Base erosion and profit shifting (OECD project)

The OECD G20 Base Erosion and Profit Shifting Project (or BEPS Project) is an OECD/G20 project to set up an international framework to combat tax avoidance by multinational enterprises ("MNEs") using "base erosion and profit shifting" tools. The project, led by the OECD's Committee on Fiscal Affairs, began in 2013 with OECD and G20 countries, in a context of financial crisis and tax affairs (e.g. Offshore Leaks). Currently, after the BEPS report has been delivered in 2015, the project is now in its implementation phase, 116 countries are involved including a majority of developing countries. During two years, the package was developed by participating members on an equal footing, as well as widespread consultations with jurisdictions and stakeholders, including business, academics and civil society. And since 2016, the OECD/G20 Inclusive Framework on BEPS provides for its 140 members a platform to work on an equal footing to tackle BEPS, including through peer review of the BEPS minimum standards, and monitoring of implementation of the BEPS package as a whole.
The BEPS project looks to develop multilateral dialogue and could be achieved thanks to a successful international cooperation, unavoidable when it comes to such a domestic and sovereign topic. It is one of the instances of the OECD that involves developing countries in its process. The European Commission and the US have unilaterally taken actions in 2017-2018 that implement several key measures of the BEPS project, even going beyond in some cases.
Content.
Project aim.
The aim of the project is to mitigate tax code loopholes and country-to-country inconsistencies so that corporations cannot shift profits from a country with a high corporate tax rate to countries with a low tax rate. The practice - in particular double non-taxation - is usually legal but often involves complex manoeuvres within tax law. BEPS is costly for all parties involved, save the firm. The citizens' trust in tax systems can be harmed by widespread tax avoidance practices, which puts at stake fiscal consent a concept at the core of modern democracies ; it is also a loss of revenues for the State. A conservative estimate has annual tax revenue losses between 100 and US$240 billion (i.e. 4-10% of global revenues from corporate income tax) due to profit shifting around the globe. A study by the Tax Justice Network estimated that around US$660 billion of corporate profits were shifted in 2012. In developed countries like those comprising the OECD, BEPS undermines the integrity of tax systems. In developing countries, where there is heavy reliance on corporate taxes, revenues are trimmed, leaving states underfunded and underinvested.
Furthermore, the project serves as an alternative to the deterioration of international tax norms. The project's Action Plan states that a failure to address BEPS would spawn "the emergence of competing sets of international standards, and the replacement of the current consensus-based framework by unilateral measures, which could lead to global tax chaos marked by the massive re-emergence of double taxation. In this respect, the BEPS project serves as an example of cooperation in game theory. The project prevents both double taxation and double non-taxation, as well as countries undercutting others by lowering tax rates to attract business. Countries cooperating yields a better outcome than non-cooperation.
Inclusive Framework.
In October 2015, after two years of negotiations and development, a 15-point Action Plan was announced by the OECD and G20 to address BEPS. The Inclusive Framework was established in 2016, it was deemed necessary that for an effective international tax framework, developing countries must be involved. To gain membership, non-OECD/G20 countries must commit to the BEPS package, a plan to "equip government with domestic and international instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created." All countries in the framework work on equal footing to implement the BEPS package. The package consists of 15 action plans that provide tax standards in exchange for a membership fee (discounted for developing countries). As of May 2018, 116 countries had signed on to the project.
BEPS achievements.
During its ongoing implementation and as of July 2018, the BEPS project of the OECD allowed to achieve the following realisations:
BEPS examples.
A spate of BEPS scandals in the past decade has served as an impetus for the OECD's action. The largest firms are often U.S. multinationals avoiding the high (35%) worldwide corporate tax rate in the United States. However BEPS tools (and structuring) are also increasingly used in money laundering/regulatory avoidance. The following are prominent examples of the leading BEPS tools in operation today:
Structure.
The BEPS project consists of 15 action plans with 4 minimum standards, agreed to by all participating countries who have committed to consistent implementation.
Some measures can be used immediately, others require renegotiating bilateral tax treaties.
Action 1: Address the Digital Economy
Action 2: Hybrids
Action 3: Controlled Foreign Companies (CFC) Rules
Action 4: Interest Deductions
Action 5: Harmful Tax Practices ("minimum standard")
Action 6: Treaty Abuse ("minimum standard")
Action 7: Permanent Establishment Status
Actions 8-10: Transfer Pricing
Action 11: BEPS Data Analysis
Action 12: Disclosure of Aggressive Tax Planning
Action 13: Transfer Pricing Documentation ("minimum standard")
Action 14: Dispute Resolution("minimum standard")
Action 15: Multilateral Instrument
Other initiatives.
In 2017–2018, both the U.S. and the European Commission decided to depart from the OECD BEPS process and timetable, and launch their own anti-BEPS tax regimes:
The departure of the U.S. and EU Commission from the OECD BEPS project is attributed to frustrations with the rise in intellectual property (or IP), as a key BEPS tool to create intangible assets, which are then turned into royalty payment BEPS schemes (double Irish), and/or capital allowance BEPS schemes (capital allowances for intangibles). In contrast, the OECD has spent decades developing intellectual property as a legal and a GAAP accounting concept.
Ireland, who has some of the most advanced IP-based BEPS tools in the world, and have the first OECD-approved IP-box, has been a supporter of the OECD BEPS project (see Feargal O'Rourke quote). Ireland's capital allowances for intangibles scheme was the BEPS structure to secure it as an ultra-low tax (i.e. 0-3% in perpuity) location for U.S. multinationals, that is in full compliance with all OECD guidelines, and the OECD BEPS project.
However, the U.S. and EU's new tax regimes deliberately "override" these IP-based BEPS tools.
Ireland has opened a new line of Debt-based BEPS tools which use securitization vehicles to create advanced artificial loan structures that are hard to understand and track in the $10 trillion global securitisation sector (the securitization orphan structure approach also hides their ownership). Main tool is the Section 110 SPV.