Historic background of the Base Erosion and Profit Shifting (BEPS) project
Almost a century has passed since the international tax rules were first written in the 1920s. A time in which the US increases tariff duties to protect the American market, Germany suffers from hyperinflation following World War I and in which the Great Depression starts with the collapse of the Dow Jones in October 1929.
Since then the world has changed considerably. Globalization driven by technological advancement, an increased global mobility and shifting geopolitics are some of the topics that define the here and now. One of the results is that it has become easier to produce, purchase and sell products and services anywhere in the world. The world today looks quite different compared to when the international tax rules were first written.
Because of these real-world changes the Organization for Economic Cooperation and Development (OECD) is of the opinion that many of the international tax rules of the 1920s needed to be updated. The goal is to address gaps and mismatches in the rules, leading to double non-taxation as well as double taxation, that have arisen over time.
This has been the trigger for the OECD to partner with the G20 and as a result in 2013 the Base Erosion and Profit Shifting (BEPS) project is launched. The project aims to ensure that the international tax rules do not facilitate the shifting of corporate profits away from where the real economic activity and value creation is taking place.
Already existing standards in international tax rules
Until the BEPS project the OECD standard-setting work in the international tax rules has been based on two key standards:
- The OECD Model Tax Convention on Income and on Capital
- The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
The OECD Model Tax Convention on Income and on Capital is the international benchmark for the negotiation, interpretation and application of tax treaties since it was first published in 1963. It forms the basis of a network of around 3000 tax treaties globally, reducing the tax barriers to cross-border trade and investment, as well as assisting in the prevention of tax avoidance and evasion.
It provides countries with a firm basis on which to conclude and implement arrangements to minimize double taxation on those cross-border movements without creating opportunities for unintended non-taxation.
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide guidance on valuing cross-border transactions within a Multinational Group. Based on the arm’s length principle these Guidelines are a touchstone for business and tax administrations alike. Robust transfer pricing rules are critical for governments to ensure profits and the associated revenues are not artificially shifted out of the jurisdiction where the value has been created. For taxpayers, an effective and consistent approach to transfer pricing can limit the exposure to economic double taxation or risks of cross-border tax disputes arising between two countries in which they do business.
BEPS will not supersede these key standards and they will not go away with BEPS. On the contrary – they are fully updated to reflect the BEPS measures.
Having looked at the historic background of why the BEPS project has been launched, in the next article we will take a look at what the BEPS project aims to achieve and what measures have been defined.