The Transformation in BEPS Mechanism and Tax Evaluation from Global Digitalization and Tax Competition

Abstract

With the advent of the globalization, it was witnessed that there was a growth of communication system within the companies and the services were more intangible in nature. Therefore, the initiative of the OECD Base Erosion and Profit Shifting (BEPS), 2013 was the one of the most significant effort to eradicate the problem of shifting tax profit. Further, the misalignment of the national tax laws benefitted the companies in shifting their profits to the less tax jurisdiction. This imbedded the basis for the arm’s length principle acting as a guidance for comparison of associated enterprises with the independent one. The OECD/G20 Addressing the Tax Challenges of the Digital Economy, 2014 articulated a structural shift towards the profit-split method which is more suitable for intangible transactions. However, the 2018 Revised Guidance on the Application of the Transactional Profit Split Method: action 10 prescribed a revision of the above consideration. Consequently, Inclusive Framework’s 2019 asserted a need to address a more appropriate transfer pricing method that would be allow the evaluation of profits to go beyond the basic arm’s length principle. As a result, there is an unlikeliness with a stable tax system that can be adhered too. Therefore, I evaluate alternative proposals including the value created method or the residual profit-split method to re-examine the loopholes of the existing residence-source paradigm.