G20 Anti-BEPS and the erosion of international tax policies
Writer: Rahma Monika
(01 March 2020)
The issue of international taxation is a concern for both developed and developing countries, this is due to aggressive tax planning by multinational companies (MNEs). MNEs can exploit weaknesses in the international tax framework to reduce their tax obligations. The international taxation system is further complicated by the expansion of the digital economy.
Concerns about the international tax system have led to international tax initiatives, especially the BEPS G20-OECD project. The Ministers of Finance of the G20 countries agreed to start a joint agenda named the Base Erosion and Profit Shifting (BEPS Project) Project. To realize this, the G20 gave the OECD a mandate to formulate the necessary recommendations.
In 2015, the OECD estimated revenue losses from BEPS practices to reach US $ 240 billion, equivalent to 10% of global corporate tax revenue. BEPS also causes serious problems for tax revenue, tax sovereignty, and trust in the integrity of the tax system throughout the country which will negatively affect investment, services, competition, and growth and the global labor market (OECD, 2013).
There are several things that become potential causes that can occur as a result of the BEPS problem, as follows:
- Profit shifting practices are carried out by MNEs to minimize payments
- their taxes and maximizing their profits are the main causes of BEPS.
- Conventional global tax regulations (compiled 80 years ago) are no longer
- can regulate the development of an increasingly complex business world.
- The current (conventional) taxation system makes it easy and encouraging
- MNEs to practice reducing their tax obligations.
- Misuse of tax avoidance by MNEs has provided advantages
- competitive for them, although this encourages the emergence of justice and problems tax compliance.
- Nowadays, practices have developed where MNEs do not pay their tax
- obligations in the countries where they operate and get business profits.
Impact caused by BEPS
- Causing a serious risk to a country's tax revenue, sovereignty and
- tax justice both for developed and developing countries, especially for countries that apply normal / high tax rates.
- Encourage the development of profit shifting practices in low-tax jurisdiction countries MNEs. Differences in tax rates give rise to the opportunity to carry out tax arbitrage, which is generally utilized by MNEs in its tax planning.
- Encourage increased practice of tax dispute and tax arbritage if it is not resolved appropriately and quickly. If the domestic taxpayer considers that MNEs can easily avoid their tax obligations, then this will interfere with the compliance of other taxpayers. As a result, developing countries lose at least US $ 100 billion in revenue every year, which is hidden by multinational companies in tax-exempt countries. According to economist Gabriel Zucman, globally, this method transfers 40% of foreign profits into a tax haven.
Transfer pricing practices are cheated by Multi National Companies (MNEs).
This fraudulent transfer pricing practice is increasingly undermining the policy of the international tax system. According to Sylvain R.F Plesschaert (1979), transfer pricing is a systematic engineering of price, tariff or reward policies with the intention of reducing the amount of artificial profit (a unit), producing artificial losses, avoiding taxes, or import duties in a country.
This practice of transfer pricing results in the potential of state revenue from the tax sector shrinking or even disappearing. Though taxes are the main source of state revenue. For example in Indonesia, taxes account for 74 - 80% of total revenue
According to the OECD (2014), there are 60% of international trade conducted multinational cooperation in Indonesia. However, 39% of these transactions avoid tax through transfer pricing. Meanwhile, according to Global Financial Integrity, in its report on illicit financial flows released in 2014 stated that Indonesia ranks 7th out of the top 10 developing countries against the practice of illicit financial outflows.
The practice of transfer pricing by multinational companies donates as much 81% of illicit financial flows and 19% comes from corrupt practices, money laundering, drug trafficking and other crimes. If there is no massive and cooperative effort between countries in the prevention and enforcement of transfer pricing, then financing strategic sectors such as education, health, social security, and infrastructure can be disrupted. In the period 2003 - 2012, the amount of money that came out of Indonesia caused by the practice of transfer pricing amounted to US $ 152, 154 billion (GFI, 2014).
This is only a small example as a result of the impact of transfer pricing practices cheated by MNEs, so what about other countries experiencing the same thing? Of course the OECD must immediately take action to further strengthen the policies of the international tax system for countries. And provide strict sanctions for states and multinational companies that violate these policies.
The reason why you have to fight BEPS
- At present many countries in the world including G20 member countries and European Union (EU) imposes a normal / high tax rate (non-low tax jurisdiction). This makes these countries the most vulnerable to be affected by the BEPS practices carried out by MNEs, so it has a strong interest in preventing and overcoming the impacts caused by BEPS.
- Advances in information technology owned by MNCs and the current digital economic system have made it possible for many MNEs to have the
- ability to make profit shifts to countries that apply lower tax rates to maximize corporate profits.
- Based on the OECD report on BEPS in 2013 (p. 61), OECD has conducted a review of various studies related to BEPS issues and found evidence that there is an indirect relationship between the imposition of low tax rates with profit shifting conducted by MNEs
- The current international taxation system is already inadequate and unable to regulate MNEs operations throughout the world, especially with the presence of more complex business challenges and the increasing practice of the current digital economy.
The Exit taken to overcome BEPS
- The G20 level meeting of the Minister of Finance and the Governor of the Central Bank in July 2013 has ratified the Global Action Plan prepared by the OECD in order to address the issue of BEPS comprehensively. The implementation of this action plan will result in significant changes in international tax regulations since 1920, such as:
- International tax regulations will be developed to address the tax system gaps between different countries, while still respecting the sovereignty of each country to design its own taxation rules.
- The current tax agreement and transfer pricing regulations will be reviewed to correct existing deficiencies and to align them with substance and value creation.
- The creation of a more transparent climate through reporting by multinational companies (MNCs) to governments on the allocation of their company's profits throughout the world.
- Implementation of the BEPS Project by the OECD
- The BEPS project implemented by the OECD and G20 has become the top priority of the tax agenda discussed at the G20, in response to various evidences in various fields that the implementation of contemporary taxation has done a lot of harm and is still far from the expected ideal conditions. (source: kemenkeu.co.id)
