1. Evaluating BEPS Reuven S. Avi-Yonah Professor in Residence, IBFD May, 2016 1

2. 2 Base Erosion Profit Shifting Base Erosion Profit Shifting Project (2013) Release of Action Steps (2015) Angel Gurria: “..they [BEPS] will put an end to double non-taxation” True?

3. 3 Not sure it will… BEPS won’t solve double non-taxation because: BEPS takes as a given the fundamental consensus underlying the int’l tax regime, known as the “benefit principle”. Under the benefit principle: Active (business) income taxed primarily at source Passive (investment) income taxed primarily at residence

4. Before 1980 4

5. 5 Wow!!! The “Benefit principle” works great! Reasons: Difficult to earn active income without taxation by source countries Tax competition limited in scope Investments by MNEs were immobile Exchange restrictions limiting ability to earn to earn passive income oversea

6. After 1980 6

7. 7 Something changed…. What? Focus shifted from heavy manufacturing to services and intangibles, and therefore MMEs became more mobile. This led to “tax competition”. Relaxation of exchange controls and abolition of WHT on interest Result: most cross-border income untaxed!!

8. 8 Problems Residence countries exempt foreign source activity income They do so out of fear, that MNEs will establish HQs elsewhere Source countries lack authority to tax: Because MNEs avoid the required physical presence And/or because some jurisdictions grant tax holidays Multinationals Individuals Exchange of information ineffective in deterring tax evasion via offshore jurisdictions No WHT levied by source jurisdictions Double non-taxation Loss of tax revenues World-wide shift to taxing consumption rather than income Elimination of progressive taxation and increase of inequality growth

9. 9 Primary problem with MAATM & BEPS MAATM & BEPS are helpful. But they will most likely not solve the problem In both cases, the problem is that too much cooperation is required! MAATM  All tax havens need to sign otherwise, funds will be routed via non-cooperating havens  Currently, we are far from there BEPS  The project only addresses artificial profits shifting; it does not address profit shifting due to tax competition  BEPS proposals apply only to OECD and G20 countries

10. 10 Wait a second…

11. 11 Actions:  Re-evaluate the benefit principle Tax passive income primarily at source Tax active income primarily at residence  Reduce corporate income tax rate  Change corporate residency rules. Residence to be based on location of HQs rather than place of incorporation

12. 12 Why change benefit principle? For passive income, the number of source countries are smaller than residence. It is therefore easier to coordinate and to reinstate a WHT on interest/dividend/royalties For active income, 90% of large MNEs are headquartered in G20 countries. It is therefore easier to coordinate to tax MNEs on current basis, and restrict ability to move This will: enable the large economies to address both individual tax evasion and corporate tax avoidance.

13. 13 Thanks!