Base erosion and profit shifting Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations where there is little or no economic activity, thus "eroding" the "taxbase" of the higher-tax jurisdictions using deductible payments such as interest or royalties.[5][6] For the government, the tax base is a company's income or profit. Tax is levied as a percentage on this income/profit. When that income / profit is transferred to a tax haven, the tax base is eroded and the company does not pay taxes to the country that is generating the income. As a result, tax revenues are reduced and the country is disadvantaged. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as "exploiting gaps and mismatches in tax rules".[6] While some of the tactics are illegal, the majority are not. Because businesses that operate across borders can utilize BEPS to obtain a competitive edge over domestic businesses, it affects the righteousness and integrity of tax systems. Furthermore, it lessens deliberate compliance, when taxpayers notice multinationals legally avoiding corporate income taxes. Because developing nations rely more heavily on corporate income tax, they are disproportionately affected by BEPS.[7]
The United States Department of the Treasury decided against signing the 2016 OECD anti–BEPS MLI initiative from the § Failure of OECD (2012– 2016), stating that the U.S.: "has a low degree of exposure to base erosion and profit shifting".[1] International tax academics showed in 2018 that U.S. multinationals are the largest users of BEPS tools in the world;[2] while U.S tax academics demonstrated, even as early as 1994 that the U.S. Treasury is a net beneficiary from the use of tax havens and BEPS by U.S.
multinationals.[3][4] Corporate tax havens offer BEPS tools to "shift" profits to the haven, and additional BEPS tools to avoid paying taxes within the haven (e.g. Ireland's "CAIA tool").[a] BEPS activities cost nations 100-240 billion dollars in lost revenue each year, which is 4-10 percent of worldwide corporate income tax collection. It is alleged that BEPS tools are associated mostly with American technology and life science multinationals.[b][2] A few studies showed that use of the BEPS tools by American multinationals maximized long–term American Treasury revenue and shareholder return, at the expense of other countries.[3][4][2]
Scale In January 2017 the OECD estimated that BEPS tools are responsible for tax losses of circa $100–240 billion per annum.[8] In June 2018 an investigation by tax academic Gabriel Zucman (et alia),[9] estimated that the figure is closer to $200 billion per annum.[10] The Tax Justice Network estimated that profits of $660 billion were "shifted" in 2015 due to Apple's Q1 2015 leprechaun economics restructuring, the largest individual BEPS transaction in history.[11][12][13] The effect of BEPS tools is most felt in developing economies, who are denied the tax revenues needed to build infrastructure.[14][15]