Base erosion and profit shifting (BEPS) – where multinationals shift profits to low or no-tax locations where they have little or no economic activity or erode tax bases through deductible payments like interest or royalties – costs countries USD 100-240 billion in lost revenue annually. That is equivalent to 4-10% of global corporate income tax revenue. Although some BEPS schemes are illegal, most are not. BEPS practices undermine the fairness and integrity of tax systems because businesses that operate across borders can use them to gain a competitive advantage over enterprises operating at a domestic level. In a broader context, when large corporations are seen to be avoiding income tax, it undermines voluntary compliance by all taxpayers.
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Domestic tax base erosion and profit shifting (BEPS) relates to tax planning strategies that multinational enterprises use to exploit loopholes in tax rules to artificially shift profits to low or no-tax locations as a way to avoid paying tax. The OECD/G20 BEPS Project equips governments with rules and instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating them take place and where value is created.
Key messages
Although BEPS affects all countries, developing economies suffer disproportionately from the practice due to their heavy reliance on corporate income tax, particularly from multinational enterprises. Engaging developing countries in the international tax agenda is vital, both to help address their specific needs and to ensure they can effectively participate in the process of standard-setting on international tax. Developing countries participate on an equal footing with OECD and G20 countries in the BEPS project, and work is being carried out to support all countries interested in implementing and applying the rules in a consistent and coherent manner, particularly those for which capacity building is an important issue.
Business operates internationally, making it vital that governments act together to tackle BEPS and restore trust in domestic and international tax systems. Under the OECD/G20 Inclusive Framework on BEPS, over 140 countries and jurisdictions are working together to implement 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment. The 15 Actions in the BEPS package equip governments with the domestic and international instruments to ensure that profits are taxed where economic activity and value creation take place. These tools help to address the specific tax challenges arising from the digitalisation of the?economy and they give businesses greater certainty by reducing disputes over the application of international tax rules and standardising compliance requirements.
The OECD/G20 Inclusive Framework on BEPS allows interested countries and jurisdictions to work with OECD and G20 members on developing standards on BEPS-related issues and review and monitor the implementation of the BEPS Package. The Inclusive Framework actively monitors the implementation of all the BEPS Actions and reports annually to the G20 on progress. The implementation of the BEPS Minimum Standards is of particular importance, and each of these is the subject of a peer review process that evaluates the implementation by each member and provides clear recommendations for improvement. Peer reviews of the BEPS minimum standards are an essential tool to ensure the effective implementation of the BEPS Package and the results show strong implementation throughout the world. All countries and jurisdictions joining the Inclusive Framework will participate in this review process, which allows members to review their own tax systems and to identify and remove elements that pose BEPS risks.
Peer review and monitoring process of the?four minimum standards:
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BEPS Actions
Context
Membership
At its inaugural meeting in Kyoto, Japan in June 2016 there were 82 members of the OECD/G20 Inclusive Framework on BEPS. Since then, the membership of the Inclusive Framework has grown to over 145 countries and jurisdictions, including 14 observer organisations. The ongoing work of the OECD/G20 Inclusive Framework is led by a 24-country Steering Group. All members of the Inclusive Framework participate on an equal footing, and the widespread adherence to and further development of the BEPS standards have resulted in tangible progress under the three principles of coherence, substance and transparency as articulated under the original BEPS Action Plan.
Structure
Countries and jurisdictions have been invited to express their interest to join this framework as Associates, to participate on an equal footing and to commit to implement the comprehensive BEPS package. Timelines for implementation may differ to reflect the level of development of participating countries.
COUNTRIES OF RELEVANCE
Countries and jurisdictions of relevance will be identified by the inclusive framework as part of its mentoring process and reviewed. Countries and jurisdictions of relevance are those whose adherence to the minimum standards will be necessary to ensure that a level playing field is achieved. Jurisdictions of relevance will be informed about the minimum standards and invited to commit to the BEPS package and participate in the review process.
OTHER ORGANISATIONS
International organisations can act as Observers within the Inclusive Framework. This allows for more co-ordinated and targeted capacity building in the implementation of the BEPS outcomes. Regional tax organisations, such as the African Tax Administration Forum, the Cercle de réflexion et d’échange des dirigeants des administrations fiscales, and the Centro Interamericano de Administraciones Tributarias, will continue to play an important role in the BEPS Project, together with international organisations such as the International Monetary Fund, the United Nations and the World Bank Group. Regional tax organisations and regional networks play an important role in supporting the Inclusive Framework, through initiatives to support developing countries with limited capacity, including via regional meetings where such countries can exchange views and best practices and provide feedback. Regional Networks continue to be of particular relevance to developing countries for the implementation of the BEPS package as well as providing support to such countries to effectively participate in the ongoing standard setting process.
Understanding tax avoidance
Domestic tax base erosion and profit shifting (BEPS) due to multinational enterprises exploiting gaps and mismatches between different countries' tax systems affects all countries. Developing countries' higher reliance on corporate income tax means they suffer from BEPS disproportionately. Business operates internationally, so governments must act together to tackle BEPS and restore trust in domestic and international tax systems. BEPS practices cost countries 100-240 billion USD in lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue. Working together in the OECD/G20 Inclusive Framework on BEPS, over 140 countries and jurisdictions are implementing 15 Actions to tackle tax avoidance, improve the coherence of international tax rules, ensure a more transparent tax environment and address the tax challenges arising from the digitalisation of the economy.
Stakeholder input
The OECD is committed to giving a voice to civil society stakeholders and helping ensure that their views are factored into the OECD’s work and hence making the OECD analyses stronger. Civil society has been continuously involved in the work of the OECD/G20 Inclusive Framework, with representatives playing an active role in the recent discussions on the tax challenges of digitalisation.
