What Is Base Erosion and Profit Shifting?
BEPS describes how multinationals exploit tax rules to shift profits to low-tax locations. Learn the OECD's response and what it means for business.
Key Takeaways
- BEPS refers to tax planning strategies that exploit gaps between different countries' tax rules to artificially shift profits to low or no-tax locations.
- The OECD's BEPS project produced 15 Action items to close loopholes and align taxation with real economic activity.
- African countries are among those most affected by BEPS, losing significant tax revenue to profit shifting by multinationals.
What BEPS means
Base Erosion and Profit Shifting describes practices where multinational companies use legal but aggressive tax planning to move profits away from countries where genuine economic activity occurs toward jurisdictions with little or no tax. The 'base' refers to the taxable income base of the country losing revenue. The OECD estimates that BEPS costs governments USD 100 to 240 billion annually in lost revenue.
How BEPS happens in practice
Common BEPS techniques include: routing payments through entities in tax havens, using intercompany debt to strip profits through interest deductions, locating intellectual property in low-tax jurisdictions and charging royalties back to operating companies, and exploiting treaty mismatches to achieve double non-taxation. These strategies are legal under individual countries' rules but exploit gaps between different systems.
The OECD BEPS project
In 2015, the OECD released 15 Actions to combat BEPS, covering transfer pricing, treaty abuse, digital economy taxation, and transparency. Key actions include country-by-country reporting, limiting interest deductions, preventing treaty shopping, and addressing the digital economy. The Inclusive Framework now has over 140 member jurisdictions, including many African countries, working to implement these actions.
Impact on African economies
African countries are disproportionately affected by BEPS because they rely heavily on corporate income tax and have limited capacity to detect complex profit-shifting structures. The African Tax Administration Forum estimates the continent loses tens of billions of dollars annually. Countries like Nigeria, Kenya, and South Africa have responded with domestic anti-avoidance rules, transfer pricing regulations, and digital services taxes.