Letter to OECD Beps (Base Erosion and Profit-Shifting) - Recommending Approach to Change Behavior of Multinationals Re Profit Shifting into Low-Tax Countries

Abstract

The OECD through its BEPS initiative should strongly recommend to OECD member and non-member countries that they abandon the territorial and deferral systems that they currently use. To replace these systems, they would implement full-inclusion systems under which all foreign income, including profits in foreign subsidiaries, would be currently taxed by each MNE’s home country. A foreign tax credit mechanism would prevent double-taxation.

This action would eliminate or significantly reduce the motivation of multinationals to shift profits into tax havens and other low-tax countries. As such, there would be significantly reduced MNE profit-shifting structures that erode the tax bases of all countries and require considerable time and resources of all tax authorities as well as of the multinationals that must create and maintain complicated supply-chain and other tax-motivated structures.

Other benefits include an expanded tax base for all countries, simplification through elimination of home country transfer pricing issues and need for CFC rules, and a more level-playing field competitively both for competition between multinationals headquartered in different countries and for competition between pure domestic companies and multinationals headquartered in that country. And the expanded tax base could allow a reduction in the overall corporate tax rate, a factor that could make the change to this full-inclusion system more politically acceptable.

The basic concept is simple. By being subject to current home-country taxation on its worldwide earnings, a multinational’s motivation for complicated structures that shift profits into tax havens from countries where operations, sales and services take place is significantly reduced or eliminated.

Keywords: International Tax Reform, OECD, BEPS, Territorial, Deferral, Full-Inclusion, Worldwide Taxation

JEL Classification: H21, H25, K34, E62