1. BASE EROSION AND PROFIT
SHIFTING
FUNDAMENTAL AND SUBSTANTIVE ISSUES
PROF MARIANNE OJO

2. DEFINITION
• “BASE EROSION AND PROFIT SHIFTING (BEPS) REFERS TO TAX PLANNING STRATEGIES THAT
EXPLOIT GAPS AND MISMATCHES IN TAX RULES TO ARTIFICIALLY SHIFT PROFITS TO LOW OR
NO TAX LOCATIONS WHERE THERE IS LITTLE OR NO ECONOMIC ACTIVITY. ALTHOUGH SOME
OF THE SCHEMES USED ARE ILLEGAL, MOST ARE NOT. THIS UNDERMINES THE FAIRNESS AND
INTEGRITY OF TAX SYSTEMS BECAUSE BUSINESSES THAT OPERATE ACROSS BORDERS CAN USE
BEPS TO GAIN COMPETITIVE ADVANTAGE OVER ENTERPRISES THAT OPERATE AT A DOMESTIC
LEVEL. “ (OECD)

3. INTRODUCTION
• WHILST MANY WAYS EXIST WHEREBY DOMESTIC TAX BASES ARE SUBJECT TO BEING ERODED,
A PRINCIPAL SOURCE OF BASE EROSION IS PROFIT SHIFTING.
• BASE EROSION PRESENTS A VITAL AND IMPORTANT ISSUE FOR THE FOLLOWING REASONS:
• ITS THREAT AS A SERIOUS RISK TO :
• TAX REVENUES,
• TAX SOVEREIGNTY AND:
• TAX FAIRNESS

4. FUNDAMENTAL POLICY ISSUE
• - THE INTERNATIONAL COMMON PRINCIPLES DRAWN FROM NATIONAL EXPERIENCES TO
SHARE TAX JURISDICTION MAY NOT HAVE KEPT PACE WITH THE CHANGING BUSINESS
ENVIRONMENT.
• - DOMESTIC RULES FOR INTERNATIONAL TAXATION AND INTERNATIONALLY AGREED
STANDARDS ARE STILL GROUNDED IN AN ECONOMIC ENVIRONMENT CHARACTERIZED BY A
LOWER DEGREE OF ECONOMIC INTEGRATION ACROSS BORDERS – RATHER THAN TODAY’S
ENVIRONMENT OF GLOBAL TAXPAYERS, CHARACTERIZED BY THE INCREASING IMPORTANCE OF
INTELLECTUAL PROPERTY AS A VALUE DRIVER, AND BY CONSTANT DEVELOPMENTS OF
INFORMATION AND COMMUNICATION DEVELOPMENT.

5. SOME SELECTED MAJOR AREAS FOR CONSIDERATION
AND FOCUS: ADDRESSING BEPS
• NEED FOR INCREASED TRANSPARENCY IN RESPECT OF TAX RATES OF MULTINATIONAL
ENTERPRISES
• GREATER FOCUS ON INTERNATIONAL MISMATCHES IN ENTITY AND INSTRUMENT
CHARACTERIZATION (HYBRID MISMATCH ARRANGEMENTS AND ARBITRAGE)
• TRANSFER PRICING
• IMPROVING TAX COMPLIANCE ON-SHORE AND OFF-SHORE
• TAX TREATMENT OF RELATED PARTY DEBT FINANCING
• EFFECTIVENESS OF ANTI AVOIDANCE MEASURES AND RULES TO PREVENT TREATY TAX ABUSE

6. NEED FOR HOLISTIC AND COORDINATED APPROACH
• - HOLISTIC APPROACH URGENTLY AND PRINCIPALLY REQUIRED TO ADDRESS THE ISSUE OF BEPS. GOVERNMENT
ACTIONS SHOULD BE COMPREHENSIVE AND ROBUST IN DEALING WITH DIFFERENT ASPECTS OF THE ISSUE –
FOR EXAMPLE, THE BALANCE BETWEEN SOURCE AND RESIDENCE TAXATION, TAX TREATMENT OF INTRA GROUP
FINANCIAL TRANSACTIONS, THE IMPLEMENTATION OF ANTI ABUSE PROVISIONS (INCLUDING CFC LEGISLATION)
AS WELL AS TRANSFER PRICING RULES.
• - NEED FOR COORDINATED APPROACH SINCE MANY BEPS STRATEGIES TAKE ADVANTAGE OF THE INTERFACE
BETWEEN TAX RULES OF DIFFERENT COUNTRIES, AND SINCE IT MAY BE DIFFICULT FOR A SINGLE INDIVIDUAL
COUNTRY, ON ITS OWN, TO ADDRESS THE ISSUE IN ITS ENTIRETY.
• - COLLABORATION AND COORDINATION WOULD NOT ONLY FACILITATE AND REINFORCE DOMESTIC ACTIONS
TO PROTECT TAX BASES, BUT WOULD ALSO BE CRUCIAL AND VITAL TO PROVIDING COMPREHENSIVE
INTERNATIONAL SOLUTIONS THAT MAY RESPOND FAIRLY TO ADDRESS THE ISSUE.

7. THE RELEVANCE OF GLOBAL VALUE CHAINS (I)
• - RISE OF GLOBAL VALUE CHAINS (GVCS) HAS ALTERED THE LANDSCAPE OF WHAT
ECONOMIES DO AND WHAT THEY PRODUCE OR GENERATE.
• - INCREASINGLY LESS RELEVANT TO TALK ABOUT GROSS GOODS OR SERVICES THAT ARE
EXPORTED
• - MORE INCREASINGLY RELEVANT TO TALK ABOUT STAGES OF PRODUCTION

8. THE RELEVANCE OF GLOBAL VALUE CHAINS (II)
• - FROM AN ECONOMIC POINT OF VIEW, MOST OF THE VALUE OF A GOOD OR SERVICE IS
TYPICALLY CREATED ALONG WITH UPSTREAM ACTIVITIES (WHERE PRODUCT DESIGN, R&D OR
PRODUCTION OF CORE COMPONENTS OCCUR);
• OR FROM THE TAIL-END DOWN-STREAM ACTIVITIES (WHERE MARKETING OR BRANDING
OCCURS)
• - KNOWLEDGE BASED ASSETS SUCH AS INTELLECTUAL PROPERTY, SOFTWARE AND
ORGANIZATIONAL SKILLS HAVE BECOME INCREASINGLY IMPORTANT FOR PURPOSES OF
COMPETITIVENESS, ECONOMIC GROWTH AND EMPLOYMENT

9. REFERENCES
• OECD (2013), ADDRESSING BASE EROSION AND PROFIT SHIFTING, OECD PUBLISHING
• HTTP://DX.DOI.ORG/10.1787/9789264192744-EN

10. SUGGESTED READING
• AULT, H. J., SCHON, W. & SHAY, S. E. (2014). BASE EROSION AND PROFIT SHIFTING: A ROAD
MAP FOR REFORM
• GARBARINO, C. (2014). THE USE OF CROSS BORDER CORPORATE PROFITS AND LOSSES AND
“GLOBAL CORPORATE TAX INFORMATION”: A GAM THEORY APPROACH
• KEIGHTLEY, M. P. & STUPAK, J. M. (2015). CORPORATE TAX BASE EROSION AND PROFIT
SHIFTING (BEPS): AN EXAMINATION OF THE DATA