Base Erosion and Profit Shifting (BEPS)

Base Erosion and Profit Shifting (BEPS) refers to the cross-border shifting of profits to avoid taxes within multinational corporations. The OECD has launched an initiative and issued guidelines to combat this form of tax avoidance.

What is BEPS?

The English term "Base Erosion and Profit Shifting" (BEPS) denotes the reduction of the tax base by shifting profits across borders within multinational corporations. This shifting of profits across national boundaries is intended to reduce the tax burden for the entire group. By strategically and legitimately exploiting loopholes in the tax laws of different countries, multinational corporations can shift their profits to low-tax or offshore countries, thus reducing their tax burden. This results in states losing about 4 – 10 percent of their respective tax revenues.

Example Google

An example of tax avoidance through BEPS is the licensing strategy of Google. The parent company of the internet giant, based in the USA, transfers licenses to use the search engine to its subsidiary in Bermuda, which levies little to no taxes. If the Bermuda company now granted licenses for a fee to the Irish subsidiary, these could be taxed. However, such taxation can be avoided by interposing a Dutch company. In this case, since the Dutch company grants licenses to the Irish subsidiary, the EU's Licensing Fees Directive applies and no Irish withholding taxes need to be paid. The revenues from the licensing are fully realized and without any reduction due to taxes by the company in Bermuda.

OECD – Initiative

In 2013, the OECD launched an initiative aimed at combating tax avoidance through BEPS. The initiative aims to ensure that profits are taxed in the country where they are actually generated, that is, in the country where the business activities underlying the value creation are carried out. To this end, the OECD has issued a package of measures containing 15 specific actions designed to help states reduce tax losses due to BEPS. In particular, the tax qualification of assets is to be harmonized across countries. Additionally, increased transparency and improved exchange of information among national tax administrations should provide a better overview of corporate profits.

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