What made base erosion and profit shifting project possible?. Identifying factors for building momentum for reform of international taxation
| Published date | 02 July 2018 |
| Pages | 795-810 |
| DOI | https://doi.org/10.1108/JFC-08-2017-0072 |
| Date | 02 July 2018 |
| Author | Akira Matsuoka |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
What made base erosion and
profit shifting project possible?
Identifying factors for building momentum
for reform of international taxation
Akira Matsuoka
Tufts University Fletcher School of Law and Diplomacy, Medford, Massachusetts, USA
Abstract
Purpose –The purpose of this paper is to unveil the true background of the Base Erosion and Profit
Shifting (BEPS)Project and to suggest crucial indexes forbringing a movement into a future ceiling causing a
struggleof the internationaltax system.
Design/methodology/approach –This paper looks into the historicalcontext of this project before and
after Starbucks’scandal, comparing to other contexts of the international tax system. Also, this paper
partiallyreviews BEPS from a legal perspective.
Findings –The key factorsfor building momentum of reform of international taxationare a country having
a government willing to embrace the cause of reform, unfairness felt toward entities using tax avoidance
schemes whichother comparable entities could not be use, grass-rootspressure for the reform, effective places
to negotiatecooperation among major countries for the reform, solid cooperationamong many countries in the
world to implementstandards and rhetoric of slogan withless opposition.
Originality/value –The momentum of the reform of international taxation was analyzed before.But the
BEPS Project has involvedsome unique events as compared with the Organization for EconomicCooperation
and Development’s project on harmful tax practices,such as initiation of NGOs and boycott by consumers.
Additionally,this paper will discuss insights, which the former researchdid not do.
Keywords BEPS Project, Harmful tax practices, Starbucks’scandal, Tax moral, The OECD
Paper type Research paper
Suppose that you were traveling across developed countries, such as the USA, Canada,
Japan, Italy, Germany, France and the UK. Youwould probably take lots of photos in each
country: at the top of Empire State Building,at the foot of the Leaning Tower of Pisa, at the
Eiffel Tower, at the Big Ben. After taking the photos, maybe you would share them with
your friends on social network services such as on Facebook. Also, you could plan to keep
the photos on Google Drive.When you took the photos, maybe you used some smart devises
like iPhone or iPad. Also, you probably needed to locate some venues providing internet
connections; maybe you went to a Starbucks near you to get access to its Wi-Fi service.
Imagine this scenario: You took advantageof products and services provided by American
multinational businessenterprises (MNEs) almost anywhere.
American MNEs operate all over the world. It seems likely that you would have a
positive impression of each of them: their products and services are fashionable, cutting-
edge, innovative and user-friendly.They offer catchy environments: well-paid employment,
suitable working conditions,croaked in a hip and trendy environment.
Now ask yourself, how do those MNEs earn money? They earn it through advertising
revenue, royalties pertaining to their intangible assets, and profits from selling their
branded products from coffee to tie, shirt or mugs-to go. These companies earn huge
Base erosion
and profit
shifting
795
Journalof Financial Crime
Vol.25 No. 3, 2018
pp. 795-810
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-08-2017-0072
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
amounts of money through theirvarious businesses and may choose to reinvest into new or
existing businesses.The American MNEs are personifications of capitalism.
What if these MNEs were too artful in their greediness? What if these MNEs exploited
the weak points of complicated tax codes with artful tax avoidance schemes? What if the
MNEs succeeded ingaining an unfair advantage over other honest local businessesby using
loopholes in the tax codes to increase profits? Do any of these questions impact caffeine
seeking customer’schoice –Starbucks or Marylou’s?
Google, Apple, Microsoft, Facebook, Amazon, Starbucks: They are outstanding MNEs.
However, for some tax specialists, they are emblematic of international tax avoidance
schemes. Though policy makers and the tax specialists look at those MNEs with awe for
their cleverness,they have also been aware of their devious practicesfor a long time.
History shows that the tax policy makers play a cat-and-mouse game with the MNEs:
MNEs exploiting a vulnerable part of tax codes, the tax policy makers repairing loopholes
and MNE exploiting another vulnerable part of new revised tax codes. TheMNEs have not
committed a crime such as tax evasion as much as they have committed actions in a gray
zone, which is generally called as tax avoidance. Some may argue MNEs have not
committed illegal actions –rather, morally illegal actions. Through tax avoidance, MNEs
shift tax burdens to the rest of taxpayers and harm the fairnessof tax codes. Policy makers
need to address tax avoidance. Many policy makers have long struggled with the problem
and have dreamed of transformingthe current laws.
An ambitious challenge on international taxation is in the hands of policy makers,
namely, the Base Erosion and Profit Shifting (BEPS) Project recently initiated by the
Organization for Economic Cooperation and Development (OECD). By the OECD, BEPS
refers to “tax planningstrategies that exploit gaps and mismatches in tax rules to artificially
shift profits to low or no-tax locations where there is little or no economic activity”(OECD,
2018a). The policy makers recently initiating the battle against international tax avoidance
scheme at the OECD have been developing a comprehensive project in 2016 against BEPS,
the so-called BEPS Project, at an unprecedentedly rapid pace. The BEPS Project is so
inclusive: the OECD involvesas many as 87 member countries in the BEPS Project, as of the
end of October 2016 (OECD,2017).
This paper suggests that momentum was spurred by a scandalous and innovative
international tax avoidance scheme in 2012. This paper will analyze this argument and
identify the important factors needed to build momentum for the next phased reform of
international taxation following the BEPS Project. The hypothesis of this paper is that the
key factors for building momentumare a country having a government willing to embrace
the cause of reform, unfairnessfelt toward entities using tax avoidance schemes which other
comparable entities could not be use, grass-rootspressure for the reform, effective places to
negotiate cooperation amongmajor countries for the reform, solid cooperation among many
countries in the worldto implement standards, and rhetoric of slogan with less opposition.
Richard Eccleston identified following four factors for the reform of international
taxation through analysis of history: “the support of great powers,”“a robust compliance
regime,”“prevailing norms,”and “the demands of domestic political circumstances”
(Eccleston, 2012, Chapter 3 Politics without Conviction: The OECD’s Failed Harmful Tax
Competition Initiative).According to Richard Eccleston, “the support of great powers”refers
to a setting where all of powerful countries should concert the cooperation of reform of
international taxation; “a robust compliance regime”refers to power which force every
country to follow standards for the reformof the international taxation; “prevailing norms”
refers to a dominating theory which would sound supportive to the reform of international
taxation; “the demands of domestic politicalcircumstances”refers to support for the reform
JFC
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796
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