BEPS research essay
Purpose Recently, there has been more talk of tax revenues lost through schemes aimed at eroding profit bases and shifting profits to low- or no-tax jurisdictions . Many companies have found this to be relatively easy task through the use of base erosion and profit shifting (BEPS). BEPS are tax planning strategies created to take advantage of gaps in tax rules and different tax systems (Burmester, K., & Smiley, S., 2013)
Importance
Many tax authorities from different countries have brought up the issue of losing tax revenues to countries with a lower tax rate. With the increasing number of companies moving offshore, multinational enterprises(MNE) can easily use BEPS strategies to reduce their global effective rate of tax (Base Erosion and Profit Shifting, 2012). Globalization has made it easier for MNEs to use BEPS strategies to their advantage.
Results BEPS can achieve a number of results. Some can be beneficial to the economy, while others can be harmful. Jurisdiction to Tax - Two tax systems are never the same and are not usually employed in a pure form. When income is earned in two systems, without uniform international taxation rules it could lead to a double taxation or double non-taxation. Corporations can erode the base and shift profits to the lower tax rate country. This can distort international competition OECD (2013b). Transfer Pricing - The rules are used to determine the relevant share of the profits which should be taxed in a particular country. This may create an incentive to shift a greater amount of profits to a country where it will be taxed more favourably OECD (2013b). Leverage - Most countries have a different tax treatment of debt and that of equity. Interest on debt is usually deductible, whereas dividends paid are not. This is an incentive for MNE's to use debt financing to have debt and equity taxed favourably or not being taxed at all OECD (2013b). Anti-avoidance - There are a number of strategies that are used to reduce the
Importance
Many tax authorities from different countries have brought up the issue of losing tax revenues to countries with a lower tax rate. With the increasing number of companies moving offshore, multinational enterprises(MNE) can easily use BEPS strategies to reduce their global effective rate of tax (Base Erosion and Profit Shifting, 2012). Globalization has made it easier for MNEs to use BEPS strategies to their advantage.
Results BEPS can achieve a number of results. Some can be beneficial to the economy, while others can be harmful. Jurisdiction to Tax - Two tax systems are never the same and are not usually employed in a pure form. When income is earned in two systems, without uniform international taxation rules it could lead to a double taxation or double non-taxation. Corporations can erode the base and shift profits to the lower tax rate country. This can distort international competition OECD (2013b). Transfer Pricing - The rules are used to determine the relevant share of the profits which should be taxed in a particular country. This may create an incentive to shift a greater amount of profits to a country where it will be taxed more favourably OECD (2013b). Leverage - Most countries have a different tax treatment of debt and that of equity. Interest on debt is usually deductible, whereas dividends paid are not. This is an incentive for MNE's to use debt financing to have debt and equity taxed favourably or not being taxed at all OECD (2013b). Anti-avoidance - There are a number of strategies that are used to reduce the