Category Archives: Income Tax

BEPS–A case for developing Countries

“Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit these gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.” This is the definition of BEPs by the Organization of Economic Development (OECD) Centre for Tax policy and Administration.

My view on BEPS is that whereas it is a legal tax avoidance scheme, and is of benefit to its’ multinational corporate users, its’ disadvantages to the majority of developing economies being exploited, far outweigh the advantages that the multinationals enjoy in line with the existence of BEPS.

BEPS is not a tax planning strategy that is used only by multinationals in developed countries. This strategy can be accessed by multinationals in both developed and developing countries. The essential basic four tier system of a BEPS structure usually contains a target market where the entity is an individual to avoid a recognized legal entity, there are hybrid mismatches, an ineffective tax regime is present or there is general poor enforcement of economic and tax policies. And the ultimate beneficiary or the parent company is usually a multinational company from a developed country or a country with high, stringent tax rules.

We then get to see a developing country’s tax base being eroded legally through well placed tax planning strategies, and its potential revenue coffers being depleted as a multinational’s profits are prudently repatriated back to its parent company, usually located in a developed country.

However, the State coffers of the developing country, whereas a growth in the economy will have been recorded, will remain with low revenue. With low revenue collected, because of profit shifting, the developing country will not have enough resource income to upgrade or maintain its social responsibility expectations towards its citizens.

So in one hand, there is growth in a few areas of the economy and in another, lack in areas where the government is directly responsible for the well being of its citizens. The Country will have poor roads, unequipped hospitals, and poor education systems to name a few public amenities.

This peculiarity however sad, is not illegal. “This situation can be aptly described by veteran MP Dame Margaret Hodge who famously told Google’s European boss ‘ I think you do do evil’ when she was chairing a public accounts committee hearing into Google’s controversial tax affairs in 2013.”This quote is an extract from a report for the Independent newspaper by Michael Bow on 13th February 2016. My view on the above comment is if a developed country can have a representative whose choice of words describes an immorality from the use of tax planning BEPS, and then what words would a representative from a developing country use for the same? I would rather not find out.

The OECD has taken steps to neutralize the disadvantages of BEPS. More so as BEPS is not an inconvenience of either developed or only developing countries. The executive summaries of the OECD/G20 Base Erosion and Profit Shifting Project 2015 contain ways in which countries can reduce BEPS. These are listed in the order of the report verbatim below as; addressing the tax challenges of the digital economy, neutralizing the effects of hybrid mismatch arrangements, designing effective controlled foreign company rules, limiting base erosion involving interest deductions and other financial payments, countering harmful tax practices more effectively by taking into account transparency and substance, preventing the granting of Treaty benefits in inappropriate circumstances, preventing artificial avoidance of permanent establishment status, aligning transfer pricing outcomes with value creation, measuring and monitoring BEPS, mandatory disclosure rules, transfer pricing documentation and country by country reporting, making dispute resolution mechanisms more effective, developing a multilateral instrument to modify Bilateral Tax Treaties.

My conclusion is; any Country that feels aggrieved or exploited by its currently existing tax laws promoting tax avoidance, should counter these laws with new laws. In the event that it does not, then the status quo of multinationals using BEPS to maximize their profits in that country will remain. And the grievance remains the country’s grievance not the multinationals’.

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