Base Erosion And Profit Shifting (BEPS)

Base erosion and profit shifting (BEPS) is a strategy used by some multinational companies to reduce their tax liabilities by shifting profits from high-tax jurisdictions to low-tax or no-tax locations.

Example #1

Imagine a multinational company that artificially inflates expenses in a country with high taxes to reduce its reported profits, then shifts those profits to a subsidiary located in a tax haven to pay significantly lower taxes.

Example #2

Another example is when a company manipulates transfer pricing by setting prices for goods and services exchanged between its subsidiaries in a way that shifts profits to low-tax jurisdictions.

Misuse

The misuse of BEPS can lead to significant revenue losses for countries where the economic activity actually takes place. This practice undermines the fairness of the tax system by allowing large corporations to avoid paying their fair share of taxes, shifting the burden onto consumers, employees, and small businesses.

Benefits

One benefit of BEPS regulations is the creation of a more level playing field for all businesses, ensuring that multinationals pay taxes proportionate to the economic activities they undertake in each country. This can prevent unfair advantages for large corporations over smaller, local businesses.

Conclusion

BEPS is a critical issue in the realm of corporate tax, as it impacts the fairness and sustainability of tax systems worldwide. By addressing BEPS through effective regulations and enforcement, consumer, employee, and small business interests can be better protected.

Related Terms

Tax LiabilityTax EvasionTransfer Pricing