Base Erosion and Profit Shifting (BEPS) is a concept referring to corporate tax avoidance strategies used by multinational enterprises (MNEs) to artificially shift profits from high-tax jurisdictions to low-tax or no-tax locations where there is little or no economic activity. This practice exploits gaps and mismatches in tax rules, eroding the tax base of the countries where the economic activity takes place.
The initiative to combat BEPS was commissioned by the G20 and driven by the Organisation for Economic Co-operation and Development (OECD). The OECD Action Plan on BEPS was released on July 19, 2013, and approved by the G-20 Finance Ministers on July 20, 2013, to address the problem of lost global corporate income tax revenue, estimated at USD 100-240 billion annually. The final reports on the original 15 Action Points were published on October 5, 2015.
The original BEPS project (BEPS 1) mechanism included 15 Action Points, such as neutralizing hybrid mismatch arrangements (Action 2), strengthening Controlled Foreign Company (CFC) rules (Action 3), and ensuring transfer pricing aligns with value creation (Actions 8, 9, 10). The project connects to the Multilateral Convention (MLI), which allows jurisdictions to implement treaty-related BEPS measures without renegotiating numerous bilateral treaties.
The framework has recently changed with BEPS 2.0, which fundamentally modifies the rules for allocating multinational profits. BEPS 2.0 introduces two main components: Pillar One and Pillar Two. Pillar One reallocates a portion of the profits of the largest MNEs (those with global revenues exceeding €20 billion and profitability above 10%) to market jurisdictions. Pillar Two introduces a Global Anti-Base Erosion (GloBE) rule to establish a global minimum corporate tax rate of 15%.