Limiting Base Erosion

S. 41. Introduction

The OECD’s Base Erosion and Profit Shifting (BEPS) project addresses corporate tax avoidance and aggressive tax planning and their impact on the budgets of governments. The need to prevent base erosion and profit shifting was first expressed in June 2012 when G20 finance ministers articulated an intention to prevent profit shifting to no-tax or low-tax jurisdictions where no substantial economic activity of the corporation takes place. They also called for the elimination of double non-taxation made possible by the use of hybrid mismatch arrangements, which basically means that, due to a loophole, corporations with business activities in two or more countries can totally avoid paying taxes. They asked the OECD to commence work on these issues. Thus, on 5 October 2015 the OECD, keeping a very tight schedule, released its final report on hybrid mismatch arrangements under Action 2 of its Action Plan on BEPS.

The BEPS project has its roots in the global financial crisis of 2008–2009, which dealt a heavy blow to the fiscal positions of governments around the world. In response, governments have been forced to enact highly unpopular increases in taxes and cut backs on serv...