The OECD’s “Action Plan” to Raise Taxes on Multinational Corporations
Gary Hufbauer, Euijin Jung, Tyler Moran, and Martin Vieiro
"The Organization for Economic Cooperation and Development (OECD) has embarked on an ambitious multipart project, titled Base Erosion and Profit Shifting (BEPS), with 15 “Actions” to prevent multinational corporations (MNCs) from escaping their “fair share” of the tax burden. Although the tax returns of these MNCs comply with the laws of every country where they do business, the proposition that MNCs need to pay more tax enjoys considerable political resonance as government budgets are strained, the world economy is struggling, income inequality is rising, and the news media have publicized instances of corporations legally lowering their global tax burdens by reporting income in low-tax juris- dictions and expenses in high-tax jurisdictions. To achieve the goal of increasing taxes on MNCs, the OECD—spurred by G-20 finance ministers—recommends changes in national legislation, revision of existing bilateral tax treaties, and a new multilateral agreement for participating countries.
This working paper provides a critical evaluation, from the standpoint of US economic interests, of each of the OECD plan’s 15 Actions. Given that the US system taxes MNCs more heavily than other advanced countries and provides fewer tax-incentives for research and development (R&D), implementation of the BEPS Actions would drive many MNCs to “invert” (i.e., relocate their headquarters to tax-friendly countries) and others to offshore significant amounts of R&D activity.
Examining the 15 Actions in detail, the Working Paper finds many would be detrimental to the United States, though some are harmless and a few are actually useful. Many of the findings presented here echo those of Senator Orrin Hatch (R-UT), chair of the Senate Finance Committee, and Representative Paul Ryan (R-WI), chair of the House Ways and Means Committee, who have raised serious concerns about the BEPS project.
The working paper acknowledges concerns that motivate the BEPS project, but describes alternative approaches that would better address those concerns. A major priority for Congress is to reform the corporate tax structure, lowering the tax rate to discourage the offshoring of operations to lower tax jurisdictions and adopting a “territorial system” in line with other OECD countries. In the meantime, Congress should await the ongoing analysis by the General Account- ability Office (GAO) of the recommendations offered in the BEPS project and commission additional analyses from the US International Trade Commission and at least one major accounting firm. "