Evaluating BEPS

56 Pages Posted: 16 Jan 2016 Last revised: 5 Sep 2017

See all articles by Reuven S. Avi-Yonah

Reuven S. Avi-Yonah

University of Michigan Law School

Haiyan Xu

University of Michigan Law School; University of International Business and Economics (UIBE) Law School

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Date Written: January 15, 2016


Following the financial crisis and ensuing austerity, politicians discovered the problem of tax avoidance. In response, the OECD and G20 launched the Base Erosion and Profit Shifting (BEPS) project in 2013, and this has in October, 2015 culminated with the release of a series of action steps that the OECD and G20 countries have undertaken to adopt. OECD Secretary-General Angel Gurria has stated that "Base erosion and profit shifting affects all countries, not only economically, but also as a matter of trust. BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide. The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective".

Is Mr. Gurria justified in his optimism? We do not think so. These efforts are commendable and to some extent have an impact. But in our opinion they are inadequate. The basic problem is that they take as a given the fundamental consensus underlying the international tax regime, also known as the "benefits principle". Under the benefits principle, active (business) income should be taxed primarily at source while passive (investment) income should be taxed primarily at residence. This compromise between the claims of residence and source countries was reached by the four economists in 1923 and still serves as the foundation of the international tax regime. It is embedded in over 3,000 bilateral tax treaties and in the domestic laws of the US and most other countries. Not surprisingly, it is also reflected in BEPS, which is an attempt to improve source-based taxation of active income.

In our opinion, this consensus should be reconsidered in light of current realities. The shortcomings of BEPS are directly related to its reliance on the benefits principle, because upholding it requires cooperation by too many jurisdictions.

Keywords: BEPS, tax competition, tax coordination

JEL Classification: H26

Suggested Citation

Avi-Yonah, Reuven S. and Xu, Haiyan and Xu, Haiyan, Evaluating BEPS (January 15, 2016). U of Michigan Public Law Research Paper No. 493, Available at SSRN: https://ssrn.com/abstract=2716125 or http://dx.doi.org/10.2139/ssrn.2716125

Reuven S. Avi-Yonah (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4033 (Phone)

Haiyan Xu

University of International Business and Economics (UIBE) Law School ( email )

No. 10, Huixin Dongjie, Room 724, Ningyuan Buildin
Chaoyang District

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

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