Tax Competition, Tax Co-operation and BEPS


The OECD Base Erosion and Profit Shifting (BEPS) project was initiated to tackle the cross-country tax avoidance practices of multinational companies (MNEs). We argue that the BEPS project inevitably impacts a range of existing tax competition policies pursued by states to lower the costs of capital with a view to attracting mobile investment and profits, and, hence, MNEs. Despite the measures to be introduced by BEPS, tax competition practices will continue, mainly because coordination is not incentive-compatible. However, the nature of tax competition will change as a result of BEPS. Before BEPS, tax competition policies were a mix of low statutory rates and specialised regimes designed to accommodate specific activities or transactions. After BEPS, tax competition policies are likely to become more rate-based. Governments will have to tighten some specific regimes aimed at attracting highly mobile capital and profits, such as the patent box regime, rulings arrangements and interest deductions. At the same time, they may reduce the tax burden on mobile and non-mobile activities by implementing economy-wide cuts (chiefly through tax rate cuts) allowed under BEPS. Many countries, including France, Italy, Japan, Spain and the UK, have announced cuts in the corporate statutory tax rate. To foster real investment, governments could also increase depreciation allowances or introduce an Allowance for Corporate Equity (ACE). The interesting feature of the ACE in the context of BEPS is that it reduces the incentive to classify financing instruments as tax-advantaged debt.

Research Highlight 2015

Can the UK tax system remain competitive after BEPS?

In implementing proposals emanating from the OECD BEPS project, there will be tensions between the UK government’s competitiveness agenda and its support for BEPS. Until now the UK has aimed to be competitive by having a low statutory tax rate and by designing specific regimes to attract mobile capital, such as CFC rules, interest deductibility rules and the Patent Box. But implementing BEPS proposals will make generosity in such special regimes more difficult to sustain - the government may have to tighten some specific measures aimed at attracting highly mobile capital and profits such as the patent box regime and possibly interest deductions. The government could attempt to offset such measures by further cuts in the tax rate, which it has already begun to do with the recent announcement of a reduction of the rate to 18% in 2020. But the government could also move away from the broad-base low-rate agenda by narrowing the tax base more generally. For example, it could increase capital allowances or introduce an Allowance for Corporate Equity. Both of these measures would be supported by economic theory. Currently allowances in the UK are lower than other countries, creating a greater disincentive to locate and invest in the UK. And introducing an ACE would remove the preferential treatment of debt at the same time as taxing only profit above the normal rate of return – which would also reduce disincentives to locate and invest in the UK.

Giorgia Maffini and Richard Collier


Richard Collier and Giorgia Maffini