TRansfer pricing glossary
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BEPS (Base Erosion and Profit Shifting)

BEPS (Base Erosion and Profit Shifting)

20/11/2024
Base Erosion and Profit Shifting (BEPS) is a major concern for governments worldwide, as it allows multinational enterprises (MNEs) to minimize their tax liabilities by shifting profits to low-tax jurisdictions.

Base Erosion and Profit Shifting (BEPS) is a major concern for governments worldwide, as it allows multinational enterprises (MNEs) to minimize their tax liabilities by shifting profits to low-tax jurisdictions. The OECD introduced the BEPS Action Plan to combat these strategies and ensure fair taxation. Below, we answer some of the most frequently asked questions about BEPS.

1. What is BEPS (Base Erosion and Profit Shifting)?

BEPS refers to tax planning strategies used by multinational enterprises (MNEs) to artificially shift profits from high-tax to low-tax (or no-tax) jurisdictions, thereby eroding the taxable base of higher-tax countries. These strategies exploit gaps and mismatches in international tax rules to reduce corporate tax liability.

2. Why is BEPS a problem?

BEPS reduces government tax revenues, limiting public investment in infrastructure, education, and healthcare. It also creates unfair advantages for large MNEs over smaller businesses that cannot engage in complex tax planning. The OECD estimates that BEPS practices cost governments between $100 billion to $240 billion annually in lost tax revenue.

3. What is the OECD BEPS Action Plan?

The OECD BEPS Action Plan is a framework developed by the Organisation for Economic Co-operation and Development (OECD) and G20 nations to combat tax avoidance. Introduced in 2013, the plan consists of 15 action points designed to close loopholes, improve transparency, and align profits with real economic activity.

4. What are the 15 BEPS Actions?

The BEPS Action Plan consists of the following key measures:

  1. Addressing tax challenges of the digital economy
  2. Neutralizing hybrid mismatch arrangements
  3. Strengthening Controlled Foreign Corporation (CFC) rules
  4. Limiting base erosion through interest deductions
  5. Countering harmful tax practices (including tax rulings & incentives)
  6. Preventing treaty abuse
  7. Preventing artificial avoidance of Permanent Establishment (PE) status
  8. Aligning transfer pricing with value creation – Intangibles
  9. Aligning transfer pricing with value creation – Risks & Capital
  10. Aligning transfer pricing with value creation – Other high-risk transactions
  11. Measuring and monitoring BEPS activities
  12. Enhancing disclosure of aggressive tax planning
  13. Improving transfer pricing documentation (Master File, Local File, CbCR)
  14. Making dispute resolution mechanisms more effective
  15. Developing a multilateral instrument (MLI) to update tax treaties

Each action point targets specific weaknesses in international tax systems, ensuring MNEs pay their fair share in the jurisdictions where they generate profits.

5. Who does BEPS impact?

BEPS regulations impact:

  • Multinational Enterprises (MNEs) engaging in cross-border business activities.
  • Tax authorities and governments seeking to prevent revenue loss.
  • Small and medium enterprises (SMEs) that compete with MNEs but lack access to aggressive tax planning.
  • Consumers and citizens, as lost tax revenue affects public services.

6. How does BEPS relate to transfer pricing?

Transfer pricing rules determine how profits are allocated between related entities in different countries. BEPS addresses transfer pricing concerns by ensuring that profits are taxed where economic activities occur and value is created. Actions 8-10 of the BEPS Plan specifically focus on tightening transfer pricing regulations to prevent artificial profit shifting.

7. How do companies engage in BEPS strategies?

Common BEPS strategies include:

  • Shifting intangibles (like patents or trademarks) to tax havens to minimize taxable income.
  • Using intra-group loans to generate tax-deductible interest expenses.
  • Artificially avoiding Permanent Establishment (PE) status to avoid local taxation.
  • Exploiting hybrid mismatch arrangements to benefit from double non-taxation.

These strategies reduce tax liabilities but are now being scrutinized under BEPS reforms.

8. What is the Multilateral Instrument (MLI) under BEPS?

The Multilateral Instrument (MLI) is a treaty developed under BEPS Action 15 to swiftly implement tax treaty changes in multiple jurisdictions. Instead of renegotiating thousands of bilateral tax treaties, the MLI allows countries to adopt BEPS measures in a standardized way, reducing treaty abuse and tax avoidance.

9. What is the role of Country-by-Country Reporting (CbCR) in BEPS?

CbCR (BEPS Action 13) enhances tax transparency by requiring large MNEs to disclose financial and tax data for each country in which they operate. This helps tax authorities detect inconsistencies in profit allocation and assess potential BEPS risks.

10. How does BEPS affect tax treaties?

BEPS introduces anti-abuse clauses in tax treaties to prevent treaty shopping, where companies use tax treaties to gain unfair tax advantages. Under BEPS Action 6, the Principal Purpose Test (PPT) and Limitation on Benefits (LOB) rule help ensure tax treaties are not misused for tax avoidance.

11. How does BEPS affect digital businesses?

Digital companies often generate revenue in countries where they have no physical presence, making taxation difficult. BEPS Action 1 addresses this by introducing rules for taxing the digital economy, including concepts like Significant Economic Presence (SEP) and Digital Services Taxes (DSTs).

12. What is Pillar One and Pillar Two under BEPS 2.0?

The OECD introduced BEPS 2.0, focusing on global tax reforms through Pillar One and Pillar Two:

  • Pillar One reallocates taxing rights to ensure that digital and consumer-facing businesses pay taxes where they generate revenue.
  • Pillar Two introduces a global minimum tax of 15% to prevent profit shifting to low-tax jurisdictions.

13. What are the penalties for non-compliance with BEPS regulations?

Penalties vary by country but may include:

  • Financial penalties for non-compliance with transfer pricing or CbCR requirements.
  • Additional tax assessments if authorities reallocate profits.
  • Reputational risks due to public scrutiny of aggressive tax planning.

Governments are actively enforcing BEPS measures to ensure compliance.

14. How can companies comply with BEPS regulations?

To comply with BEPS, MNEs should:

  • Review their transfer pricing policies to align with economic substance.‍
  • Ensure proper documentation (Master File, Local File, and CbC Report).‍
  • Monitor tax treaty changes due to MLI implementation.‍
  • Assess digital tax exposure if operating in the digital economy.
  • ‍Work with tax advisors to implement BEPS-compliant strategies.

15. What is the future of BEPS?

BEPS continues to evolve, with ongoing OECD discussions on taxing the digital economy and implementing the global minimum tax. Countries are increasingly adopting unilateral measures like Digital Services Taxes (DSTs), making international tax compliance more complex.

Final Thoughts

BEPS has reshaped the global tax landscape, making tax planning more transparent and accountable. Businesses must stay ahead of regulatory changes to avoid risks and maintain compliance. If you're dealing with BEPS-related challenges, consulting a tax expert is essential for navigating the evolving tax environment.