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
- 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.