Base erosion and profit shifting
Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations where there is little or no economic activity, thus "eroding" the "tax-base" of the higher-tax jurisdictions using deductible payments such as interest or royalties. For the government, the tax base is a company's income or profit. Tax is levied as a percentage on this income/profit. When that income / profit is transferred to a tax haven, the tax base is eroded and the company does not pay taxes to the country that is generating the income. As a result, tax revenues are reduced and the country is disadvantaged. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as "exploiting gaps and mismatches in tax rules". While some of the tactics are illegal, the majority are not. Because businesses that operate across borders can utilize BEPS to obtain a competitive edge over domestic businesses, it affects the righteousness and integrity of tax systems. Furthermore, it lessens deliberate compliance, when taxpayers notice multinationals legally avoiding corporate income taxes. Because developing nations rely more heavily on corporate income tax, they are disproportionately affected by BEPS.
The United States Department of the Treasury decided against signing the 2016 OECD anti–BEPS MLI initiative from the § Failure of OECD (2012–2016), stating that the U.S.: "has a low degree of exposure to base erosion and profit shifting". International tax academics showed in 2018 that U.S. multinationals are the largest users of BEPS tools in the world; while U.S tax academics demonstrated, even as early as 1994 that the U.S. Treasury is a net beneficiary from the use of tax havens and BEPS by U.S. multinationals.
Profitability of U.S. subsidiaries (2015 BEA data).
Former Irish Taoiseach Enda Kenny (l), and PwC Partner Feargal O'Rourke (r) architect of two of the largest BEPS tools in the world, the Double Irish (including Microsoft, Google, Facebook, IBM, Johnson & Johnson and Pfizer, amongst many others), and the Green Jersey (as used by Apple in their Q1 2015 "leprechaun economics" restructuring in Ireland).
Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes. Tax avoidance should not be confused with tax evasion, which is illegal. Both tax evasion and tax avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system.
Avoiding the window tax in England