“Base Erosion and Profit Shifting” (BEPS) has become a shorthand term of many developed economies to describe a symptom of declining corporate tax revenues around the world.

Causes continue to be the subject of speculation, including theories at the more extreme end regarding aggressive tax planning by multinational corporate groups seeking to take advantage of gaps in international tax rules by a variety of means, including transfer pricing, tax havens, hybrid entities and thin capitalisation.

Following an OECD report in February 2013 which highlighted the problem, the OECD recently issued an Action Plan on BEPS which sets the stage for further international development. The Australian Government itself released a “scoping paper” in July 2013 which set out the Government’s intention to take action. In addition, the Australian Treasurer and the UK Chancellor of the Exchequer issued a joint media release in August expressing an agreement to “combat tax avoidance and evasion”.

It is a safe prediction that BEPS will be a priority topic when Australia hosts the G20 next year.

Motivations for a global project on BEPS

Reviews into the so-called practice of international tax planning by multinationals are not a new phenomenon. OECD member countries have grappled with the appropriate allocation and exercise of taxing powers between nations, including how to address the use of tax havens and how to enforce transfer pricing for a long time. Many countries, including Australia, already have detailed domestic laws and processes to address the concerns (actual and perceived) arising from international tax planning activities. Australia recently made a range of amendments to its own transfer pricing laws.

But the Australian Government and the OECD have embarked upon a renewed push to resolve what they believe to be a growing problem. This may be influenced by further declines in revenues at a time when governments can least afford them, or a general acceptance that despite the existence of domestic anti-avoidance rules in countries like Australia, the problem can no longer be addressed by one country acting alone. In the background, certain economists have for some time predicted a gradual reduction in the global corporate tax base. This was a feature of the 2009 report Australia’s future tax system (the Henry Review).

The Australian BEPS scoping paper covers a lot of ground and sets out a range of statistics to reenforce the existence of the problem and a variety of explanations for it. It is suggested that BEPS is increasing as a result of globalisation, both in terms of increased mobility of investment, flexibility in location of intellectual property and intangibles and also internet-based business. These factors are perceived to create a fertile environment for multinationals to exploit inconsistencies in international tax rules and tax rates by, for example, realising value from sales in low-tax country A even though the sales are generated from customers in higher-tax country B. In terms of recommendations, the paper proposes greater publication of taxation statistics involving international dealings, ten-year reviews of all bilateral tax treaties, expanded tax information exchange arrangements and an endorsement of the OECD’s Action Plan. The “scoping paper” identifies a problem and sets a path for Australia (with other countries) to proceed with intent in search of the solution.

Features of the Action Plan

The OECD Action Plan contains a set of fifteen “actions”. The OECD BEPS project is still in its early stages, and this is evident from some of the broad objectives which appear to be directed more at solidarity and identifying the cause of the perceived problem than recommending particular solutions at this time.

The path ahead

There is some evidence that OECD Governments believe that the first task in achieving this significant project is to encourage negative perceptions about relevant corporate behaviours, by demonising (rightly or wrongly) multinational groups who engage in activities that Governments and others believe should be perceived as highly questionable notwithstanding that they may conform with current law.

In late 2012, Assistant Treasurer David Bradbury shone the spotlight on Google, citing a low effective tax rate in Australia on certain transactions. In the UK, widely publicised campaigns against a number of taxpayers and appearances before the UK Public Accounts Committee by various multinational corporations with significant value in intangibles led to statements by Starbucks suggesting that it would pay millions of pounds in taxes voluntarily in response to public pressure.

But there is a limit to how much assistance may be obtained by encouraging public support at home. Legislating to prevent an entity (which may not be locally resident) from arranging its commercial affairs in a foreign jurisdiction may require fundamental changes to accepted treaty rules about source of income and residence. This not only requires public support, but buy-in from a wide range of jurisdictions including, quite possibly, international low-tax and notax jurisdictions that are alleged to enable the corporate behaviours underlying BEPS.

A summary of the actions is as follows.

Click here to view table.

One thing for certain is that Australia has marked itself as intent on playing a leading role in the campaign to fight BEPS, and its role in hosting the G20 is likely to provide the perfect platform.