Regulating tax treaties to minimize exposure to base erosion and profit shifting (BEPS): Resolving issues and prescribing guidelines

• Main Author: Rovero, Zarah Mae L.
• Format: text
• Published: Animo Repository 2016
• Subjects: International business enterprises—Taxation—Law and legislation—Philippines; Taxation
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/12243
• Institution: De La Salle University

Globalization is a game changer in the business industry. It has allowed seamless flow of cross-border transactions, which in turn gave rise to the emergence of multinational corporations (MNCs). However, problems arise when severe contractions result in conflicting sovereignties or jurisdictions. An example of which is the dispelling effect of double taxation to investors. This extraterritorial dilemma was resolved by settling conflicts through bilateral tax treaties or international agreements making cross border transactions less costly. Indeed, the objective to attract investments from MNCs through minimizing the impact of taxation was achieved. However, states never anticipated that as they sincerely aim to reduce MNC’s burden, they were digging their own graves. MNCs have developed sophisticated and innovative schemes of arranging their economic activities and abused tax treaties not just to avoid double taxation, but to benefit from double non-taxation. In the modern times, the governments are faced with problem on double nontaxation.Base Erosion and Profit Shifting (BEPS) schemes are some of the double non-taxation schemes employed by MNCs. It is the transferring of profit to a country which has relatively lower tax rates compared to that of the country where the profit is actually realized. BEPS schemes include mismatch of entities, use of hybrid financial instruments, leveraging, treaty shopping, and commissionaire arrangements short of being permanent establishments. Because of their complexities, some BEPS schemes turn out to be legal and valid because there are no laws prohibiting them. However, it must still be curbed because it undermines the integrity and fairness of the tax system, depriving the government of the actual taxes due to them. According to OECD reports, BEPS costs different countries an estimate of $240 billion per year of lost tax revenues. In addition, it is unconstitutional since it gives undue advantage to MNCs in the Philippines over their domestic counterparts or those that operate in a single national market. Since BEPS are available only to MNCs, businesses which operate in a single national market suffer.One of the primary sources of BEPS is treaty abuse. MNCs scout or shop for countries which have lax tax treaties or those with loopholes that would allow them to circumvent the prohibition against evasion. More so, the existing treaties have ancient and outdated regulations which are not adept to address modern day issues such as BEPS. Most, if not all, treaties contemplate and address only the issue on how to prevent double taxation. They do not have enough protective mechanisms against foreign investors exploiting outdated tax treaties resulting in paying lesser taxes, or none at all.The Philippines has relatively higher tax rates compared to other countries. Hence, it is most exposed to the adverse effects of BEPS. A survey of existing tax treaties of the Philippines shows that there are not enough safeguards to regulate BEPS, specifically mismatch of entities, use of hybrid financial instruments, leveraging, treaty shopping, and commissionaire arrangements. This thesis takes into consideration the reports of OECD, model treaty conventions, relevant tax laws and principles, as well as decided cases in analyzing the issues. In addition, this thesis provides possible actions that the government must take in order to address the issue on treaty abuse. More so, the proponent drafted a legislation that would provide set of guidelines that must be taken into consideration when entering into tax treaties or international agreements in order to protect the Philippines from the adverse effects of BEPS.