Legal Research

BEPS in Tax Avoidance and Morality


Base Erosion and Profit Shifting (BEPS) in Tax Avoidance

BEPS is a strategy used by various international corporations to avoid tax liability in one jurisdiction by using several forms of loopholes due to the absence of International legislation (Treaties). I believe more importantly due to the absence of a treaty instrument which is universally applicable. Even though such avoidance may be against the principles of equity but are legally valid in every form as long as such avoidance is not in violation of any legislation. The question of morality has always been a complex one with the debate of natural law theory which can open a Pandora box by itself. It is evident that it may be considered morally wrong by many but the society operates and binds itself by ‘law’ and not morals unless those morals are given the shape of ‘law’ (legislation).

Corporations seek tax havens for financial gains but for countries welcoming such corporations to do business at a very profitable rate is the cause of world economic system where smaller states suffer at the hand of established countries with large resources and a stable economy. While corporations are looking to gain in one way, such countries also have reciprocal interests. These corporations invest money, create jobs and at times facilitate public with various services such as energy. In the international scene, every country, whether big or small has its international obligations to adhere to but with the absence of a universal enforcement mechanism BEPS is a problem which will take another decade to cater unless the international community multilaterally submit their domestic interests in lieu of common interests.

The ongoing debate and active measures adopted by OECD (Organization for Economic Co-operation Development) is a positive step towards reaching universal application but OECD still lacks such power. The power assumed by the UN Security Council with recent developments in international law has marked the history, where it passed a binding resolution against terrorism in 2001. It is obvious that the mandate of both bodies are almost opposite in nature and such matter as BEPS is not a threat to peace or security in anyway but with recent examples of international bodies issuing binding resolutions over all its member states. The time is not far when this may extent to civil matters of such nature as the one at hand. The BEPS problem can be dealt individually by states but the powers of a state does not extend beyond its own jurisdiction, whereby every state is responsible for its own internal affairs without foreign interference (principle of sovereignty).  Given such restriction, there will always be tax havens available for corporations to take advantage of unless an action plan is formed by states at an international level as mentioned earlier or an international organization issues a just binding standard application of tax law to all states without any discrimination.

The first step towards solving a problem is to believe and admit that there is even one that exists. In recent years the problem of BEPS has been surfaced over media with large public outcry. Political activism on the matter has ignited a movement in the right direction which I believe will hopefully lead to a solution in the coming years.