Base Erosion and Profit Shifting (BEPS) is a concept that describes tax planning strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in different countries' tax rules to artificially shift profits to low- or no-tax locations where there is little or no economic activity, thereby eroding the tax base of higher-tax countries. The OECD/G20 BEPS Project was initiated in 2013 after the G20 Los Cabos summit tasked the Organisation for Economic Co-operation and Development (OECD) to develop an action plan. The problem it solved was the annual loss of an estimated USD 100-240 billion in global corporate income tax revenue due to these practices, which undermine the fairness of tax systems.
The initial framework, known as the BEPS Action Plan, consists of 15 Actions agreed upon at the 2015 G20 Antalya summit to equip governments with instruments to ensure profits are taxed where economic activity and value creation occur. Key mechanisms include strengthening Controlled Foreign Company (CFC) rules (Action 3), limiting base erosion through interest deductions (Action 4), and enhancing transparency through Country-by-Country Reporting (CbCR) (Action 13). The implementation of these measures is facilitated by the OECD/G20 Inclusive Framework on BEPS, established in 2016, which involves over 140 countries and jurisdictions working together.
The framework has changed recently with the introduction of BEPS 2.0, which addresses the tax challenges of the digital economy. BEPS 2.0 is built on two pillars: Pillar One and Pillar Two. Pillar One reallocates a portion of the residual profits of the largest and most profitable MNEs (those with global turnover above €20 billion and profitability above 10%) to the market jurisdictions where their customers are located, even without a physical presence. Pillar Two introduces a Global Anti-Base Erosion (GloBE) rule, establishing a global minimum effective corporate tax rate of 15% for MNEs with annual consolidated revenue of €750 million or more, which is designed to reduce the incentive for profit shifting.