Critical Evaluation of the BEPS Project: Successes and Shortcomings

This report evaluates the OECD's Base Erosion and Profit Shifting (BEPS) project, designed to combat tax avoidance by multinational enterprises. It discusses the project's origins in response to financial crises and the increasing problem of tax avoidance, particularly highlighting the role of U.S.-based m...Read More

RUNNING HEAD: BEPS PROJECT
Base erosion and profit shifting

BEPS Project 1
Contents
Introduction................................................................................................................................2
BEPS Project..............................................................................................................................2
Evaluation of the project............................................................................................................2
Conclusion..................................................................................................................................3

BEPS Project 2
Introduction
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.
BEPS Project
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
1 OECD, ‘About the Inclusive Framework on BEPS’ < http://www.oecd.org/ctp/beps-about.htm > accessed 30
June 2018.

BEPS Project 3
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
Evaluation of the project
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.
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
2 Reuven S. Avi-Yonah and Haiyan Xu, ‘Evaluating BEPS’ (2017) Rev., 10, p.3
3 Philip Baker QC, "What does success look like for BEPS and what is failure", (Fieldtax.com, 2014),
<http://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.

BEPS Project 4
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.4The 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
4 ‘Overall Evaluation of the G20/OECD Base Erosion and Profit Shifting (BEPS) Project’ (Globalpolicy.org,
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
5 ‘EVALUATING BEPS: A RECONSIDERATION OF THE BENEFITS PRINCIPLE AND PROPOSAL FOR
UN OVERSIGHT’ (Hblr.org, 2016) <http://www.hblr.org/wp-content/uploads/2017/01/1.-Evaluating-
BEPS.pdf> accessed 30 June 2018

BEPS Project 5
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
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
6 ‘Evaluation of the G20/OECD Base Erosion and Profit Shifting (BEPS) Project’ (Taxjustice.net, 2015)
https://www.taxjustice.net/wp-content/uploads/2015/09/GATJ-BEPS-2015.pdf accessed 30 June 2018

BEPS Project 6
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.
7 ‘BEPS challenges: An initiative for fair taxation leads to tax disadvantages for industrialized countries’
(English.bdi.eu, 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
8 ‘OECD presents outputs of OECD/G20 BEPS Project for discussion at G20 Finance Ministers meeting –
OECD’ (Oecd.org, 2018) <http://www.oecd.org/ctp/oecd-presents-outputs-of-oecd-g20-beps-project-for-
discussion-at-g20-finance-ministers-meeting.htm> accessed 30 June 2018

BEPS Project 7
Bibliography
‘About the Inclusive Framework on BEPS’ (OECD, 2018) < http://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)
<http://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) <http://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), <http://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

BEPS Project 8
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