developed a BEPS Action Plan that outlines specific recommendations aimed at closing loopholes in international tax rules and ensuring that profits are taxed where economic activities occur.
3. Countries may implement measures like stricter transfer pricing rules or increased transparency requirements to combat BEPS practices and protect their tax bases.
4. Ethical considerations around BEPS highlight the impact on social equity, as governments rely on tax revenue to fund essential public services and infrastructure.
5. Many nations are engaging in international cooperation to tackle BEPS, including sharing information and adopting common standards to ensure a fairer global tax system.

Review Questions

• Discuss how base erosion and profit shifting impacts the fairness of the global financial system.
  • Base erosion and profit shifting significantly impacts the fairness of the global financial system by allowing multinational companies to avoid paying taxes in jurisdictions where they generate substantial profits. This creates an uneven playing field where smaller businesses that do not have the same capacity for tax avoidance face higher effective tax rates. Consequently, this undermines public trust in tax systems and raises questions about corporate responsibility, as the revenue lost could have been used for public services benefiting society.
• Evaluate the effectiveness of current international efforts to address base erosion and profit shifting and their implications for global business practices.
  • Current international efforts, particularly those led by the OECD through its BEPS Action Plan, aim to close loopholes and increase transparency in global taxation. These initiatives encourage countries to adopt coordinated measures, such as stricter transfer pricing regulations and reporting requirements. While progress has been made, challenges remain due to differing national interests and regulatory environments. The implications for global business practices include a potential shift towards more responsible tax strategies as companies adapt to evolving regulations aimed at curbing BEPS activities.
• Analyze how base erosion and profit shifting contributes to economic inequality both domestically and globally.
  • Base erosion and profit shifting exacerbates economic inequality by allowing wealthy multinational corporations to minimize their tax contributions while smaller businesses and individuals continue to pay taxes based on their actual earnings. This results in lower government revenue for essential services like education and healthcare, disproportionately affecting lower-income populations who rely more heavily on public funding. On a global scale, developing countries often face significant challenges as they struggle to compete with well-resourced multinational firms capable of leveraging BEPS strategies. This disparity hinders economic growth in these regions, perpetuating cycles of poverty and inequality.

Related terms

Transfer Pricing: Transfer pricing is the method by which multinational companies set prices for goods and services sold between their subsidiaries in different countries, often used to allocate income and expenses in a way that minimizes taxes.

Tax Havens: Tax havens are countries or jurisdictions that offer low or zero tax rates and often have strict confidentiality laws, making them attractive locations for companies looking to reduce their tax liabilities.

Double Taxation: Double taxation occurs when the same income is taxed in more than one jurisdiction, which can happen with international business operations if not addressed by tax treaties or credits.