Table of Contents
1. Introduction 1
2. Why is BEPS a key issue 1
3. Why it needs to be addressed now 1
4. Impact on accounting and society 2
In our business society we see companies taking advantages of loopholes in tax laws. These companies make tax strategies to exploit the mismatches in tax law and thus disappear profit to prevent paying tax. This is referred to as Base erosion and profit shifting (BEPS). BEPS strategies are not entirely illegal (but immoral). BEPS occurs because tax laws that are becoming seemingly outdated as the underlying assumptions of those standards does not consider elements like intangibles and risk management that have become critical in this century.
Companies that trade are levied corporate tax at domestic level. When the trade become cross-border, double taxation may occur (income getting taxed in more than one jurisdiction), however, there may also arise a gap due to which tax gets waived in both places. Companies devise strategies to therefore use this gap between tax system of two countries to prevent paying tax both ways.
Some of the root causes of BEPS have been identified as hybrid and mismatch agreements to achieve double non-taxation, transfer pricing, treaty shopping, residence vs source tax balance , intragroup financing, anti-avoidance rule etc.
2. Why is BEPS a key issue
BEPS has been a persistent over a long period of time. Some of the issues with BEPS are:
1. First of all, the issue of fairness arises. We as ordinary individual who strive to earn our living pay heaps of tax while corporations that bathe in lump sum pay little or no tax, what fairness of the system would it scream.
2. Given that matter, BEPS distorts competition because companies that operate cross border tax advantage of the loophole to prevent paying tax while other domestic and moral companies pay tax for their share of income.
3. The idea of saving tax money leads to companies making investment decisions that are influenced by it (most choose tax havens) Therefore, it leads to inefficient allocation of resources.
3. Why it needs to be addressed now
More than ever BEPS has become a thing to worry because advent of globalization has facilitated cross border trade and led to decline in trade barriers. MNCs are relocating their production to countries with lower labour and production cost. The digitalization of trade in this era has also led to online 24×7 trading which has decreased barriers of time and distance. Though the time has moved ahead in full fled motion, the use of faulty international systems that are based on outdated underlying assumptions (accounting and economics assumptions that bases on fixed asset and low economic integration between borders) has given leeway for companies to profit out of this system. As the problem lies in the rules made by government itself, therefore it is high time the BEPS issue is tackled.
The outbreak of cry for change has been witnessed in many OECD meetings. BEPS has reached been explicitly referred to in G8 and G20 leaders meeting (2012). Even world leaders have stated the need for tax reforms; BEPS has therefore reached highest political level and therefore needs prompt addressing.OECD has therefore intends to tackle these problems with its BEPS project.
4. Impact of BEPS project by OECD on accounting and society
With the announcement of BEPS recommendation, the business world also has seen impact on their way of business. According to EY (2014), 69% of the largest corporation has admitted that tax audits have become frequent and more aggressive over the last few years. 58% of these companies admit on audits becoming stricter in relation to VAT and indirect tax.
If we look specifically in case of Australia, new rules that require detailed consideration of arm-length method of transfer pricing have been introduced. Documentation requirement during lodgement of tax returns, increased disclosure and transparency measures and increased audit have been evident lately (Seymour, 2014). Australian ATO has set up compliance team called International structuring and profit shifting (ISAPS) that will advise field auditors.
Seymour, T 2014, ‘Australia: Base Erosion and Profit Shifting: An Australian Perspective’, International Tax Review, vol. 25, no. 2, p. 17.
EY. 2014. Enforcement risk. [ONLINE] Available at: http://www.ey.com/GL/en/Services/Tax/Tax-policy-and-controversy/EY-2014-tax-risk-controversy-survey-04-enforcement-risk. [Accessed 08 April 15].