In 2013, the Paris-based Organization for Economic Cooperation and Development (OECD) published an action plan designed to confront the tax phenomenon known as base erosion and profit shifting (BEPS). BEPS refers to a controversial (yet legal) practice in which a multinational firm reorganizes and reports its income in such a way as to avoid paying corporate taxes in high-tax countries. The OECD has spent the last two years devising a formal set of policies designed to encourage all 34 member nations to work together to eliminate the "gaps and mismatches" that "[undermine] the fairness and integrity of tax systems."
Unfortunately, the recommendations published in its final reports this week are impractical at best and exacerbate the problem at worst.
- BEPS is a relatively minor problem to begin with. OECD estimates that governments "lose" $100 billion to $240 billion per year due to multinational firms shifting profits to low-tax jurisdictions. While that sounds like an enormous amount of money, it’s a drop in the bucket that is the global economy: data from the World Bank indicate that global GDP was $77.87 trillion in 2014. Even the high end of OECD’s BEPS loss estimate is less than half of a percent of that economic activity.
- Encouraging tax competition, rather than stifling it, would combat BEPS. An assumption behind the OECD recommendations is that in an increasingly globalized economy, governments must closely align their corporate tax policies in order to discourage BEPS. In fact, they should embrace tax competition, which would drive corporate tax rates lower over time as countries compete for business. The OECD itself noted in its 2014 Economic Survey of the United States that America would do well to lower its corporate tax rate, which is well above the average of other OECD countries and drives businesses to shift profits in the first place.
- The proposals would leave taxpayers’ personal information at risk. OECD recommends that governments agree to collect “useful information to assess transfer pricing and other BEPS risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries.” That information would be shared through an “automatic government-to-government exchange mechanism”. Confidentiality concerns aside, some lawmakers have questioned whether the Treasury Department has the legal authority to share that information with foreign governments.
Taxpayers should be wary of OECD’s multinational recommendations, which are inefficient and intrusive solutions to a problem that can be resolved through corporate tax reform here at home.