Shopping Cart

No products in the cart.

BEPS

BEPS stands for “Base Erosion and Profit Shifting”.

BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode the tax base of higher-tax jurisdictions and result in significant revenue losses for governments, affecting their ability to fund essential services.

BEPS schemes often leverage the complex nature of international tax regulations, taking advantage of differences in national tax rules. The Organisation for Economic Co-operation and Development (OECD) and the Group of Twenty (G20) initiated a coordinated effort known as the BEPS Project to combat these tax avoidance practices. The project resulted in the 15 BEPS Action Plans, which propose various measures aimed at preventing tax base erosion and profit shifting. These measures include enhanced transparency, anti-abuse rules, improvements to transfer pricing guidelines, and mandatory disclosure requirements for aggressive tax planning arrangements.

The BEPS framework has reshaped the global tax landscape, requiring MNEs to adhere to stricter reporting standards and ensure that profits are taxed where economic activities generating the profits are performed. Compliance with BEPS measures is critical for tax risk management, as non-compliance may lead to disputes with tax authorities and reputational damage for companies.

CLICK HERE FOR THE BEPS WEBSITE

Examples of BEPS in Practice

Example 1: Transfer Pricing and Intellectual Property (IP)

Imagine a global technology company with subsidiaries in several countries. The company develops valuable intellectual property (IP) such as software or patents. To minimise its overall tax liability, the company transfers ownership of the IP to a subsidiary in a low-tax jurisdiction, like Bermuda or the Cayman Islands. The subsidiaries in high-tax countries then pay substantial royalties or licensing fees to the low-tax jurisdiction for the right to use the IP. This arrangement reduces the taxable income in high-tax countries, shifting profits to the subsidiary in the low-tax jurisdiction, where the tax rate is minimal or zero.

The OECD’s BEPS Action Plan 8 addresses such profit-shifting strategies by requiring that the transfer pricing for intangibles be aligned with value creation. Companies must now demonstrate that the low-tax subsidiary performs substantial economic activities related to the development and management of the IP, or else face adjustments from tax authorities.

Example 2: Hybrid Mismatch Arrangements

Hybrid mismatch arrangements exploit differences in how tax jurisdictions treat financial instruments or entities. For instance, a multinational corporation sets up a financial arrangement that is treated as debt in one country, allowing interest deductions, while the same arrangement is treated as equity in another country, where the corresponding income is exempt from tax.

For example, consider a multinational using a loan from its parent company to finance its operations in a high-tax country. The loan generates interest payments deductible from taxable income in the high-tax country, but the corresponding income received by the parent company in a low-tax country is not taxable. This creates a mismatch, reducing the company’s overall tax liability. The BEPS Action Plan 2 seeks to neutralise such mismatches by aligning tax treatment across jurisdictions, preventing companies from benefiting from double non-taxation.

Example 3: Excessive Interest Deductions

Another common BEPS strategy involves the use of excessive interest deductions to erode the tax base. An MNE may capitalise a subsidiary in a high-tax country primarily through debt rather than equity. The subsidiary then makes significant interest payments to related parties in low-tax jurisdictions, reducing its taxable income in the high-tax country.

For example, a multinational sets up an intra-group financing structure where a subsidiary in a high-tax jurisdiction borrows a substantial amount from a related entity in a tax haven. The interest payments on the loan are deductible, significantly lowering the taxable income of the borrowing subsidiary. Meanwhile, the interest income received by the lender in the tax haven is subject to minimal or no tax. BEPS Action Plan 4 addresses this by recommending rules to limit interest deductions to a fixed percentage of earnings, thus curbing base erosion through excessive debt financing.