The term Base Erosion and Profit Shifting (BEPS) describes the ensemble of two different activities applied by multinationals i.e. on one hand the implementation of tax strategies in order to reduce the tax base (Base erosion), and on the other profit shifting from countries with a high tax rate to those with no or a low tax rate on the other. These two strategies have the same purpose of reducing the tax base in countries where they are implemented.

These two practices are definitely not new. Actually they are commonly used by multinationals that – obviously from their point of view – implement aggressive tax strategies in order to transfer profits from their subsidiaries to the parent company (i.e. from the various subsidiaries, generally operating in countries with high tax rates, either to intermediate companies operating in countries with low corporate taxes, or in any case, to the parent company). This is for the purpose of shifting taxes on the accounts of the parent company thereby avoiding or reducing the taxes in the countries where the subsidiaries generate their profits.

 This phenomenon has broadened relevantly following the changes of the economic activity which moved from what I define as “physical” - companies with plants, machinery, employees in countries with high taxation - to the new reality of Internet where the high rate of innovation, digitalization and globalisation has substantially determined to consider the entire world as just one market.

 Countries with a high tax rates, generally forced by budget matters, victims of their stiff tax systems and still anchored to what I defined the “physical”, have not been able to coordinate with an equal distribution of the tax burden where profits are generated.

The analysis of the tax structures of big companies based on digital economy such as Apple, Google, Amazon etc. shows how all companies have an area sub-holding in countries with reduced taxes, and from these countries they invoice their products and services to customers resident in countries subject to high taxes. 

Since conventions against double taxation were drafted at a time when such activities were not even thinkable, as a consequence – theoretically - profits generated in countries with high tax rates could not be taxable over there.

In Italy, for example, the action carried out by the Tax Authority (Agenzia delle Entrate) targeted intermediate companies held by the above companies in Italy, and that are regarded as permanent establishment of the said companies in Italy. This is the only possible scheme if we look at the scheme of OECD conventions against double taxation.

A further element, concerning all kinds of operating companies, are the asymmetries between the various national tax regimes regarding the different treatment applied for tax purposes to some elements of the financial statement (e.g. interests, dividends, etc.) and a non uniform evaluation of income items associated with non and infra –group transactions. 

Estimates made within the frame of the BEPS project with respect to revenue loss indicate a fork between 100 and 240 billion dollars yearly (88-211 billion dollars yearly) i.e. between 4 and 10 percent of the global revenue regarding corporate taxes. 

Considering the high tax rate on the revenues of companies operating in western countries, the circumvention practices have distortive effects also on investment choices. Sometimes these are taken on the base of tax strategies as well as of global social work and services conditions (with respect to Italy, for example, the slow pace of justice is an element holding a considerable weight on investment choices of foreign companies) – rather than on economic/productive reasons.

Finally BEPS practices create competitive advantages in favour of multinationals and to the detriment of micro and small/medium size companies as well as towards big companies having mainly domestic business activities.

In order to avoid the above, actions provided by the BEPS scheme bring new minimum standards in matter of information exchange between countries, in order to supply financial administrations with a global picture of the strategies implemented by multinationals. It also includes a limitation to the distort use of treaties against double taxation in order to eliminate the use of special purpose vehicles with mainly elusive intentions 

Other provisions regard the limitation of damaging tax practices, in particular in the intellectual property field - where these are becoming increasingly relevant for the budgets of internet companies - the exchange of information within the frame of tax agreements between multinationals and countries through advance tax ruling schemes, and agreements between tax authorities in order to avoid that actions fighting tax elusion are turned into a double taxation.

For the purpose of achieving the above targets, there is a fundamental provision included in the BEPS scheme. It is namely the one reviewing the guidelines in matters of transfer pricing aiming at avoiding the so called “cash-box” – which is meant to erase tax base from the tax authority - and to redefine the concept of permanent establishment in view of reducing the base erosion practices that are made possible by the disparities of the different provisions of the various States.

 In brief, the BEPS scheme intends to operate on three fundamental guidelines:

I. Give consistency to national tax regimes in matters of international activities;

II. Strengthen the substantial requirements that are the base for the international standards currently in force, thereby achieving the realignment of tax (and of taxation regimes) with the substantial localization of productive activities and the creation of value;

III. Increase transparency, information exchange and improve the conditions of the certainty of law both for the business world and for the governments.

In order to reach the above goals, two more actions are provided. The three guidelines above are based on these: an action in matters of digital economy and the use of a multilateral conventional instrument. 

As first step towards this change of the global complex tax laws, on 28 January 2016, the European Commission adopted a package of measures to contrast international tax avoidance. Among these, there is also a Proposal for a Directive – COM (2016) 26 – containing provisions on deductibility of interest, exit taxation, tax credit, a general anti-abuse rule (GAAR), controlled foreign company (CFC) rules; and a framework to tackle hybrid mismatches. The above outlined measures (if definitely approved) are meant to impact the current Italian tax regime that shall necessarily be reviewed in compliance with the commitments taken at EU level.