OECD aims to restrict shifting of corporate profit into low/no tax environments
G20 finance ministers adopted OECD international tax reform to restrain tax evasion. The reform says that huge multinational corporate businesses will pay taxes in the state where profit is earned therefore they could not shift profits artificially in to low or no tax environments where no business activity occurs. According to OECD researches in 2013 the governments’ revenue losses amounts from USD 100 to 240 billion annually thanks to profit shifting into tax advantageous areas.
The reform called BEPS (Base Erosion and Profit Shifting) highlights the corporate tax strategies exploiting from legal gaps and mismatches of tax rules at the international level. Because of them corporate businesses can artificially move their profits in to no or low tax countries where little or no economic activity takes place. In such countries the multinational corporate businesses pay very low taxes in comparison to tax burden in countries where profit is made.
OECD understands the problem of artificial profit shifting as global which needs an international solution. OECD even emphasizes the reform as the most important in 100-years-history.
The BEPS provides all countries 15 basic rules to tax profit earned in their territories. Multinational companies also gain bigger amount of certainty over which rules to use for international taxation and compliance.
The BEPS key instruments involves addressing the tax challenges of the digital economy, effective fight against harmful tax practices, aligning transfer pricing outcomes, preventing the artificial avoidance of permanent establishment status, creating effective dispute resolution mechanisms and developing a multilateral instrument to modify bilateral tax treaties or guidance on transfer pricing documentation and country-by-country reporting.