Contributions of the Base Erosion and Profit Shifting BEPS Project on Transfer Pricing and Tax Avoidance

Anissa Ouelhadj,Mehdi Bouchetara

doi:10.21272/fmir.5(3).59-70.2021

Abstract

Globalization and digitalization lead to flaws and asymmetries in tax rules which were used by multinational companies in their own benefit. Then, to face tax avoidance and tax losses which represents 100 to 240 billion dollars per year, Organization for Economic Co-operation and Development and G-20 implement, since 2012, the Base Erosion and Profit Shifting project, base erosion and profit shifting, which is the most important international reform that tax system has known. This paper aims to understand whether the Base Erosion and Profit Shifting project’s transfer pricing actions mitigate tax avoidance by multinationals through a literature review and a qualitative approach. We interview 05 international tax specialists working in Multinational Companies and Tax Administration. We found that the project’s transfer pricing reforms mitigate tax avoidance in short term. We confirm the first hypothesis, that the Base Erosion and Profit Shifting project’s transfer pricing inputs mitigate tax avoidance in the short term, and following the results obtained, we refute the second hypothesis that Base Erosion and Profit Shifting actions dealing with transfer pricing do not mitigate tax avoidance.

Highlights

The international tax system, conceived more than a century ago, has put in place a number of rules that govern a country's cross-border transactions with another country, using bilateral conventions (Chaouche, 2019), the aim is to eliminate double taxation of multinational enterprises in the source country and the residet country (OCDE, 2015)
This paper aims to understand whether the Base Erosion and Profit Shifting project’s transfer pricing actions mitigate tax avoidance by multinationals through a literature review and a qualitative approach
What motivates multinational companies to engage in tax avoidance through transfer pricing is, according to the respondents, tax optimization (40% of respondents), reduction of the tax base (40% of respondents) and 20% think it is the high rate of corporation tax

Summary

Introduction

The international tax system, conceived more than a century ago, has put in place a number of rules that govern a country's cross-border transactions with another country, using bilateral conventions (Chaouche, 2019), the aim is to eliminate double taxation of multinational enterprises in the source country and the residet country (OCDE, 2015). As international tax rules are complex and contain loopholes due to existing discrepancies and asymmetries, they have been exploited by multinational companies to their own advantage, often through legal channels, through tax optimization (Fuest, Parenti, & Toubal, 2019). Multinational companies often transfer their income to low or no-tax countries, commonly known as tax havens (Fuest, Parenti, & Toubal, 2019) to avoid taxes (Sasse, Watrin, & Weiß, 2020). According to the OECD, in 2015, tax avoidance created a loss of tax revenues (intended for the “citizen” public) of US$100-240 billion per year, or 4%-10% of these revenues with 36% of multinational company’s revenues artificially transferred to tax havens (Broussolle, 2020).

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