Base Erosion and Profit Shifting [BEPS]

By : Neha Dhyani

Updated : May 18, 2022, 5:51

Base Erosion and Profit Shifting [BEPS] is a tax shifting strategy exploiting the gaps and mismatches in tax regulations used by many multinational companies to eliminate tax payments. Therefore, a significant problem arises for nations as they lose their tax revenues.

What is Base Erosion and Profit Shifting [BEPS]?

Base Erosion and Profit Shifting is the plan of action for shifting tax or corporate tax avoidance approaches that help shift profit from higher-tax nations to lower-tax or no-tax nations.

BEPS helps eliminate considerable interest or royalty payments to reduce the taxable profit. According to the Organisation for Economic Co-operation and Development (OECD), BEPS is important for under-developing nations because of their heavy reliance on corporate tax, especially from multinational enterprises.

The Government imposes a tax on the percentage of the income or profit of multinational companies. But to avoid paying tax, global enterprises use BEPS to shift their income or profit to another nation which could be a tax haven (lower tax or no tax). Although, when the profit or revenue is transferred to the tax haven nation, which helps the tax-base or multinational enterprise to generate their income, it does not receive any tax, or tax erosion occurs.

Tools of Base Erosion and Profit Shifting [BEPS]

There are three Base Erosion and Profit Shifting tools used to transfer profit to a corporate lower-tax or no-tax nations, which are the following -

  • Debt-based tools: It is also known as earnings stripping. The debt-base BESP tools help extract the profit charge-out artificially exorbitant interest rates across the cross-border.
  • IP-based tools: It is also known as intergroup IP charging. The IP-based BESP tools help extract the profit charge out of internal virtual IP assets cross-border.
  • TP-based tools: TP refers to a transfer price at which the tax haven charges the finished products to higher-tax nations. This tool justifies an extended rise in transfer price by shifting profits to the lower-tax or no-tax nation by asserting that the operation performed in the lower-tax nation.

Problems With Base Erosion and Profit Shifting [BEPS]

BEPS exploits the gaps and mismatch in tax payments; however, the concern across the globe has risen regarding enterprises making profits in specific countries but not paying taxes to the local or subsidised Governments. Hence, the following issues arise with the Base Erosion and Profit Shifting -

  • According to the OECD, the estimates for 2013 conservatively demonstrate the annual loss of global corporate income tax revenue is about 4 to 10 per cent which is $100B to $240B.
  • The BEPS erodes all taxpayers' voluntary compliance when they see the legal avoidance of income or profit tax by higher-tax jurisdictions or multinational companies.
  • Enterprises set across nations gain competitive benefits over the domestic level enterprises by using BEPS; thus, Base Erosion and Profit Shifting erode the detachment and probity of tax regulations.
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Projects Launched to Tackle BEPS

To conduct more cooperation in the international tax system, ensure transparent tax, reduce disputes, and tackle the problem of tax avoidance by multinational enterprises, the OECD introduced various Base Erosion and Profit Shifting Action Plans.

The OECD launched 15 action plans. There are approximately 141 countries that have implemented these 15 action plans, which help them tax the company that is generating income and profit in that nation.

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Base Erosion and Profit Shifting lead to unfairness between domestic and multinational companies by using tax shifting strategies. However, the OECD has introduced action plans so that nations can act together to address BEPS and restore trust in international and domestic enterprises' tax regulations.

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FAQs on the Base Erosion and Profit Shifting [BEPS]

Q1) What is Base Erosion and Profit Shifting [BEPS]?

Base Erosion and Profit Shifting [BEPS] is the tax shifting strategy exploiting the gaps and mismatches in tax regulations used by many multinational companies to eliminate tax payments.

Q2) What is the mechanism of Base Erosion and Profit Shifting [BEPS]?

Base Erosion and Profit Shifting is the plan of action for shifting tax or corporate tax avoidance approaches to help shift profit from higher-tax nations to lower-tax or no-tax nations.

Q3) What are the tools for Base Erosion and Profit Shifting?

The three primary tools for Base Erosion and Profit Shifting are Debt-based tools, IP-based tools, and TP-based tools.

Q4) What is the OECD doing to tackle Base Erosion and Profit Shifting?

To conduct more cooperation in the international tax system, ensure transparent tax, reduce disputes, and tackle the problem of tax avoidance by multinational enterprises, the OECD launched 15 Base Erosion and Profit Shifting Action Plans.