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BEPS Has Failed on Key Issues, Corporate Tax Reform Group Says

POSTED ON Jan. 18, 2019

The OECD’s base erosion and profit-shifting project has failed to address some of the problems that gave rise to the project, and doesn't amount to real international tax reform, according to a nongovernmental organization.

The Independent Commission for the Reform of International Corporate Taxation (ICRICT) leveled several critiques at what it considers failures and missteps of the BEPS project and renewed its call for formulary apportionment just days before a meeting of the inclusive framework on BEPS.

The marginal progress of BEPS on multinational tax avoidance is being offset by reduced tax rates and new incentives, ICRICT said in a report released January 17. “When the public reacted angrily to tax avoidance scandals in 2012 and forced the G-20 to act, the last thing people would have expected would have been more tax cuts for multinationals,” the report says.

The BEPS project “has achieved what it could,” given political constraints and corporate interests, but it “failed to address the core problem, which is the transfer pricing system,” ICRICT said.

The commission said companies can still shift profits to low-tax jurisdictions via transfer pricing and called on the governments in the inclusive framework, the U.N. Tax Committee, and multilateral institutions to look at alternatives to transfer pricing and pursue unitary taxation for multinationals with an effective minimum tax rate of between 20 and 25 percent.

“The OECD’s ongoing work on the digital economy exposes all the contradictions of transfer pricing to the extreme and demonstrates that it is no longer fit for purpose,” ICRICT said. The use of transfer pricing to move a corporation’s tax base among countries was always problematic, but the “flaws were bearable until we reached the current magnitude of globalization,” it said.

Globalization has ushered in changes to production and supply chains and increased value attributed to intellectual property rights, the group said, adding that "there typically is no way of judging what . . . an arm’s length transaction price would look like.”

Tax dodging by multinationals and the resulting burden on middle- and lower-income taxpayers  “is toxic for democracy and contributes to the kind of populist backlash that allows authoritarianism to flourish, as we see today,” ICRICT said.

The commission praised the BEPS project for addressing hybrid mismatches, information exchange, tax ruling transparency, and treaty abuse, but said the project failed to reach consensus on allocating the profits of multinationals and failed to address tax avoidance by digital companies, whose conduct “gave rise to the BEPS project.”

Failure to secure agreements in several areas has encouraged unilateral measures such as “U.S. tax reform, U.K. and Australia diverted profits taxes, and the introduction of taxes based on turnover targeted at digital multinationals,” ICRICT said. The project didn’t sufficiently address tax avoidance via excessive related-party royalties and interest, it added.

Among BEPS’s negative effects is the “normalization and proliferation of ‘acceptable incentives,’” like patent boxes and special economic zones, and countries’ selective adoption, or refusal to adopt, the multilateral instrument, the group said. The focus on dispute resolution through measures that lack transparency “builds compromised legitimacy into the BEPS reforms,” it continued.

Giving the OECD, rather than the U.N., control of assessing the global tax structure “put the fox in charge of the hen house,” according to Joseph Stiglitz, ICRICT commissioner and professor at Columbia University.

ICRICT has promoted formulary apportionment for years, and its latest report reiterates that support.

"A simple, formulaic approach would ensure that global profits and associated taxes could then be allocated according to objective factors,” ICRICT said. Taxing multinationals as unified taxpayers would eliminate profit shifting via transfer pricing, it says. Both developed and developing countries could benefit from formulary apportionment, “to the detriment of tax havens,” it said.