Base erosion and profit shifting or BEPS refers to corporate tax planning strategies used by multinationals designed to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions, thus "eroding" the "tax-base" of the higher-tax jurisdictions. The OECD additionally defines BEPS strategies as exploiting gaps and mismatches in tax rules, however, academic research has shown the leading corporate tax havens, who are the largest global BEPS hubs, use OECD-whitelisted tax structures and OECD-compliant BEPS tools. Modern corporate tax havens offer OECD-compliant BEPS tools to "shift" profits to the haven, and additional OECD-compliant BEPS tools to avoid paying corporate taxes within the haven (e.g. Ireland's "Green Jersey"). BEPS tools are mostly associated with U.S. technology and life sciences multinationals. Tax academics show the use of BEPS tools by U.S. multinationals, via corporate tax havens, maximises long-term U.S. exchequer receipts, at the expense of other jurisdictions.
Video Base erosion and profit shifting
Source and scale
A January 2017 OECD report estimates that BEPS tools are responsible for tax losses of circa $100-240 billion per annum. A June 2018 report by tax academic Gabriel Zucman (et alia), estimated that the figure is closer to $200 billion per annum. The Tax Justice Network estimated that profits of $660 billion were "shifted" in 2015 (due to Apple's Q1 2015 leprechaun economics restructuring, the largest individual BEPS transaction in history). The effect of BEPS tools is most keenly felt in the developing world who are denied the corporate tax revenues needed to build their economies.
Most BEPS activity is associated with industries with intellectual property ("IP"), namely Technology (e.g. Apple, Google, Microsoft, Oracle), and Life Sciences (e.g. Allergan, Medtronic, Pfizer and Merck & Co) (see here). IP is described as the raw materials of tax avoidance, and IP-based BEPS tools are responsible for the largest global BEPS income flows. Corporate tax havens have detailed IP tax leglislation in their statutate books.
Most BEPS activity is also most associated with U.S. multinationals, and is attributed to the historical U.S. "worldwide" corporate taxation system. Pre the Tax Cuts and Jobs Act of 2017 ("TCJA"), the U.S. was one of only eight jurisdictions to operate a "worldwide" tax system. Most global jurisdictions operate a "territorial" corporate tax system with lower tax rates for foreign sourced income, thus avoiding the need to "shift" profits (i.e. IP can be charged directly from the home country at preferential rates and/or terms; the TCJA now enables this in the U.S. with the FDII-regime).
June 2018 research, identified Ireland as the world's largest BEPS hub. Ireland is larger than the entire Caribbean tax haven BEPS system. The largest global BEPS hubs, as shown in the Zucman-Tørsløv-Wier table below, are synonymous with the top 10 global corporate tax havens:
(+) Mostly consists of The Cayman Islands and The British Virgin Islands
Maps Base erosion and profit shifting
Tools and techniques
Research identifies three main BEPS techniques used for "shifting" profits to a corporate tax haven via OECD-compliant BEPS tools:
BEPS tools could not function if the corporate tax haven did not have a network of bilateral tax treaties that accept the haven's BEPS tools, which "shift" the profits to the haven. Modern corporate tax havens, who are the main global BEPS hubs, have extensive networks of bilateral tax treaties. The U.K. is the leader with over 122, followed by the Netherlands with over 100. The blacklisting of a corporate tax haven is a serious event, which is why major BEPS hubs are OECD-compliant. Ireland was the first major corporate tax haven to be blacklisted by a G20 economy; Brazil, in September 2016.
Once the profits are "shifted" to the corporate tax haven, additional tools are used to avoid paying headline tax rates in the haven. Some of these tools are also OCED-compliant (e.g. patent boxes, capital allowances for intangible assets or "Green Jersey"), others have become OECD-proscribed (e.g. double Irish and Dutch double-dipping), while others have not attracted OECD attention (e.g. single malt).
Because of the need for BEPS hubs to have extensive bilateral tax treaties (e.g. to source the profits that are "shifted"), they go to great lengths to obscure the fact that effective tax rates paid by multinationals in their jurisdiction are close to zero percent, rather than the headline corporate tax rate of the haven (see Table 1). OECD jurisdictions do not enter into full bilateral tax treaties with obvious tax havens (e.g. the Cayman Islands). This is achieved with strong financial secrecy laws and avoiding country-by-country reporting ("CbCr"), or the filing of public accounts by multinationals in the haven's jurisdiction. BEPS hubs emphatically deny they are corporate tax havens, and that their use of IP is mainly as a BEPS tax avoidance tool. Instead, they call themselves "knowledge economies".
Make no mistake: the headline rate is not what triggers tax evasion and aggressive tax planning. That comes from schemes that facilitate profit shifting.
The complex accounting tools, and the detailed tax legislation, that corporate tax havens require to become OECD-compliant BEPS hubs, requires both advanced international tax-law professional services firms, and a high degree of coordination with the State, who encode their BEPS tools into the State's statutory legislation. Tax investigators call such jurisdictions "captured states", and explain that most leading BEPS hubs started as established financial centres, where the necessary skills and State support for tax avoidance tools, already existed.
Complex agendas
The BEPS tools used by tax havens have been known and discussed for decades in Washington. For example, when Ireland was pressured by the EU-OECD to close its double Irish BEPS tool, the largest in history, to new entrants in January 2015, existing users, which include Google and Facebook, were given a 5-year extension to 2020. Even before 2015, Ireland had already publicly replaced the double Irish with two new BEPS tools: the single malt (as used by Microsoft and Allergan), and capital allowances for intangible assets ("CAIA"), also called the "Green Jersey", (as used by Apple in Q1 2015). None of these new BEPS tools have been as yet proscribed by the OECD. Tax experts show that disputes between higher-tax jurisdictions and tax havens are very rare.
Tax experts describe a more complex picture of an implicit acceptance by Washington that U.S. multinationals could use BEPS tools on non-U.S. earnings to offset the very high U.S. 35% corporate tax rate from the historical U.S. "worldwide" corporate tax system (see source of contradictions). Other tax experts, including a founder of academic tax haven research, James R. Hines Jr., note that U.S. multinational use of BEPS tools and corporate tax havens had actually increased the long-term tax receipts of the U.S. exchequer, at the expense of other higher-tax jurisdictions, making the U.S a major beneficiary of BEPS tools and corporate-tax havens. The U.S. was one of the only major developed nations not to sign up to the § OECD BEPS Project to curtail BEPS tools.
Lower foreign tax rates entail smaller credits for foreign taxes and greater ultimate U.S. tax collections (Hines and Rice, 1994). Dyreng and Lindsey (2009), offer evidence that U.S. firms with foreign affiliates in certain tax havens pay lower pay lower foreign taxes and higher U.S. taxes than do otherwise-similar large U.S. companies.
The 1994 Hines-Rice paper, on U.S. multinational use of tax havens was the first to use the term profit shifting. Hines-Rice concluded that: low foreign tax rates [from tax havens] ultimately enhance U.S. tax collections. For example, the Tax Cuts and Jobs Act of 2017 ("TCJA") levied 15.5% on the untaxed offshore cash reserves built up by U.S. multinationals with BEPS tools from 2004-2017. Had these U.S. multinationals not used BEPS tools, and paid their full foreign taxes, their foreign tax credits would have removed most of their residual exposure to any U.S. tax liability, under the U.S. tax code.
OECD BEPS Project
The 2012 G20 Los Cabos summit tasked the OECD to develop a BEPS Action Plan, which 2013 G-20 St. Petersburg summit approved. An OECD BEPS Multilateral Instrument, consisting of 15 Actions designed to be implemented domestically and through bilateral tax treaty provisions, were agreed at the 2015 G20 Antalya summit.
The OECD BEPS Multilateral Instrument ("MLI"), was adopted on 24 November 2016 and has been signed by 78 jurisdictions. It comes into force in July 2018. Many of the corporate tax havens opted-out from several of the Actions, including Action 12 (Disclosure of aggressive tax planning), which was considered onerous by corporations who use BEPS tools.
Global legal firm Baker McKenzie, representing a coalition of 24 multinational US software firms, including Microsoft, lobbied Michael Noonan, as [Irish] minister for finance, to resist the [OECD MLI] proposals in January 2017. In a letter to him the group recommended Ireland not adopt article 12, as the changes "will have effects lasting decades" and could "hamper global investment and growth due to uncertainty around taxation". The letter said that "keeping the current standard will make Ireland a more attractive location for a regional headquarters by reducing the level of uncertainty in the tax relationship with Ireland's trading partners".
The acknowledged architect of the largest ever global corporate BEPS tools (e.g. Google and Facebooks' Double Irish and Apple's Green Jersey), tax partner Feargal O'Rourke from PriceWaterhouseCoopers ("PwC), predicted in May 2015 that the OECD's MLI would be a success for the leading corporate tax havens, at the expense of the smaller, less developed, traditional tax havens, whose BEPS tools were not sufficiently robust.
In August 2016, the Tax Justice Network's Alex Cobham described the OECD's MLI as a failure due to the opt-outs and watering-down of individual BEPS Actions. In December 2016, Cobham highlighted that one of the critical anti-BEPS Actions, full public country-by-country-reporting ("CbCr"), had been dropped due to lobbying by the U.S. multinationals. CbCr is the only way to conclusively observe the level of BEPS activitiy and OECD compliance in any country.
In June 2017, a U.S. Treasury official explained why the U.S. refused to sign up to the OECD's MLI, or any of its Actions, as they felt the U.S. had a low exposure to profit shifting.
Impact of the TCJA
The Tax Cuts and Jobs Act of 2017 ("TCJA") moved the U.S. from a "worldwide" corporate tax system to a hybrid "territorial" tax system. The TCJA includes anti-BEPS tool regimes including the GILTI-tax and BEAT-tax regimes. It also contains its own BEPS tools, namely the FDII-tax regime. The TCJA could represent a major change in Washington's tolerance of U.S. multinational use of BEPS tools. Tax experts in early 2018 forecast the demise of the two major U.S. corporate tax havens, Ireland and Singapore, in the expectation that U.S. multinationals would no longer need foreign BEPS tools.
However, by mid-2018, U.S. multinationals had not repatriated any BEPS tools, and the evidence is that they have increased exposure to corporate tax havens. In March-May 2018, Google committed to doubling its office space in Ireland, while in June 2018 it was shown that Microsoft is preparing to execute Apple's Irish BEPS tool, the "Green Jersey" (see Irish experience post-TCJA). In July 2018, one of Ireland's leading tax experts forecasted a potential boom in U.S. multinationals on-shoring their BEPS tools from the Caribbean to Ireland, and not the U.S. as was expected after TCJA.
In May 2018 it was shown that the TCJA contains technical issues that incentivise these actions. For example, by accepting Irish tangible, and intangible, capital allowances in the GILTI calculation, Irish BEPS tools like the "Green Jersey" enable U.S. multinationals to achieve U.S. effective tax rates of 0-3% via the TCJA's foreign participation relief system. There is confusion as to whether these are drafting mistakes that will be corrected, or genuine concessions to enable U.S. multinationals to reduce their aggregate effective corporate tax rates to circa 10% (the Trump administration's original target).
See also
- Conduit and Sink OFCs
- Corporate tax haven
- Dhammika Dharmapala
References
External links
- OECD BEPS Portal
- Ernst & Young BEPS Portal
- KPMG BEPS Portal
Source of article : Wikipedia
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