What Is BEPS?

It has been a hot topic, and after hearing it a few times you might wonder: What is BEPS? In this article, we explain the different meanings given to the word in practice and the way this came to be.

There are two ways the word BEPS is used. The first, is the literal way:

What Is BEPS – Literal meaning

BEPS is an abbreviation of four words. BEPS stands for: Base Erosion and Profit Shifting. This in turn refers to two common practices for multinationals to lower the taxes that they pay (notably: corporate taxes).

• “Base erosion” refers to the practice of reducing the taxable base. An example is deducting large interest payments in order to lower the taxable profits.
• “Profit shifting” refers to the practice of shifting taxable profits from high-tax countries to low-tax countries. An example is the transfer of ownership of intellectual property and its income from the US (high-tax) to Bermuda (low-tax).

International organizations like the OECD have labeled Base Erosion and Profit Shifting as a major issue. This leads us to the other way in which the word “BEPS” is often used.

What Is BEPS? Conceptual meaning

Do you remember when the news told us that Starbucks, Google, Yahoo and Amazon paid very little corporate income tax in the UK? Well, this triggered more than a public outcry.

It motivated a lot of busy bees at international organizations to “do something” about Base Erosion and Profit Shifting. The goal in mind is to have multinationals pay their “fair share” of taxes.

Since then, various noteworthy initiatives have been launched:

• The first one was the publication of an initial report on BEPS by the OECD on 12 February 2013. This report detailed the magnitude of base erosion and profit shifting and global developments in the field of corporate tax.
• This was followed by an extensive “Action Plan on BEPS,” published by the OECD on 19 July 2013. This plan provided 15 action points to tackle “weaknesses” in the existing international taxation principles. The plan was endorsed by the Finance Ministers of the G20.
• On 16 September 2014, the OECD published the first “deliverables” of the Action Plan. This was the first set of recommendations addressing the first 7 action points in the BEPS action plan.
• Following the initiatives of the G20 and OECD, the UN has also taken action on BEPS by creating the UN Subcommittee on BEPS. Its main purpose is to include the views and input of developing countries into the Action Plan.
• On 28 January 2016, the European Commission issued its proposal for a Council Directive dealing with tax avoidance practices within the EU. The so-called Anti-BEPS Directive, is based on the recommendations of the OECD.
• In addition, there is an ongoing stream of recommendations and deliverables to tackle the various Action Points.

To summarize: a number of initiatives have been started to prevent Base Erosion and Profit Shifting. Based on these initiatives and their output, a number of new policies have been created. These policies are now being implemented worldwide.

In the realm of tax advisors, these developments are collectively referred to as… BEPS!

This is why you can see articles like “the impact of BEPS on jobs” or “Practical business implications of BEPS.”

But remind yourself that these kinds of articles explain the impact of BEPS regulation on businesses, NOT the practice of BEPS by multinationals.

Conclusion

We have seen that BEPS is used in two different ways:

1. As the abbreviation of Base Erosion and Profit Shifting.
2. To refer to the set of rules being implemented worldwide to combat the practice of base erosion and profit shifting, which is considered harmful.

It should be clear from the context what is meant.

If you want to know more about BEPS, you can read the following articles:

In the article: The 15 Action Points of BEPS Explained, we provide a detailed overview of the 15 points of the Action Plan on BEPS.

And this is our main article explaining the basics of transfer pricing.