"Evaluating BEPS: A Reconsideration of the Benefits Principle and Proposal for UN Oversight"

Michigan Law Authors
Areas of Interest
Publish Date
2016
Publication
Harvard Business Law Review
Publication Type
Journal Article
Abstract

The Financial Crisis of 2008 and Great Recession that followed have exacerbated income inequality within and between countries. In the aftermath of the economic turbulence, politicians have turned their attention to the twin problems of individual tax evasion and corporate tax avoidance. U.S. legislators enacted the Foreign Account Tax Compliance Act (FACTA), leading to the United States signing a series of Intergovernmental Agreements (IGAs) for the exchange of tax information. The Organization for Economic Co-operation and Development (OECD) developed the Multilateral Agreement for Administrative Assistance in Tax Matters (MAATM) and initiated the Base Erosion and Profit Shifting (BEPS) project to reduce tax evasion and tax avoidance globally. Although these efforts were well-intended, this Article argues that the tax policy response to the Financial Crisis and Great Recession has ultimately been inadequate. The problem, which is discussed in-depth in the sections that follow, is the benefits principle. Part I of this Article introduces the primary weakness of the benefits principle: the reliance on source-based taxation for active income and residencebased taxation for passive income requires cooperation by too many jurisdictions. This section provides three case studies of individual tax evasion and corporate tax avoidance to illustrate the principleā€™s shortcomings. Part II focuses on the individual tax evasion problem. This section analyzes the FATCA, IGA, and MAATM responses and explains why these measures are likely to fall short. Part III focuses on corporate tax avoidance. This section examines the BEPS response and its inadequacies. Part IV proposes an alternative to international tax policy based on the benefits principle. This section argues that reversing the benefits principle by taxing passive income primarily at source and active income primarily at residence will more effectively reduce individual tax evasion and corporate tax avoidance in the developed and developing world

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