The Impact of BEPS 1.
Alan Cole Senior Economist
April 2024
Key Findings
• Both the OECD Pillar Two agreement and scheduled changes to the Tax Cuts and Jobs Act are likely to
alter the international corporate income tax landscape in the coming years.
• The OECD also spearheaded a considerable tax policy initiative, known as BEPS 1.0, last decade, and
its effects are still being felt.
• Tax policy benefits from stability and slow, considered change. It is worth examining the successes
and failures of the BEPS 1.0 initiative before adding new initiatives.
• Base erosion and profit shifting are legitimate problems with international corporate income taxa-
tion. Even if low effective rates have some desirable economic properties, these should be achieved
through legislation, not costly tax planning.
• Some of the better ideas for international reforms were already made in that prior effort. And many
reforms come with compliance costs. Future reforms may have a worse cost-benefit ratio.
• Future efforts should avoid duplication, pursue win-win arrangements, and aim to reduce compliance
costs.
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Introduction
The global landscape of international corporate taxation is undergoing significant transformations as
jurisdictions grapple with the difficulty of defining and apportioning corporate income for the purposes of
tax.
The most important upcoming changes on this front include scheduled changes to the U.S. Tax Cuts and
Jobs Act (TCJA), which will increase the effective tax rates on a variety of its international provisions, and
the Pillar Two global minimum tax agreement brokered by the Organisation for Economic Co-operation
and Development (OECD).
Further down the line, the OECD may come to an agreement on another global tax agreement known as
Pillar One, which would apportion some corporate income according to the location of sales, rather than
the location of production. Additionally, the United Nations is also creating a working group on global tax
policy.
However, as policymakers look ahead to these new changes, they should also remember that substantial
work has been done on international tax policy in the last decade. The OECD’s first effort on Base Erosion
and Profit Shifting (BEPS) was a considerable undertaking, and TCJA substantially reformed the U.S. inter-
national tax rules. These reforms are relatively young, dating back to roughly 2015 and 2017, respectively.
Examining these efforts is important for several reasons. Policymakers should understand what works
and what does not work in international tax policy when crafting new international rules. They should
avoid duplication of past efforts. And they should attempt to “weed the garden” by removing rules that do
not work or have been superseded by better ones.
A recent Tax Foundation report examined the legacy of TCJA international reforms.1 Below is an examina-
tion of the OECD’s early efforts on BEPS, often called “BEPS 1.0.” It will describe the problems OECD BEPS
efforts were intended to address, the actions taken by the OECD, and the implementation of those actions.
Then it will examine the results, where possible, and draw lessons from those results.
Corporate Tax Avoidance Behaviors
The recent flurry of changes to international corporate income taxation reflects a legitimate need to adapt
the international tax system to a changing economy. Cross-border transactions have become more fre-
quent and more global income has become attributable to so-called intangibles: abstract ideas like intel-
lectual property that are difficult to pin down to a specific location. These trends have made the definition
of corporate income, and the apportionment of that corporate income among jurisdictions, more difficult.
1 Alan Cole, “The Impact of GILTI, FDII, and BEAT,” Tax Foundation, Jan. 31, 2024, https://taxfoundation.org/research/all/federal/impact-gilti-fdii-beat/
Tax Foundation | 3
When the definition or location of income is ambiguous, multinational enterprises (MNEs) have a pecuni-
ary incentive to report their income in ways that incur a lower tax burden. This behavior presents a prob-
lem for policymakers. While low effective tax rates can be a fine policy applied broadly, it is undesirable for
MNEs to achieve low effective rates haphazardly through tax planning. This favors business models that
lend themselves to tax planning over those that do not, and it might end up spurring lawmakers to enact
higher tax rates to meet revenue targets, shifting more of the corporate income tax burden to companies
less able to shift income to lower tax jurisdictions.
Corporate tax avoidance behaviors take a variety of forms, depending on the kind of tax the MNE intends
to avoid. Corporate income taxes are primarily apportioned through a source-based system: that is, a
corporation’s income is taxable by the jurisdiction in which the corporation produces its goods or services.
However, some countries, including the U.S., also employ some residence-based taxation: that is, a corpo-
ration may also pay tax to the jurisdiction of its ultimate parent entity, on top of any source-based taxes it
might owe.
As most corporate income taxes today are source-based, the most important avoidance strategies are
designed to reduce liabilities associated with source-based taxation.
Transfer Pricing
One of the simplest tax avoidance behaviors involves transfer pricing. Transfer pricing is not a tax avoid-
ance strategy per se; it is simply the valuation of transactions between different components of an MNE,
which is necessary and required for tax and accounting purposes. However, MNEs can sometimes take
advantage of flexibility in transfer pricing to reduce their tax burdens. Payments from a subsidiary in one
jurisdiction to a subsidiary in another jurisdiction are deducted from income in the first jurisdiction and
counted as income in the second jurisdiction. An MNE stands to benefit if its payments from high-tax ju-
risdictions to low-tax jurisdictions are valued as high as possible, and if its payments from low-tax jurisdic-
tions to high-tax jurisdictions are valued as low as possible. While this does not change the MNE’s overall
income, it shifts the income to low-tax jurisdictions, reducing the average effective rate on the MNE’s
global income.
Transfer pricing regulations require that related-party transactions be valued at “arm’s length”—that is, they
should resemble the values that one would see in a similar transaction between unrelated parties, each
maximizing its own interest. However, it is difficult to define and enforce arm’s length in practice; it is a
hypothetical value that in many cases leaves room for substantial subjectivity and debate. In some cases,
comparable unrelated-party transactions may not exist at all.
Interest and Thin Capitalization
The deductibility of interest creates another way for MNEs to lower their global tax liability by taking ad-
vantage of tax rate differentials. Firms use debt financing for a few reasons. First, offering both debt and
equity allows the MNE to raise capital from savers with diverse risk tolerances. And second, payments to
bondholders—unlike the earnings paid out to shareholders—are often deductible from corporate income
tax.
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The tax advantage of interest deductibility is considerable, so firms of all kinds borrow, and the deductibil-
ity of interest helps offset taxable income. However, firms prefer to avoid too much leverage because it
increases the risk of costly bankruptcy.
Given an optimal amount of leverage—an amount that allows for some interest deductibility but does not
pose a serious risk of bankruptcy—an MNE would prefer to locate that leverage, and the associated tax
deductions, in a high-tax jurisdiction, wiping out the taxable income there, while booking taxable income
more in low-tax jurisdictions.
Limitations on interest deductibility—often called thin capitalization rules—are one policy tool that jurisdic-
tions have used to limit this practice.
Intellectual Property Location
The location and valuation of intangible assets like intellectual property are subject to considerable am-
biguity. Patents, trademarks, and copyrights are important assets for MNEs, but they do not have a clear
location in the way that more physical assets do. In many cases, MNEs can transfer intangible assets to
subsidiaries in low-tax jurisdictions. While the arm’s length principle might apply to such transfers in theo-
ry, the MNE in practice is likely to have a better understanding of the true value of its intangibles than tax
authorities do. It can therefore make trades that ultimately favor its subsidiaries in low-tax jurisdictions.
As those intangible assets begin to earn income, such as royalties, that income manifests more heavily in
low-tax jurisdictions than the underlying research and development (R&D) activities might suggest. This in
turn reduces the MNE’s global tax liability.
Treaty Shopping
Many cross-border transactions are governed by a patchwork of thousands of bilateral tax treaties. In
treaty shopping arrangements, MNEs divert an international transaction through an intermediate country
to get more favorable terms from the intermediate country’s network of tax treaties.
For example, consider a country that applies withholding taxes on outbound royalty payments. It may have
valid reasons for this policy—for example, to help protect its own tax base from profit shifting to low-tax
jurisdictions. In some tax treaties, it waives or substantially reduces its withholding taxes to attract invest-
ment. But it retains its withholding taxes on royalty payments to low-tax countries.
An MNE that holds its intellectual property in a low-tax jurisdiction might want to earn revenues in this
country but avoid the withholding tax. It could use a treaty shopping arrangement, sending the royalty
payments through an intermediate country with a tax treaty, and then onward to the low-tax jurisdiction.
This treaty shopping arrangement effectively extends the reprieve from withholding tax further than the
lawmakers intended.
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Strategies for Avoiding Residence-Based Taxation
Residence-based taxation, determined by the nationality of the MNE’s ultimate parent entity, is an alterna-
tive to source-based taxation that plays a supplementary role in some countries. Under residence-based
taxation, a country taxes its MNEs on their foreign profits as well as domestic profits.
Most OECD countries in recent years have used territorial tax systems, which largely exempt foreign prof-
its through a provision known as a participation exemption. An MNE, therefore, might owe no additional
tax to its parent company’s country beyond the tax already paid to the jurisdiction in which it is operating.
Territorial systems are attractive locations for corporate headquarters and allow a country’s corporations
to be more competitive abroad. However, under territorial systems, there is an incentive to shift profits
to foreign jurisdictions with lower tax rates than the MNE’s home jurisdiction. (By contrast, profit shifting
under a fully worldwide tax system would not escape the home jurisdiction’s taxes.) Therefore, most coun-
tries take at least some notice of their MNEs’ foreign profits, and, in some cases, tax them through provi-
sions called controlled foreign corporation (CFC) rules. CFC rules are a limited form of residence-based
taxation. They try to protect the corporate income tax base from profit shifting, without endangering
domestic firms’ competitiveness abroad.
If a country employs too much residence-based taxation, through a worldwide system of tax or with
heavy-handed CFC rules, then corporations may attempt to avoid this by effectively changing their home
country through mergers and acquisitions.2
The OECD’s 15 Actions
In the mid-2010s, the OECD spearheaded an effort among some of the world’s largest economies to
combat some of these avoidance behaviors. In July 2013, this effort took shape in a document outlining a
15-item action plan.3 After input and deliberation, the OECD then released a final series of reports on this
plan in October 2015.4 Today, most of the world’s countries—not just the OECD members—are signatories
to the plan. However, only a handful of the actions are called “minimum requirements,” or standards to
which signatories must adhere. In the last eight years, significant progress has been made on many, but
not all, of the actions.
Action 1 was ambitiously titled “Addressing the Tax Challenges of the Digital Economy,” an extremely
broad scope. Products without a clear physical location, especially internet products, were posing all
kinds of challenges to tax systems designed for the wheat-and-steel economies of the 20th century, and
Action 1’s nominal purpose was to address those challenges.
2 Kyle Pomerleau, “Everything You Need to Know About Corporate Inversions,” Tax Foundation, Aug. 4, 2014, https://taxfoundation.org/blog/every-
thing-you-need-know-about-corporate-inversions/.
thing-you-need-know-about-corporate-inversions/
3 Organisation for Economic Co-operation and Development, “Action Plan on Base Erosion and Profit Shifting,” Jul. 19, 2013, https://www.oecd.org/tax/action-plan-
on-base-erosion-and-profit-shifting-9789264202719-en.htm.
on-base-erosion-and-profit-shifting-9789264202719-en.htm
4 Organisation for Economic Co-operation and Development, “Action Plan on Base Erosion and Profit Shifting,” Oct. 5, 2015, https://www.oecd.org/ctp/beps-2015-
final-reports.htm.
final-reports.htm
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Unsurprisingly, Action 1 remains unfinished. (Arguably, it has barely begun.) The Action 1 report almost
serves more as a thesis statement for the whole BEPS project, rather than a specific and narrow action
plan. It notes that BEPS issues are exacerbated by digitalization and refers to other OECD BEPS actions
that are especially digitalization-specific. But importantly, it rejected the idea of creating a separate tax
system for “digital” business models from the traditional physical economy. Digital and information com-
ponents were fast becoming part of every sector, so it made sense to rebuild tax codes to handle them.5
In the years since 2015, disputes over taxing rights on large corporations have intensified, with many
countries enacting digital service taxes and attempting to raise revenues from large technology compa-
nies, typically those from the United States. Over time, an outgrowth of Action 1 has been an attempt to
strike deals on some of these issues and reallocate taxing rights throughout the global economy. This
effort became known as OECD’s two-pillar solution, or BEPS 2.0.6
Although Action 1 is only beginning to have an influence on corporate income taxes through the Pillar Two
agreement, it has led to policy change on value-added taxes (VAT), which have their own problems with
digitalization. When sellers have no presence in the jurisdiction where the end consumer resides, it is of-
ten difficult to enforce VAT compliance. Insights from Action 1 have been relevant in European Union (EU)
VAT reforms, such as the place of supply changes that went into effect in 2015.7
Action 2 was far more concrete and achievable. It sought to address a problem known as hybrid mis-
match arrangements. Some financial arrangements incorporate a mix of debt-like and equity-like features.
As a result, they can be treated as bond payments within one country’s tax system and equity payments
within another country’s tax system. This can result in a deduction for one party without a matching in-
come receipt for another party. For example, an entity in one country makes a payment that is counted as
deductible interest under that country’s rules, but the receiving country counts it as a dividend under a par-
ticipation exemption. Different rules for debt and equity are arguably a problem throughout the corporate
income tax system in general, but the problems are exacerbated when different jurisdictions with different
definitions of debt and equity payments are involved.
The OECD recommended an approach to addressing these arrangements, either through the denial of de-
ductions or the recognition of income. This approach has achieved voluntary adoption by many significant
economies, including the EU in 2016 and 2017 Council Directives known as Anti-Tax Avoidance Directives
(ATAD) I and II.8 Furthermore, the U.S. Treasury under Secretary Steven Mnuchin issued guidance moving
the hybrid rules within existing U.S. law to more closely match the OECD approach.9
Action 2 addressed a clear problem and achieved some success in treating the symptoms of a broader
problem—debt-equity bias in tax codes. Greater reforms to address debt-equity bias may be worth pursu-
ing in the future.
5 Organisation for Economic Co-operation and Development, “Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final Report,” Oct. 5, 2015,
https://www.oecd.org/tax/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report-9789264241046-en.htm.
https://www.oecd.org/tax/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report-9789264241046-en.htm
6 Stephanie Soong, “BEPS 5 Years Later: Action 1 and the Quest to Tax Digital Activity,” Oct. 5, 2020, https://www.taxnotes.com/featured-news/beps-5-years-later-
action-1-and-quest-tax-digital-activity/2020/10/02/2d0lg.
7 Deloitte, “EU: 2015 Place of Supply Changes,” Jul. 1 2014, https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-indirect-tax-eu-2015-
place-of-supply-changes.pdf.
8 European Union, “Council Directive 2016/1164, laying down rules against tax avoidance practices that directly affect the functioning of the internal mar-
ket,” Jul., 12, 2016, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016L1164
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016L1164; European Union, “Council Directive 2017/952, amending
Directive (EU) 2016/1164 as regards hybrid mismatches with third countries,” May 29, 2017, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uris-
erv:OJ.L_.2017.144.01.0001.01.ENG.
9 Federal Register, “Rules Regarding Certain Hybrid Arrangements,” Apr. 8, 2020, https://www.federalregister.gov/documents/2020/04/08/2020-05924/rules-regard-
ing-certain-hybrid-arrangements.
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Action 3 was a series of recommendations for the design of effective CFC rules. CFC rules had existed
prior to action 3; they can protect territorial tax systems from overly aggressive profit shifting, so many
countries had an incentive to adopt them before the OECD outlined some best practices. While OECD
recommendations were reasonable and inspired some EU changes, the action will largely be superseded
by the income inclusion rule (IIR) of Pillar Two, which operates as a more powerful claim on worldwide
income than most CFC rules today.
Action 4 recommended limitations on interest deductibility to combat the use of debt financing in base
erosion and profit shifting. The EU and U.S. both implemented limitations on interest deductibility follow-
ing the BEPS report; the European limitation came as a part of ATAD I, and the U.S. limitation as a part
of TCJA. However, the limitations in the U.S. were not exclusively enacted for BEPS reasons. Limitations
on interest deductibility had been present in several draft tax plans, in part to raise revenue and reduce
debt-equity bias.10 The EU limitation of 30 percent of earnings before interest, taxes, depreciation, and
amortization (EBITDA) is now relatively common around the world, including in non-EU countries such as
Australia and Canada. The U.S. limitation, which was initially set at 30 percent of EBITDA and tightened to
30 percent of earnings before interest and taxes (EBIT) is more stringent and makes the U.S. an interna-
tional outlier. 11
Limitations on interest deductibility have some virtues in curbing profit shifting and reducing debt-equity
bias. However, they also have some vices: the ratios are arbitrary, many countries use accounting stan-
dards in a manner for which they were not intended, and interest limitations not paired with business tax
rate cuts may raise marginal effective tax rates on investment.
Action 5 focuses on combating harmful tax practices. The two major components of Action 5 are a review
of certain preferential tax regimes and a transparency framework that facilitates exchanges of informa-
tion between countries on tax rulings. While Action 5 is a minimum requirement for signatories of the
OECD’s inclusive framework, it is mostly the transparency framework that is compulsory.
The OECD’s forum on harmful tax practices (FHTP) labels regimes it evaluates as harmful—that is, likely
to contribute to profit-shifting—but there is no clear binding force behind the FHTP’s labels. Though there
exist somewhat objective criteria for harmful tax practices, the label can in practice be relatively arbitrary
and even political in nature. For example, a U.S. tax provision for foreign-derived intangible income (FDII)
remained “under review” with the FHTP for several years until the Biden administration proposed remov-
ing it in 2021. FHTP then strongly characterized the situation, stating that FDII is “in the process of being
eliminated” and that “the United States has committed to abolish this regime.”12 As of 2024, FDII remains
U.S. law, and FHTP’s characterization of the situation remains the same.
Action 6, and relatedly, Action 15, address treaty shopping. Action 6, a BEPS minimum standard, asks
jurisdictions to adopt provisions that limit the ability to extend bilateral treaties to inappropriate circum-
stances. Typically, a sign of treaty shopping is that a corporation from a third country benefits from a
treaty between two countries that the corporation does not reside in. Action 6 offers several different
mechanisms to address treaty shopping. Action 15, known as the multilateral instrument (MLI), offers a
10 Alan Cole, “Interest Deductibility: Issues and Reforms,” Tax Foundation, May 4, 2017, https://taxfoundation.org/research/all/federal/interest-deductibility/.
11 Garrett Watson and William McBride, “U.S. Businesses Face Growing Impact from Tightened Interest Deductions and Higher Interest Rates,” Tax Foundation, Sep.
12, 2023, https://taxfoundation.org/blog/ebitda-us-business-interest-expense-limitation/
https://taxfoundation.org/blog/ebitda-us-business-interest-expense-limitation/.
12 Daniel Bunn, “Will FDII Stay or Will it Go?,” Tax Foundation, Aug. 10, 2021, https://taxfoundation.org/blog/will-fdii-stay-will-go/
https://taxfoundation.org/blog/will-fdii-stay-will-go/.
Tax Foundation | 8
kind of ready-made patch for many tax treaties. When jurisdictions adopt the MLI, they can consider their
treaties with other MLI adopters effectively patched for the purposes of Action 6, without having to rene-
gotiate each one individually.
Though progress on Action 6 has been speedy for countries adopting the MLI, it has been slow among
those countries that have not adopted the MLI, including the U.S.
Action 7 proposes changes to the definition of a “permanent establishment” for the purposes of tax trea-
ties, to deter common arrangements where MNEs avoid having a taxable presence in a jurisdiction. For
example, an MNE that wishes to sell into a market with high tax rates, but does not wish to be a taxable
business under that market’s laws, might operate through an intermediary or series of intermediaries to
avoid having a taxable presence of its own. Action 7 would attempt to modify tax treaties to make it more
likely that such activity falls in the scope of a jurisdiction’s taxation. Like Action 6, Action 7 can be adopted
as part of the MLI from Action 15.
Actions 8-10 involve guidance on transfer pricing for intangibles, risks and capital, and high-risk transac-
tions respectively. These actions attempt to better align transfer pricing outcomes with the substance of
value creation. One component of the OECD framework is to categorize the business functions pertaining
to intellectual property: development, enhancement, maintenance, protection, and exploitation, and enu-
merate principles for how the costs and revenues from these functions should be allocated. However, the
subjectivity involved in transfer pricing will always risk some profit shifting.
Transfer pricing regulations may come at a cost: in making investments by multinationals more expensive
after tax, they could make some investments less worthwhile. A 2018 study by IMF economists Ruud De
Mooij and Li Liu finds that transfer pricing regulations can decrease investment in foreign subsidiaries of
multinationals.13
Action 11 attempts to devise metrics or indicators for quantifying profit-shifting activity. However, the lack
of good data and proper experimental designs make this extraordinarily difficult in practice. A study of
several BEPS action 11 indicators concludes that the metrics are simplistic and potentially easily con-
founded by trends unrelated to profit shifting. For example, multinational firms have lower tax rates than
purely domestic firms, but multinational firms may differ from domestic firms in other ways besides tax
planning that result in lower tax rates.14
Action 12 recommends mandatory disclosure rules that would require taxpayers or tax advisors to dis-
close certain aggressive tax planning authorities to their jurisdictions.
Action 13, a BEPS minimum standard, requires large MNEs to prepare a country-by-country (CbC) report
with aggregate data on the allocation of income, profit, and other key measures among tax jurisdictions.
This CbC report is then to be shared with tax authorities.
13 Rood de Mooij and Li Liu, “At A Cost: the Real Effects of Transfer Pricing Regulations,” Mar. 23, 2018, https://www.imf.org/en/Publications/WP/Is-
sues/2018/03/23/At-A-Cost-the-Real-Effects-of-Transfer-Pricing-Regulations-45734.
14 Daniel Klein, Christopher Ludwig, Katharina Nicolay, and Christoph Spengel, “Quantifying the OECD BEPS Indicators – An Update to BEPS Action 11,” Feb. 25, 2021,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3792823.
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CbC reporting is not necessarily perfectly reliable—apportioning corporate metrics among jurisdictions
is often guesswork at best—and it can be significantly burdensome for MNEs with many entities across
many lines of business and many jurisdictions.
However, even the act of CbC reporting, imperfect though it may be, may have had a chilling effect on
profit shifting by MNEs. After the introduction of CbC reporting by the EU, an accounting study found a 1-2
percentage point increase in taxes for firms just above the €750 million revenue threshold for CbC report-
ing, relative to the firms just below. This finding is potentially consistent with the idea that transparency
reduces tax planning.15
Action 14, a standardized procedure for speedier dispute resolution between jurisdictions, is also a BEPS
minimum standard.
Action 15, the BEPS MLI mentioned above, is a framework for the speedy updating of treaties on mutually
agreed-upon rules. The number of bilateral tax treaties in the world is immense, as there are tens of thou-
sands of possible combinations of two jurisdictions that might want to negotiate treaties with each other.
While many provisions can, and arguably should, be addressed in individual bilateral agreements, there is
also a place for harmonization among many countries simultaneously. The MLI helps serve that role and
has led to speedy adoption of some BEPS conventions. Over 100 jurisdictions have adopted the MLI thus
far, but the U.S. is not among that group.16
Takeaways from BEPS 1.0
Global policymakers should be deliberate and careful as they move on from BEPS 1.0 to the next phase
of international tax policy. The effects of BEPS and TCJA may not be fully felt yet. In a recent report on
TCJA’s international reforms, Tax Foundation showed modest evidence that the rise in profit shifting has
slowed or even stalled. For the U.S. especially, there is evidence that more intellectual property is being
located at home.17
However, there was also reason to believe that the full effects of the reforms of the 2010s—whether from
the TCJA or from BEPS—would not be felt overnight. Some profits—“stuck profits”—are located in juris-
dictions that don’t reflect economic substance, but not necessarily because the current TCJA and BEPS
regimes were insufficient. Instead, they may merely reflect legacy arrangements that are hard to unwind.18
Many of the effects of the BEPS reforms, therefore, may take many years to fully manifest, as eventually
new intangibles eclipse legacy intangibles in value, for instance.
Additionally, stable tax codes are desirable, and uncertainty over upcoming changes to U.S. and OECD tax
laws may prevent MNEs from making changes. A deliberate, slow, and well-telegraphed pace of change
may allay some of that uncertainty.
15 Preetika Joshi, “Does Private Country-by-Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from BEPS Action Item 13,” Journal of Accounting
Research 58:2 (Mar. 13, 2020), https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-679X.12304.
16 Organisation for Economic Co-operation and Development, “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit
Shifting,” January 2023, https://www2.oecd.org/ctp/treaties/multilateral-instrument-BEPS-tax-treaty-information-brochure.pdf.
17 Alan Cole, “The Impact of GILTI, FDII, and BEAT,” Tax Foundation, Jan. 31, 2024, https://taxfoundation.org/research/all/federal/impact-gilti-fdii-beat/.
18 Alan Cole, “The Impact of GILTI, FDII, and BEAT,” Tax Foundation, Jan. 31, 2024, https://taxfoundation.org/research/all/federal/impact-gilti-fdii-beat/.
Tax Foundation | 10
There are also some specific principles and lessons from the BEPS 1.0 experience that can inform policy-
makers as they take the next steps.
First, most actions have costs. CFC rules, more elaborate definitions of “permanent establishment,” and
CbC reporting requirements all occupy the time and energy of talented people who might better serve
the global economy in other roles. In addition to what are probably substantial compliance costs associ-
ated with these rules, there are also considerable administrative costs involved. Getting a better handle
on these costs should be an imperative to better inform future policymaking. This could be achieved in
a number of ways, such as by the OECD or another international body instituting a series of surveys of
taxpayers and administrators.
Second, much has already been done. The OECD’s flurry of actions is a legitimately impressive effort, even
if many actions are not fully enforced or adopted, and even if a handful are essentially incomplete.
Third, the lowest-hanging fruit may already be picked. Ideas like curbing hybrid mismatch arrangements
are genuinely good, but they cannot be done twice. Future efforts might be more costly with less benefit
than the efforts of the past. Additionally, a proliferation of backstops and minimum tax regimes may result
in instances of unintended double taxation.
Fourth, some of the best ideas—like frameworks for speedier dispute resolution—are about using harmo-
nization to reduce compliance costs, not raise them.
Fifth, even without a specific enforcement mechanism, good tax ideas can achieve broad voluntary com-
pliance simply by providing a net win for everyone.
And sixth, the biggest disputes over the distribution of corporate tax revenue will never be fully solved.
Issues like “harmful tax practices,” digital service taxes, the two-pillar agreement, and trade disputes in
general will continue to be raised by countries arguing in their own self-interest. The corporate income tax
has inherent limits as a policy tool, limits that will never be fully overcome, and—while also imperfect—
destination-based taxes with broad bases, such as VATs, are likely to be a bit hardier in the face of global-
ization and digitalization than the corporate income tax.
Given these lessons, international policymakers attempting to forge new agreements should eschew
more marginal attempts to curb profit shifting with high compliance costs. They should avoid duplicative
efforts. And they should attempt to “weed the garden” by removing requirements that have proven ineffec-
tive or better solved by a different policy tool.19
Global tax policy will likely always remain an unfinished job. No tax regime is perfect, even in one juris-
diction, much less two hundred. And the competing interests of different jurisdictions and MNEs make it
unlikely that any regime will last permanently. However, international policymakers should err on the side
of deliberate, mutually beneficial, and well-considered changes.
19 Daniel Bunn, “Weeding the Garden of International Tax,” Tax Foundation, Jul. 19, 2023, https://taxfoundation.org/blog/decluttering-international-tax-rules/.
