You have almost certainly seen news stories recently about how global companies like Apple, Amazon, and Starbucks reduce their tax bills through clever use of international tax planning. You may also have come across the term ‘BEPS’ sprinkled liberally through the business news over the past month or two. If so, your eyes probably glazed over at the time. But since a number of my non-transfer pricing specialist friends have been asking me what ‘BEPS’ actually is and whether they should care, I thought I would take a moment to try to connect the dots and explain what it’s all about.
As these stories about global companies paying little or no tax in certain jurisdictions have become regular front page items in the business press, the issue has drawn the attention of the world’s political leaders. For better or worse (and I think it’s probably for the better – the system is sort of a mess in my opinion), corporate tax policy has become a hot political topic in recent years, as noted by the OECD:
The debate over base erosion and profit shifting (‘BEPS’) has reached the highest political level and has become an issue on the agenda of several OECD and non-OECD countries… The G20 leaders’ meeting in Los Cabos on 18-19 June 2012 explicitly referred to “the need to prevent base erosion and profit shifting” in their final declaration. G20 finance ministers, triggered by a joint statement of United Kingdom Chancellor George Osborne and German Finance Minister Wolfgang Shaüble, have asked the OECD to report on this issue by their meeting in February 2013. Such a concern was also voiced by US President Barack Obama in his Framework for Business Tax Reform, where it is stated that “the empirical evidence suggests that income-shifting behaviour by multinational corporations is a significant concern that should be addressed through tax reform”.
In other words, governments around the world have decided that it’s time to consider reforming corporate tax policy. But since global corporations are, well, global, it is widely recognized that such a project really needs to be internationally coordinated if it’s going to be successful. That’s where the OECD and its BEPS project comes in.
The BEPS project is essentially a bunch of working groups, composed of officials from the world’s largest economies, that are tasked with the job of trying to figure out how the international tax landscape for corporations should be changed. They are focusing on a few specific areas, including but not limited to:
- Tax avoidance by digital companies: Do different rules need to be created to specifically address the digital economy?
- Financial loopholes: What changes need to be made to prevent companies from using financial instruments like intercompany loans to avoid paying tax on some of their income?
- Intangibles: Should international transfer pricing norms be revised to make it harder for companies to reduce their taxes simply by moving their intangibles to low-tax jurisdictions?
- Documentation: What sort of international reporting standards could be imposed to make it harder for global companies to shift their income into low-tax jurisdictions?
In a nutshell, the BEPS project is the attempt by the world’s major economies to try to rewrite the rules on corporate taxation to address the widespread perception that they don’t pay their fair share of taxes. So despite its opaque acronym, and even though they don’t know it, BEPS is actually something that millions of people around the world feel strongly about.
In future posts I’ll address some of the questions you might be asking yourself at this point, like:
- Will any of the BEPS agenda items actually result in higher tax bills for global companies, and if so, which ones?
- Do different rules really need to be created to specifically address the digital economy?
- Is BEPS a good way to address the issue of corporate taxation?
In the meantime, keep your eyes open for mentions of BEPS in the news. And the next time you come across that obscure acronym, hopefully you’ll be able to see through it to the substantial international effort to address corporate tax policy that it represents.