Fundamental Change in Countries’ Corporate Tax Framework Needed to Properly Address BEPS

Traditionally, countries impose their corporation tax on an entity-by-entity rather than a group-wide basis. As the taxability of entities, tax bases, and tax rates vary from one country to another, these differences give rise to mismatches, leading to double taxation, but also to non-or almost non-taxation. In practice, however, the overall operation of the countries' divergent corporation tax systems seems to allow MNCs to reduce their overall tax burden by entering into strategic ‘Base Erosion and Profit Shifting' operations. In its February 2013 report, the OECD suggests developing a global and comprehensive action plan to provide solutions for realigning international taxation standards with the current global business environment. In its follow-up report of July 2013, the OECD identifies fifteen specific actions. It, however, advocates continuing to maintain the current building blocks of international taxation, including the separate entity approach and the arm's length principle. The question arises whether such an approach would address the issue of BEPS effectively. Another issue is that this will not result in MNCs' profits being fairly allocated between states, given that measures to counter hybrid mismatch arrangements and to strengthen CFC rules mean that an MNCs' residual profit will be attributed to the state in which its top holding company is resident