After two years of breakneck work, the Organisation for Economic Co-operation and Development (OECD) published its final reports last week on the Base Erosion and Profit Shifting (BEPS) project, which is aimed at coordinating international taxation among member countries. While this work may have drawn little attention from the general public, tax experts around the country are busy analyzing the impact of the recommendations, which are likely to be significant for many U.S.-headquartered companies—including tech companies.
As we begin to dig into the substance, I thought I would offer a few key observations:
- Global tax policy likely just got a lot more complicated. One of the goals of the BEPS process was to create global taxation standards for certain economic activity, such as Intellectual Property (IP)-related income, or profits derived from the digital economy, and increase coordination between nations around cross-border taxation.
At ITI, we have concerns that the result of the BEPS process could, in fact, be the opposite. While some recommendations may lead to universal changes in tax treaties or other economic agreements, few of the BEPS recommendations are mandatory. Instead, BEPS offers a menu of options for nations to pick and choose from. The result is likely to be a patchwork of BEPS-related policies around the world. While BEPS is typically thought of as a European Union (EU) endeavor, we have already seen these policies implemented beyond the EU in places like China, which has moved forward with a number of BEPS-like policies on transfer pricing and other topics. Experts agree that the result of this uneven patchwork will be a significant uptick in disputes.
- The U.S. tax base is a key target of the BEPS process. Many of the policies outlined by BEPS target U.S.-headquartered companies’ IP-related income for additional taxes to collect revenues by treasuries around the world. These policies are then coupled with strong incentives to attract key economic activity like research and development into lower tax regimes in those countries. This is a one-two punch for the United States. First, by having a disproportionate negative effect on U.S.-headquartered firms, BEPS has the effect of eroding the U.S. tax base. Second, by offering generous tax cuts for onshoring IP-related operations, the ability of companies to create jobs in the United States suffers, which also weakens the U.S. tax base and economic health.
- Policymakers must develop an engagement strategy. ITI has been pleased to see bipartisan, bicameral conversations about reforming the global tax system. We believe these efforts should be intensified. Further, the U.S. Treasury Department must actively engage and outline how it sees the U.S. interacting with these efforts moving forward and demonstrate strong leadership to ensure the U.S. remains a hub for innovative businesses.
U.S.-headquartered tech companies have become a source of national pride and international envy because their high-risk, high-reward development of technology shapes our world for the better and supports a flourishing economy. Increasingly, the ability to innovate is not just held back by a lack of scientific ability and know-how, but by misguided policies. The OECD report underscores how important tax policy is to promoting strong economic growth. Policymakers reluctant to address the broken U.S. tax system should take notice that they are missing an important opportunity to shape global standards and ensure that international tax policies support innovation and competitiveness in the United States.