Overview of BEPS Project

Evaluate the success or failure of the BEPS project.

This report deals with the evaluation of BEPS project developed by OECD with the purpose of reducing and eliminating the concept of double nontaxation curtailing from BEPS which reflected that the international standards does not complies with the changes occurring in the global cooperative environment. The report analyses the whole BEPS project and its action plans which includes the key issues of tax policy required to be addressed for forming a new international tax standard. BEPS was introduced to recover the limitations and weakness found in the current taxation system. The answer for the question of its success and failure depends upon a proper evaluation of the initiative. The report deals with such assessment and then concludes about the failure and success of BEPS after evaluating the project and its action plans.

Base Erosion and Profit Shifting is basically a tax avoidance strategy used for eliminating the gaps and mismatches in tax rules and shifts the profits to no tax location artificially, where there is no or little economic activity. Some of the schemes used are illegal which reinforces the integrity of tax systems. As a result of which, businesses that operate internationally can use BEPS in order to gain competitive advantage as compare to the ones having domestic operations.[1]

BEPS is very important and significant for the developing countries as they rely heavily on income taxes particularly from multinational companies. It is mostly associated with U.S based multinationals and the package consist of 15 actions that provide governments with the domestic and international instruments required to tackle or handles BEPS. The project was introduced due to the financial crises and newly founded problem of tax avoidance. In respect of corporate tax avoidance, it was OECD and G20 who launched BEPS in 2013 and the action steps were developed in 2015, undertaken by OECD and G20 countries. Overall, it is a taxation strategy applied to make sure that the multinational enterprises (MNEs) are taxed only at the place where economic activity has taken place and value is created.[2]

The general approach of the BEPS is to consider all the multinationals a single entity and to tax them for their real activities. The project has a complete potential to eradicate the practice of avoiding tax by MNEs by deploying tax havens and other mechanisms. This has helped a lot for raising the revenues for the government to finance the public services and development in both developed and developing countries.[3] However, the approach of considering MNEs as a single entity was opposed by OECD as a result of which, BEPS outcome fails to give more comprehensive approach, rather it made the existing rules more complex. Initially there were some sensible proposals that got weakened by some of the powerful OECD states in intention to preserve their tax breaks for businesses. As a result of this, more complexity arises in the international taxes and the compliance cost for MNEs increases. With all this, it can be said the BEPS is a partial success as it has opened the space for more changes.

BEPS and Tax Avoidance

However, the project faced many limitations, despite of considerable progress. The shortcomings were the result of its short two year framework which does not allow BEPS to become the final destination of international tax law reform. Instead of this, it is considered to be the first step of the longer process towards the modernisation or transformation of tax governance globally and in a long run. The main and primary problem faced by BEPS is that though the project has defined new directions but for that new rules and principles have not be developed yet, instead old regulation got strengthen by patching up of the current rules.[4]The core principle of global law is the promoting single tax which requires the elimination of both double taxation and non-taxation. The MNEs and both the governments have been fighting against the double taxation and in lieu of that they ignore the threat of double non-taxation. While the mission of BEPS is to prevent the enterprises from the practice of non-taxation and for this new direction, changes were required in current approaches. Unfortunately that could not happened and the new and old principle both got involved in the packages. Also the period of the framework was short which eventually resulted in the covering of loopholes in current rules.

BEPS continuously lay more emphasis on the single entity principle and attempt to counteract its harmful repercussions. As a result, the project fails to provide an inclusive and coherent approach and make the existing rules more difficult and complex. It is been observed that all the new rules of BEPS are based on one principle of single entity. Such as CFC rule, deferral and territorial systems are such flawed rules that are indirectly link to the independent entity principle.[5] Moreover, the assumptions of the principles do not exist in real commercial world. Initially the OECD declared that the BEPS package will address the structural issues by looking at the root causes rather than only examining the symptoms. As per the evaluation, one of the key root cause was the traditional benefit principle which has created many BEPS opportunities in past. However, the project failed in replacing this principle. This raises the need for modifying basic principles of current international taxation so that MNEs and domestic firms will get a level playing field.

Apart from the above failures, the lack of multilateralism and inclusiveness also became the result of BEPS failure. Although great efforts are been made by OECD in the development of BEPS project, but still it got failed in many cases. Firstly, the OECD countries showed dominance in the formation of the packages at time of making discussions and negotiations. Secondly, the effectiveness of the project is limited as only one third of the total UN members were involved in the formation of project. Apart from this, some countries did not accept the core proposals of BEPS, most of the countries might get affected by the negative outcomes of BEPS in future and the process followed for consulting and public debate was insufficient.[6]

Importance of BEPS for Developing Countries

From the statements and issues discussed above, it can be said that there is an increasing need of revaluating the benefits principles. Many of the issues can be sorted out if the passive income is been taxed at source and putting tax on active income at residence. However the main shortcoming is the absence of clear and defined new rules. All the above factors lead to the failure of BEPS project, though it is partially successful as it has opened space for fair changes. In order to become more successful, more work is required to be done on this and therefore the exact decision of failure and success cannot be taken. It is better to consider this phase as an outcomes at the initial stage and is regarded as a first stage of longer process. There is a long way to go in order to make this project successful.[7]

Conclusion

The above report conclude that the benefits principle must be changed in respect to globalization. In addition to this, passive income should be taxed primarily at source as this will allow the companies and multinationals to address and deal with the corporate tax avoidance and individual tax evasion. It is very necessary and important to address these issues in order to expand and maintain the benefits of globalization. Tax erosion and avoidance are the key issues which are required to be eradicated at any cost. Large companies must pay their fair share of tax so as to avail the benefits of trading globally.[8]

In order to make BEPS successful, it is very important to properly implement and review the proposals of the packages. In addition to that, follow up of the work is also required for the issues that are not addressed. It is already clear that in two year framework the project has only made changes in existing and current rules and regulations of taxation system. Further processing is required to properly implement the action plans mentioned in the project

‘About the Inclusive Framework on BEPS’ (OECD, 2018) < https://www.oecd.org/ctp/beps-about.htm> accessed 30 June 2018

Avi-Yonah, R.S. and Xu, H., ‘Evaluating BEPS’ (2017) Erasmus L. Rev., 10, p.3.

‘BEPS challenges: An initiative for fair taxation leads to tax disadvantages for industrialized countries’ (English.bdi.edu, 2018) <https://english.bdi.eu/article/news/beps-challenges-an-initiative-for-fair-taxation-leads-to-tax-disadvantages-for-industrialized-countries/> accessed 30 June 2018

‘EVALUATING BEPS: A RECONSIDERATION OF THE BENEFITS PRINCIPLE AND PROPOSAL FOR UN OVERSIGHT’ (Hblr.org, 2016) <https://www.hblr.org/wp-content/uploads/2017/01/1.-Evaluating-BEPS.pdf> accessed 30 June 2018

‘OECD presents outputs of OECD/G20 BEPS Project for discussion at G20 Finance Ministers meeting – OECD’ (OECD, 2018) <https://www.oecd.org/ctp/oecd-presents-outputs-of-oecd-g20-beps-project-for-discussion-at-g20-finance-ministers-meeting.htm> accessed 30 June 2018

‘Overall Evaluation of the G20/OECD Base Erosion and Profit Shifting (BEPS) Project’ (Globalpolicy, 2015) <https://www.globalpolicy.org/component/content/article/272-general/52817-overall-evaluation-of-the-g20oecd-base-erosion-and-profit-shifting-beps-project.html> accessed 30 June 2018

   Baker QC, P, ‘What does success look like for BEPS and what is failure’ (Fieldtax.com. 2014), <https://www.fieldtax.com/wp-content/uploads/2015/08/25-July-2014-What-does-success-look-like-for-BEPS-and-what-is-failure.pdf> accessed 30 June 2018 

Evaluation of the G20/OECD Base Erosion and Profit Shifting (BEPS) Project’ (Taxjustice, 2015) <https://www.taxjustice.net/wp-content/uploads/2015/09/GATJ-BEPS-2015.pdf> accessed 30 June 2018