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There is increasing public protest about the ease with which multinationals seem to game national tax systems to avoid paying tax. The OECD’s ‘BEPS’ proposals that were published are the response.



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Despite the dry title [Base Erosion and Profit Shifting] I think we should be impressed by BEPS – it is transformative.


International collaboration was the only way to deal with this issue, and BEPS is a collaboration between all the major G20 nations, including Brazil, China and India, plus representation from smaller developing countries. The project covers the waterfront and tackles many of the most intractable and long-standing issues in the international taxation of companies. As such, has done its work very quickly, taking just a couple of years to get to final proposals now. 


These are some of the ways in which multinationals avoid tax: 


  • by arguing ‘we’re not really located in your country; we have no permanent establishment there
  • or ‘okay, we are located in your territory, but the price (transfer price) we pay for the goods and services we buy from other group companies means we are not really making much profit
  • or, ‘okay, we do make a decent margin on what we sell. But you will understand that to operate we need to use valuable intangible assets – the corporate brand, intellectual property, expertise. These are all owned by group companies located far away, and once we have paid them a royalty, there’s nothing left!


BEPS tackles these issues head-on. In so many areas of life we have had to change the way we think and behave to reflect the reality of the digital age. Effectively, that is what BEP is doing for company taxation. Traditional notions of what it means to operate and earn money in this or that territory (for example, the long-standing tax concept of the ‘permanent establishment’) can’t cope with the integrated world of the globalised and digital modern economy, as Google, Starbucks, Amazon and others happily demonstrate. 

Alongside tackling these issues, BEPS brings a lot of useful proposals on the standardisation of tax treaties, on some long standing headaches such as interest deductibility, and on beefing up company reporting to the Inland Revenue.


These are all reasons to be impressed with BEPS. So what are the problems?


BEPS simply makes proposals that, to become law, must be adopted and implemented by governments. Most OECD governments are likely to publicly support the proposals. But the same governments actively use corporate tax as a competitive weapon to attract mobile international capital. 


Changing the habits of a lifetime may be hard. For these countries, protecting corporate tax revenue is not the only issue and may not be the main issue. They want to attract investment and jobs. We have been witnessing a race to the bottom in corporate tax rates, particularly in Europe, and one thing that the OECD is not trying to police is the tax rate itself.  

More fundamentally, in the modern interconnected and intangibles-dominated world, the question ‘where was the profit earned, where was the value created?’ will frequently lack an easy, unambiguous answer.

Nonetheless I remain optimistic. BEPS is already having an effect, with many countries already implementing parts of it. And, if it achieves nothing else, BEPS has given us a framework for organising company tax in the modern interconnected world, and for when we judge the efforts and the achievements in tax reform over the next few years.



Chris Higson is an Associate Professor of Accounting Practice at London Business School.



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