Base erosion and profit shifting (BEPS)

Base Erosion and Profit Shifting (BEPS) are tax planning tactics used by multinational corporations to “shift” profits from high-tax jurisdictions to low-tax jurisdictions, thus “eroding” the “tax base” of the higher-tax jurisdictions. BEPS methods are defined by the Organisation for Economic Co-operation and Development (OECD) as “the exploitation of gaps and mismatches in tax rules.” Corporate tax havens provide BEPS tools for “shifting” profits to the haven, as well as additional BEPS tools for tax avoidance within the haven (e.g., Ireland’s “CAIA tool”).

There is an argument that BEPS tools are largely associated with American technology and life sciences companies. Some studies have found that the use of BEPS methods by American companies has increased the long-term income of the U.S. Treasury and shareholder returns at the expense of other countries.

BEPS legislation changes the way multinational corporations document, report, and file taxes in countries around the world. As a result, there is a need for additional planning of new developments and meeting the requirements of master files, local files, and country-by-country reporting as implementation progresses and evolves. This involves assessing the risks associated with reporting rules and then building a strategy supported by appropriate processes and tools.

In these revolutionary times, it is crucial for your company to consider how it is created and how it approaches everything, from transfer pricing to permanent establishments to country-by-country sales. In every aspect of taxation, it is important to consult with a professional – a CPA, lawyer, or tax advisor. Nimrod Yaron & Co. serves as a professional resource on international taxation issues and provides services in areas such as transfer pricing, BEPS, and more. If you have questions regarding tax law, please contact us.

Scope of BEPS

The OECD estimated in January 2017 that BEPS methods are responsible for tax losses of between $100-240 billion annually. According to a June 2018 analysis by tax researcher Gabriel Zucman, the amount is closer to $200 billion annually. According to the Tax Justice Network, $660 billion in profits were “shifted” in 2015 (due to Apple’s reorganization for the economy in the first quarter of 2015).

The impact of BEPS techniques is most felt in emerging countries, which are deprived of the tax resources needed to create infrastructure. Most BEPS activity is related to industries with intellectual property (“I.P.”), especially technology (e.g., Apple, Google, Microsoft, Oracle) and life sciences (e.g., Allergan, Medtronic, Pfizer, and Merck & Co.). I.P. is referred to as “the raw materials of tax avoidance,” and I.P.-based BEPS instruments account for most of the BEPS income flows worldwide.

Corporate tax havens have some of the most advanced I.P. tax policies in their statutes. Most BEPS activity is also related to U.S. multinational corporations and is related to the previous “global” corporate tax system in the United States. Before the 2017 Tax Cuts and Jobs Act, the U.S. was one of only eight countries with a “worldwide” tax system. Most jurisdictions globally have a “territorial” corporate tax structure with lower tax rates for foreign-sourced income, eliminating the need for “shifting” profits.

U.S. multinationals use tax havens more than multinationals from other countries that maintain their controlled foreign corporation regulations. No other non-OECD haven country records as high a share of foreign profits recorded in tax havens as the United States. This suggests that half of all global profits shifted to tax on U.S. multinationals moved to havens. In contrast, about 25% of profits accrue to E.U. countries, 10% to the rest of the OECD, and 15% to developing countries (Tørsløv et al., 2018).

According to a study published in June 2018, Ireland is the largest BEPS point in the world. Ireland is larger than the Caribbean tax haven BEPS system, except for Bermuda.

OECD Initiatives

On January 29, 2019, the OECD published a policy statement including further steps to address BEPS activities by corporations, which analysts have called “BEPS 2.0.” The OECD said in a news release that their recommendations received support from the United States, China, Brazil, and India.

In a landmark agreement signed on July 1, 2021, 130 countries endorsed a statement outlining a framework for reforming international tax regulations. These countries are part of the OECD/G20 Inclusive Framework on BEPS (“IF”), which includes 139 other countries. The statement sets out the basic principles for a two-pillar approach to reforms and seeks to reach a comprehensive agreement by G20 finance ministers and central bank governors in October 2021, with changes to take effect in 2023.

Pillar One of the agreements significantly departs from the traditional norms of international tax laws of the last century, which primarily required physical presence in a country before that country had taxing rights.

Pillar Two achieves unprecedented consensus on a global minimum level of taxation, setting the stage for tax competitiveness between countries.

BEPS in Israel

The Israeli government began a consultation on October 12, 2020, to align the country’s transfer pricing documentation regulations with the three-tiered system described in the OECD’s 2017 Transfer Pricing Guidelines. The consultation involves legislative amendments to implement the three-tiered system advocated by the OECD as part of Action 13 of the BEPS Action Plan in Israel’s transfer pricing documentation regulations. Israel also proposes requiring organizations to create a transfer pricing position paper to be submitted upon request.