What is BEPS (Base Erosion and Profit Shifting)?

Base Erosion and Profit Shifting (BEPS) describes a type of tax avoidance strategy that some multinationals use. These strategies tend to involve shifting profits from a relatively high-tax jurisdiction to a country with no or low taxes, which erodes the tax base of higher-tax countries.

We’ve created this article to provide business leaders with some actionable insights into BEPS. What does it mean, what are its economic implications, and what has the global response to it—especially from the Organisation for Economic Co-operation and Development (OECD)— been?

Definition and Concept of BEPS

In practical terms, BEPS involves using tactics that exploit the gaps and mismatches that exist between the tax systems in different jurisdictions. Multinational companies use these tactics as a way to legally reduce their tax burdens, reallocating profits to their subsidiaries that operate in jurisdictions with more favorable tax approaches. This can also be one of many tactics considered by companies exploring what is a profit sharing plan, to boost benefits for workers.

While this is technically legal, it’s also a highly controversial practice. This is because BEPS tactics aren’t necessarily in the spirit of fair taxation, not to mention that they disrupt equitable contribution to public finances within a country’s business ecosystem.

How BEPS Affects Global Tax Systems

One of the biggest issues surrounding BEPS is that it undermines the integrity of national tax systems across the world. Perhaps most importantly, when companies use these tactics to reduce their own tax burden, they are in turn reducing the amount of revenue that is going back into the economies of countries in which the revenue is generated. This means less funding for public services such as healthcare, education, and infrastructure. 

When this occurs in developing countries, there are potential harms, as tax revenues are essential for funding diverse basic public resources. This is a perspective that business leaders exploring the question of “What is cultural intelligence?” should be mindful of. In the developed countries, these actions contribute to growing discord around fair taxation of the wealthy. Additionally, BEPS distorts competition between multinational and domestic firms, with smaller companies facing financial disadvantages due to their inability to adopt such aggressive tax planning strategies.

Key BEPS Practices Used by Multinationals

There are various BEPS approaches multinationals utilize, including:

• Intellectual property (IP) licensing – Companies license IP through subsidiaries in low-tax jurisdictions, effectively shifting profit to face reduced burdens.
• Transfer mispricing – Companies arrange intra-group transactions and mispriced transfers, ensuring exchanged goods or services are priced to benefit from tax differences.
• Hybrid mismatching – Companies will exploit the differences in how different countries treat financial instruments or entities, which means they can claim deductions in more than one jurisdiction.
• Thin capitalization – Companies finance their subsidiaries through excessive debt acquisition, which enables them to make high-interest deductions that functionally lower taxable profits.

OECD’s Role in Addressing BEPS

There’s growing global pressure to address the inequalities of BEPS tactics. The OECD has developed a comprehensive framework to combat such strategies. This involves a 15-point Action Plan—created in collaboration with the G20—focused on a range of measures to close exploitable tax loopholes and better align taxation with economic activity. A vital aspect of this is the Inclusive Framework, in which more than 140 countries have committed to international cooperation and increased transparency, thereby curbing profit shifting and boosting economic value.

The 15 BEPS Action Points – Overview

The 15 Action Points address a variety of international taxation challenges, with the aim of closing gaps and improving international tax compliance. For instance, Action 1 focuses on the digital economy, providing insights into closing loopholes related to intangible assets and their innate mobility. Action 7 is about preventing companies from avoiding permanent establishment status through artificial structures; a tactic that is often used to manipulate the jurisdiction in which a company has tax liability. Action 13 supports greater transparency by introducing country-by-country reporting, requiring multinationals to disclose key financial data for each operational jurisdiction.

BEPS 2.0 and the Global Minimum Tax

Since its initial introduction, BEPS has evolved. BEPS 2.0 features two pillars that are intended to align with the economy effectively. Pillar One focuses on the challenges of the customer-facing digital economy, allocating certain taxing rights to market jurisdictions.

Pillar Two, on the other hand, establishes a global minimum corporate tax rate of 15%. This is explicitly designed to reduce the incentives companies have to shift profits to low-tax countries.

The implications of this include more rigorous compliance requirements for large multinational corporations that draw significant revenues. For tax jurisdictions, there’s the potential for some friction while trying to balance a competitive business environment with global cooperation.

Compliance and Reporting Obligations

To maintain compliance with BEPS frameworks, multinationals are having to enhance their reporting protocols. In particular, they must maintain detailed records of transfer pricing practices, providing evidence of fair intra-group transactions.

BEPS Action 13 also introduced country-to-country reporting obligations. These ensure transparency of multinationals’ income, taxes paid, and economic activity in each jurisdiction, allowing tax authorities to mitigate avoidance. Additionally, in some jurisdictions, failure to comply is met with increased scrutiny and potential financial or operational penalties.

Base Erosion and Profit Shifting BEPS: Business Impact

The implications of BEPS reforms for businesses are varied. Firstly, a higher degree of transparency and alignment with global standards needs to be incorporated into strategic tax planning and internal governance. How companies interact with transfer pricing, IP holdings, and overall financing models also must be reassessed and adjusted for compliance. In particular, companies considering cross-border mergers and acquisitions need to work with their business consultants to arrange closer scrutiny during due diligence to navigate potential tax implications of transactions that might affect both compliance and deal value.

Criticism and Limitations of the BEPS Framework

The BEPS framework has ethical goals, but it’s not without criticism. At the moment, there is uneven implementation across jurisdictions, which has resulted in some loopholes and spotty enforcement.

Additionally, some firms argue that the framework is overly complex and that this may deter legitimate investment. A particular concern is that this could stifle engagement with emerging markets.

Furthermore, there’s ongoing debate about whether BEPS adequately solves issues around digital business models and tax competition, or whether it simply creates different problems with stifling regulations.

Future Trends in International Tax Governance

Looking forward, there is a growing emphasis on the importance of tax justice; that companies’ success shouldn’t come at the expense of equitable contribution. Governance trends are likely to continue moving toward goals of ensuring fair contributions, regardless of a business’ size or reach.

The taxation of the digital economy is also expected to be a key focus. More countries are starting to adopt unilateral measures or adopt global frameworks to address issues here.

Additionally, global framework alignment is likely to continue through initiatives like BEPS. Nevertheless, there may still be some country-specific divergence as jurisdictions aim to protect their interests through competitive tax policies.

FAQs

What is BEPS in simple terms?

It refers to strategies multinational companies use whereby they shift profits to regions they have no real economic activity in to reduce taxes.

Why is base erosion and profit shifting a concern?

It erodes national tax revenues, undermines fairness, and distorts competition.

Who is addressing the problem of BEPS globally?

The OECD and G20 nations developed a coordinated framework to mitigate BEPS issues.

What does BEPS mean for my business?

It could require new compliance measures, reporting transparency, and internal tax structure reassessments.

What is the global minimum tax under BEPS 2.0?

It sets a 15% minimum corporate tax rate for large multinationals; preventing profit shifting to low-tax jurisdictions.

References

European Commission. (2025). Hybrid mismatch arrangements. Taxation and Customs Union. https://taxation-customs.ec.europa.eu/document/download/325d58ba-3829-4a42-bf0c-9acf300e4a04_en 

OECD. (2025). Global Anti-Base Erosion Model Rules (Pillar Two). OECD. https://www.oecd.org/en/topics/sub-issues/global-minimum-tax/global-anti-base-erosion-model-rules-pillar-two.html