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Base Erosion and Profit Shifting – Meaning

Base Erosion and Profit Shifting (“BEPS”)  strategies, take advantage of  gaps between tax systems of various countries to achieve double non-taxation (not taxed in either of the countries) or very low taxation. Every country levies Corporate tax, under its domestic tax laws, which may be different in different country, in terms of the applicable tax rates, nature of treatment of particular income (whether business profit, fee for technical services, royalty) etc. MNEs, which operate across borders, are subject to tax laws of more than one country, which in certain cases may result in double taxation. Similarly, interaction of laws of two countries (domestic or Treaty) may also leave gaps/provide opportunities, whereby an income may not be taxed in the Source country, and may not be taxable in the Country of residence.

SomeBase Erosion and Profit Shifting strategies take advantage of current tax rules that were framed to address the bricks and mortar economic environment, and are exploited under current environment, which is characterized by digital economy, e-commerce, intangibles and risk management.

Base Erosion and Profit Shifting –  Disadvantages

BEPS has following serious disadvantages for Corporations, Governments and individuals : –

  • Lesser Government Revenues

Since the multinational Enterprise, are able to reduce their taxes, through the use of methods and techniques which result in BEPS, it result in lesser Government Revenues . Further, to evaluate the case of such multinational Enterprises, there is a higher cost in terms of skilled tax officers   to ensure that they are in compliance with tax laws;

  • Competitive advantage to MNE’s

It provides competitive advantage to MNE’s over domestic enterprises, since such MNE’s pay lesser amount of taxes

International Taxation Services

  • Inefficient allocation of resources

It results in inefficient allocation of resources,   since investment decisions companies are biased towards activities which provide higher post tax returns, even though these may have lower pre-tax rates of return

  • Higher tax on domestic resident individuals

When MNE’s do not pay their share of taxes, the government may impose Higher tax on other individuals within their jurisdiction,

  • It undermines voluntary compliance by all taxpayers who see multinational corporations legally avoiding income tax.

Base Erosion and Profit Shifting –  Action Plans

OECD BEPS Action Plan has sets forth 15 Action Plans, which are designed to address BEPS, by bringing fundamental changes to the international tax standards. These Action Plans are based on three core principles of Coherence, Substance and Transparency.

For any queries, please write them in the Comment Section or Talk to our tax expert

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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