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Governments have dismantled, or are in the process of amending, nearly 100 preferential tax regimes as part of the Organisation for Economic Co-operation and Development (OECD)/G20 base erosion and profit shifting (BEPS) standards aimed at improving the international tax framework, according to a progress report released earlier this week.
Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
The report provides details on the outcome of peer reviews undertaken of 164 preferential tax regimes identified amongst the more than 100 jurisdictions participating in the OECD Inclusive Framework on BEPS.
“Harmful tax practices are a particularly aggressive way through which jurisdictions can encourage the erosion of other jurisdictions’ tax bases,” said Martin Kreienbaum, chairman of the inclusive framework on BEPS.
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“It is critical that they be addressed, to protect the level playing field and prevent a race to the bottom. The Inclusive Framework’s peer reviews are resulting in real changes to these tax incentives, making it harder for multinationals to artificially shift their profits around the world for a tax advantage.”
“These outcomes demonstrate that the political commitments of members of the Inclusive Framework are rapidly resulting in measureable, tangible progress” said Pascal Saint-Amans, director of the OECD centre for tax policy and administration.
“The jurisdictions concerned are already working to address the harmful tax practices in their preferential regimes. In fact, countries have already changed or are changing almost 95percent of the regimes where action is needed.”
The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to “disappear” or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Revenue losses from BEPS are conservatively estimated at $100-240 billion annually, or the equivalent of 4-10percent of global corporate income tax revenues.
The BEPS Action 5 standard covers tax incentives (“preferential tax regimes”) that apply to mobile business income, such as financial and services income and income from intellectual property, which multinationals can shift with relative ease.
To avoid a race to the bottom and negative spillover effects on other jurisdictions’ tax bases, all 102 members of the BEPS Inclusive Framework have committed to ensuring that any regimes offered meet the criteria that have been agreed as part of BEPS Action 5.
Crucially, this includes a requirement that taxpayers benefiting from a regime must themselves undertake the core business activity, ensuring the alignment of taxation with genuine business substance.
BEPS Action 5 is one of the four BEPS minimum standards that all Inclusive Framework members have committed to implement. One part of the Action 5 minimum standard relates to preferential tax regimes where a peer review is undertaken to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions.
This progress report is an update to the 2015 BEPS Action 5 report and contains the results of the review of all Inclusive Framework members’ preferential tax regimes that have been identified. The results are reported as at October 2017.
Iheanyi Nwachukwu
