The OECD's Conquest Of Domestic Tax Codes: Understanding The Costs And Consequences Of The BEPS Project

Authored by IFC Media

Recent global events from the release of the Panama Papers to a series of high-profile inversions have given international tax regulators both rhetorical ammunition and public support to execute a global crackdown on multinational tax planning. The goal is to increase total taxes paid by global businesses, regardless of their location, legal structure, or industry.

It just so happens that international tax regulators are already working to boost global corporate tax revenue by increasing tax transparency and coordinating international tax reporting. These are the goals of the Base Erosion and Profit Shifting (BEPS) Project of the Organisation for Economic Co-operation and Development (OECD). The results of a two-year long project should give pause to policymakers and activists alike - increasing global tax transparency and cracking down on perceived tax dodgers may have unintended consequences and come at a high cost.

The goals of global transparency are fundamentally at odds with the international corporate income tax systems' most valuable features—diversity and competition. Effective transparency and full taxation of corporate profits will require transferring control of corporate tax rules from individual nations to international regulators who can consolidate and unify tax rules across the world.

The most comprehensive proposal to increase international information sharing and rule harmonization is the package of BEPS Project reforms put forward by the OECD. Close examination of the proposed rules shows that the centralisation of tax authority sacrifices compliance efficiency, taxpayer rights, and nations' ability to set the tax policies best suited to their populations. Furthermore, the proposed regulations would likely fail to increase corporate tax revenues.

The OECD takes on Base Erosion and Profit Shifting

Driving the OECD's effort to increase global transparency and tax collection are 15 proposed packages of rules - called 'action items' - outlined by the BEPS Project last year. The action items illustrate the difficulty of truly increasing transparency and rule congruency.

Many of the new rules are either poorly understood or lack sufficient international consensus and have created unnecessary uncertainty for businesses around the world. For example, Carol Doran Klein of the US Council for International Business, characterised the OECD report on controlled foreign corporations as a set of rules that can be safely ignored due to lack of consensus on fundamental issues1.

The result of this uncertainty has been governments around the world haphazardly implementing portions of the new OECD standards, leaving behind rules which are locally inconvenient. A 2015 Deloitte survey found that a majority of firms think the centralization plan will have a bigger impact than they anticipated and could result in harmful double taxation of their profits due to incongruent implementation of the OECD's...

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