Four Questions to Ask about OECD's BEPS Project
The views expressed are solely the opinions of the author.
The Organization for Economic Cooperation and Development (OECD) project titled Base Erosion and Profit Shifting (BEPS) has gained wild popularity among finance ministers. This ambitious undertaking seeks to reveal how multinational corporations (MNCs) seek to locate income in low-tax jurisdictions and avoid paying rates in high-tax jurisdictions. The prospect of extracting more revenue from such "abusive" MNC practices serves as an aphrodisiac to finance ministers. And the prospect makes for great headlines: US Treasury Secretary Jacob Lew, British Chancellor George Osborne, and Australian Treasurer Joe Hockey have all thundered against the likes of Apple, Google, and Starbucks. Rather than raise taxes on gasoline, retail sales, or social security, the politics of taxing "the fellow behind the tree" are far less daunting.1
With mild prodding from Secretary Lew, the OECD grabbed hold of this policy honeypot in 2013, launching the BEPS project with a clunky title that leaves no doubt as to the outcome of its inquiry. Who can favor "base erosion"? Or "profit shifting"? It should be remembered that President Obama's rallying call, in both the 2008 and 2012 elections, was the accusation that MNCs (with Republican support) were using "tax breaks to ship jobs overseas." Now that President Obama is fighting a mammoth battle against fellow Democrats to enact Trade Promotion Authority (TPA) and ratify the Trans-Pacific Partnership (TPP), the BEPS project serves the useful purpose of showing continued concern about MNC practices. Given this political background, seemingly the only tasks left for OECD experts are to explain the complex mechanics of MNC "misdeeds" and to offer recommendations for curbing pre-judged "abuse."
Towards these goals, the BEPS Action Plan identified 15 components, called "actions," to be delivered in separate papers between September 2014 and December 2015. The amount of research entailed by these 15 actions is immense. The work program calls for a thorough review of digital taxation, hybrid vehicles, permanent establishments, transfer prices, data gaps, aggressive tax planning, and dispute resolution. Action 15 will cap the project by proposing a "multilateral tax instrument" to curtail the "rapacious" behavior of MNCs (my interpretation of the OECD's bureaucratic verbiage). Just counting the discussion drafts so far released, the 15 actions together will occupy several hundred pages. Years may pass before all the research and recommendations contemplated in the BEPS Action Plan are digested by OECD finance ministries and legislators.
Yet for all its ambition, the BEPS project omits to ask, let alone answer, important economic questions raised by the evident goal of taxing "the fellow behind the tree." To a very large extent these fellows are premier US corporations, celebrated for innovation and job creation. So let me fill some gaps.
Question 1. If the tax goal is achieved, using static analysis, which countries will collect more revenue from MNCs, and how much? Will any countries lose revenue?
Question 2. To what extent will the collection of additional revenue dampen the incentive for intellectual capital formation (via R&D expenditures) and physical capital formation (via plant and equipment outlays)?
Question 3. How much will intellectual and physical capital formation be depressed on account of reduced incentives? What will be the long term growth consequences?
Question 4. If implemented, will the "multilateral tax instrument" augment the pressure on MNCs based in high-tax countries, especially the United States, to invert, or otherwise relocate their R&D, headquarters, and production activities abroad?
Until these and similar questions are answered, finance ministers everywhere, and particularly the US Treasury Secretary, should be wary of a BEPS-inspired campaign to raise taxes on MNCs under the banner of "stopping abuse." Revenue collection in a politically convenient manner should not be the only goal, or even the foremost goal, of international tax policy.
1. The reference is to Senator Russell Long's wise observation on the political economy of taxation: "Don't tax you, don't tax me, tax the fellow behind the tree."