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Base Erosion and Profit Shifting (BEPS)

BEPS refers to the actions (profit shifting) and consequences (base erosion) of tax avoidance strategies implemented by multinational companies. To reduce its tax burden a multinational company has an incentive to shift profit from high-tax jurisdictions } low-tax jurisdictions. Profit can be shifted in several ways. For example, if an input is produced in one jurisdiction and used for final production in another, the firm can exploit transfer pricing to shift profit: it sets a high (low) transfer price if the input is produced in the low-tax (high-tax) jurisdiction. As another example, a multinational can locate a property right (such as ownership of ‘brand image’) in a low-tax jurisdiction and require all subsidiaries to purchase the property right (at an inflated price) before being permitted to trade. Profit shifting erodes the corporate tax base of high-tax jurisdictions and reduces tax revenue. It is entirely legal for multinationals to engage in profit shifting under current international trade regulations.

Reference: Oxford Press Dictonary of Economics, 5th edt.