BEPS is the short form for Base Erosion and Profit Shifting which is normally used by multinational entities in a bid to exploit voids and differences in tax laws with an aim of transferring their profits to places where there are no or very little taxes being levied hence leading to absence of corporate taxes at large.
Characteristics of BEPS
- Common techniques move intangible assets and debt to favorable regimes, treat interests and royalties as deductible expenses in high-tax places, and adopt captive insurance and financing arrangements
- The OECD launched its BEPS Project tackling these loopholes via 15 action plans addressing areas like transfer pricing, permanent establishment status, and digital taxation
- Nations independently or jointly modify legislation to curb BEPS and protect their appropriate tax bases according to substance
Example of BEPS Concern
Tax authorities scrutinized a tech giant’s extensive use of cost-sharing agreements and royalty payments to affiliates in low-tax Asian economies lacking R&D substance as an aggressive form of BEPS.
Key Takeaways
As international business models continue to outpace the global tax system, taxation remains a hot issue between governments’ revenue requirements and taxpayers’ compliance costs, thereby warranting further changes in international tax policy as well as collaboration among countries.