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  • Base erosion and profit shifting

    Base erosion and profit shifting (BEPS) refers to the tax planning strategies used by multinational companies to exploit gaps and differences between tax rules of different jurisdictions internationally to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity.

    The Organisation for Economic Co-operation and Development (OECD) conservatively estimates the annual revenue loss due to BEPS at $100 to $240 billion USD.

    Effects of base erosion and profit shifting

    BEPS results in tax not being paid in the jurisdiction where economic activity occurs – eroding revenue bases of countries and undermining the fairness and integrity of their tax systems. Although some schemes are illegal, most aren't.

    Businesses that operate across borders use BEPS to gain a competitive advantage over others that operate at a domestic level. Additionally, when taxpayers see multinational enterprises legally avoiding income tax, it weakens voluntary compliance by all taxpayers.

    The OECD BEPS Action Plan

    Due to rising government and community concern about BEPS strategies, G20 finance ministers asked the OECD to develop an action plan addressing BEPS issues in a co-ordinated and comprehensive manner. This resulted in the release of the OECD BEPS 15 Action PlanExternal Link in mid-2013:

    • Action 1: Address the tax challenges of the digital economy
    • Action 2: Neutralise the effects of hybrid mismatch arrangements
    • Action 3: Strengthen controlled foreign company (CFC) rules
    • Action 4: Limit base erosion involving interest deductions and other financial payments
    • Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance
    • Action 6: Prevent treaty abuse
    • Action 7: Prevent the artificial avoidance of the permanent establishment status
    • Actions 8–10: Assure that transfer pricing outcomes are in line with value creation
    • Action 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it
    • Action 12: Require taxpayers to disclose their aggressive tax planning arrangements
    • Action 13: Re-examine transfer pricing documentation
    • Action 14: Make dispute resolution mechanisms more effective
    • Action 15: Develop a multilateral instrument to modify bilateral tax treaties

    The ensuing work by the OECD G20 Project involving over 60 countries culminated in the October 2015 release of the BEPS final packageExternal Link – 13 reports covering the 15 actions.

    Australia’s implementation of the BEPS package

    Australia is committed to acting to address BEPS risks and is in the process of implementing recommendations from the BEPS package.

    Work is well progressed on the implementation of recommendations from BEPS Actions 2, 5, 8–10 and 3.

    On 7 June 2017, Australia, along with 67 other jurisdictions, signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

    Once the convention is enacted in Australia and the OECD has been informed of our completion of Australia's ratification procedures, Australia's network of double tax treaties will be automatically amended to give effect to those BEPS recommendations that need changes to treaties.

    Inclusive framework

    The OECD’s BEPS focus has now moved to implementation. The OECD established the inclusive framework on BEPS implementationExternal Link in December 2015. Aims of the inclusive framework include monitoring implementation of BEPS measures, in particular the minimum standard recommendations for Actions 5, 6, 13 and 14.

    The framework will also support the development of toolkits for low-capacity developing countries. Australia is one of around 100 members of the inclusive framework.

    Find out about:

    Australia’s current work on implementing the BEPS package

    OECD information:

      Last modified: 26 Oct 2018QC 52546