Regulatory Alerts, Tax and Transfer Pricing

Understanding Base Erosion and Profit Shifting (BEPS)

Certain Terms in the realm of Taxation and generally in the corporate sphere seem rather complicated to the average Student, even with endless visits to sites which deal with semantics. In very simple terms, Base Erosion and Profit Shifting entails two things; eroding the base, and shifting profit from one place to another. In Taxation, the two phrases go hand in hand and so Base Erosion and Profit Shifting is the transference of profit by a Company from a high tax jurisdiction to a lower tax jurisdiction or tax haven. It has been stated arguably to be a tax avoidance scheme.

Interestingly, Nigeria currently has a corporate tax rate of 30% of a company’s annual returns, New Zealand has 28%, Pakistan has 35%, Gambia has 31%, Falkland Islands have 26% and so on according to Wikipedia. Tax havens refer to jurisdictions with a zero percent corporate tax rate and they include; British Virgin Islands, United Arab Emirates, Saint Kitts and Nevis, Sark, Kuwait, Jersey, Guernsey, Cayman Islands, Bermuda, Bahrain, Bahamas, Anguilla and a few others which fluctuate depending on economic circumstances.
It is probably counterintuitive for Companies to keep on receiving and retaining profit in high tax jurisdictions hence the need to shift these profits to tax havens such as the Bahamas by establishing headquarters in these turfs. BEPS is not illegal however it drains economies of
economic power as companies with high annual returns continue to migrate profits.
What then is the solution to this problem?

The Organization for Economic Cooperation and Development (OECD) observed how the economy base of Countries with high tax rates were being eroded by BEPS, and came up with a plan to regulate profit shifting and protect tax bases finally on October 5, 2013.
There are 15 Action plans and they address the tax challenges of the digital economy, controlled foreign company rules, limiting base erosion involving interest deductions among other things. It should be noted however that BEPS outputs are ‘soft law’ legal instruments and are not
particularly legally binding. However, signatories to the framework are expected to abide by them.

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