What is BEPS?

September 23, 2025

Base Erosion and Profit Shifting (BEPS) represents sophisticated tax planning strategies employed by multinational enterprises to exploit gaps and mismatches in international tax rules. These strategies artificially shift profits to low- or no-tax jurisdictions, where minimal economic activity occurs, effectively eroding the tax base of countries where substantial economic activity and value creation take place.

Where did BEPS practices come from?

BEPS evolved significantly from legitimate tax planning practices into increasingly aggressive avoidance schemes. This transformation accelerated during the 1990s, driven by rapid globalisation and digital transformation. Multinational enterprises have begun leveraging complex corporate structures and digital technologies to exploit jurisdictional differences in tax laws, creating opportunities for substantial tax reductions beyond what lawmakers originally intended.

Key terminology

Base erosion occurs when taxpayers reduce their domestic tax base through deductible payments to foreign related entities. Profit shifting involves transferring income from higher-tax to lower-tax jurisdictions through artificial arrangements. Transfer pricing encompasses methods for determining appropriate prices for transactions between related entities across different tax jurisdictions.

Tax strategy classifications

Legal tax optimisation:

• Utilising legitimate tax incentives and exemptions
• Proper application of double taxation treaties
• Genuine business restructuring for operational efficiency

Aggressive tax planning:

• Complex hybrid instrument arrangements
• Artificial debt loading in high-tax jurisdictions
• Excessive risk transfer to low-tax entities

Illegal tax evasion:

• Deliberate misrepresentation of facts
• Hidden offshore accounts
• Fraudulent transfer pricing documentation

How much global revenue is lost via BEPS?

Current OECD estimates indicate global revenue losses between USD 100 and 240 billion annually due to BEPS practices. These figures represent approximately 4-10% of global corporate income tax revenues, highlighting the substantial fiscal impact on government budgets worldwide. Additional research suggests that developing countries face proportionally higher losses, as they rely more heavily on corporate income taxation than developed economies.

This comprehensive understanding of BEPS fundamentals enables tax professionals to better navigate the complex landscape of international tax compliance and policy implementation.

What is the OECD?

The Organisation for Economic Co-operation and Development (OECD) is an international organisation of 38 governments that exists in order to further trade and economic progress, as well as find solutions to the various social, economic, and environmental challenges which face the global community.

Born in 1961 out of the reformation of the post-World War II-era Organisation for European Economic Co-operation (OEEC), its initial membership of 20 European nations was expanded by the addition of non-European countries such as Canada, the USA, and Japan.

Today, the general criteria of an OECD member country are to have both a high-income economy and a very high Human Development Index (HDI), as well as to be regarded as a ‘developed country’. Demonstratively, in 2017 the 38 OECD member countries collectively comprised 42.8% of global GDP.

Their stated goal is “to shape policies that foster prosperity, equality, opportunity and well-being for all.”

The OECD/G20 BEPS project

The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project represents a comprehensive international tax reform initiative launched between 2013 and 2015. The framework encompasses 15 Action Plans designed to address tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. The Inclusive Framework has expanded significantly, now encompassing 147 member jurisdictions committed to implementing these coordinated measures. This widespread adoption demonstrates unprecedented global cooperation in addressing international tax challenges and ensuring fair taxation of multinational enterprises.

Action points

OECD has developed 15 actions to help Governments with domestic and international rules and instruments to address tax avoidance and to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. The 15 action points are discussed below:

The two-pillar solution

The OECD and G20 inclusive framework on BEPS have agreed on a two-pillar solution to address the tax challenges arising from the digitalization of the economy. The agreed components in each of these two pillars are detailed below:

OECD Pillar-1

Pillar 1 becomes applicable for multinational companies with a global turnover above 20 billion euros ($24 billion) and a profit before tax of 10%. Revenue will be sourced to the end market jurisdictions where goods or services are used or consumed. To facilitate the application of this principle, detailed source rules will be prescribed. Pillar 1 is designed so as to adhere to the concept of taxation of net income, avoid double taxation and be as simple to administer as possible. When implemented, multinational companies will pay taxes in jurisdictions where they generate revenue. While Pillar 1 is primarily focused on digital companies, it would also apply to consumer-facing businesses in which a company that does not have a physical presence in the jurisdiction sells products directly to consumers.

OECD Pillar-2

Pillar 2 seeks to establish two interlocking rules – (1) an income inclusion rule (IIR) and (2) an undertaxed payment rule (UTPR), which are interwoven to constitute the Global anti-base erosion rules (GloBE) Rules, which is the fundamental principle on which Pillar 2 is designed. The IIR imposes top-up tax on a parent entity in respect of the low tax income of a constituent entity. The UTPR denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under IIR. In addition to the above, Pillar 2 also advocates a subject to tax rule (STTR) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below the minimum rate. The GloBE rules are applicable to multinational companies that meet the 750 million euros ($900 million) threshold as determined under BEPS Action 13 (country-by-country reporting). The minimum tax rate used for IIT and UTPR shall be 15%, whereas the minimum rate for STTR shall be 9%.

The OECD’s 2024 consolidated commentary guidance reinforces these achievements while addressing emerging implementation challenges. The peer review process continues evolving, incorporating lessons learned from initial implementation phases and adapting to technological advances in tax administration. This iterative approach ensures the BEPS framework remains effective in combating international tax avoidance while supporting legitimate business activities across global markets.

BEPS 2.0 and digital economy challenges

The Base Erosion and Profit Shifting (BEPS) 2.0 initiative represents a transformative approach to addressing persistent tax challenges in the digital economy. Building upon the original BEPS Action Plan, this comprehensive framework tackles remaining gaps through two interconnected pillars: Pillar One, which reallocates taxing rights for the largest and most profitable multinational enterprises, and Pillar Two, which establishes a global minimum tax framework to address remaining BEPS risks.

Global minimum tax implementation

The implementation of Pillar Two has gained substantial momentum, with over 50 jurisdictions enacting comprehensive minimum tax legislation by early 2025. This coordinated effort establishes a 15% minimum effective tax rate for multinational enterprise groups with annual revenues exceeding EUR 750 million, fundamentally reshaping the international tax landscape.

The Global Anti-Base Erosion (GloBE) Rules operate through three primary mechanisms:

1. Income Inclusion Rule (IIR): Requires parent entities to pay top-up tax on the low-taxed income of controlled foreign companies
2. Undertaxed Profits Rule (UTPR): Serves as a backstop mechanism, denying deductions or imposing equivalent adjustments when IIR does not fully apply
3. Qualified Domestic Minimum Top-up Tax (QDMTT): Allows jurisdictions to impose domestic minimum taxes that reduce or eliminate top-up tax under GloBE Rules

Expert analysis indicates that BEPS 2.0 effectively balances the prevention of profit shifting with respect for national tax sovereignty. The framework provides jurisdictions with flexibility to maintain competitive tax policies while ensuring a baseline level of taxation. This approach preserves legitimate tax competition while eliminating harmful tax practices that erode tax bases.

The initiative is projected to generate approximately USD 150 billion in additional global tax revenues annually, significantly strengthening public finances across participating jurisdictions. Looking ahead, future developments in digital taxation will likely focus on refining allocation formulas under Pillar One and enhancing administrative cooperation mechanisms. As digital business models continue evolving, policymakers must remain adaptive to ensure the framework addresses emerging challenges while maintaining its foundational principles of fairness and effectiveness.

Implementation challenges and regional perspectives

The global implementation of international tax reforms reveals significant disparities between developed and developing nations, with capacity constraints emerging as a critical determinant of adoption success. Developed countries demonstrate substantially higher implementation rates, leveraging robust administrative infrastructure and technical expertise, while developing nations face systemic barriers that impede effective reform adoption.

OECD member countries have achieved notable implementation success through coordinated peer review mechanisms and standardised compliance frameworks. These nations benefit from established tax administration systems, adequate funding, and sophisticated technological capabilities. Conversely, low and middle-income countries encounter substantial challenges, including limited administrative capacity, insufficient technical expertise, and resource constraints that hinder the effective implementation of complex international tax standards.

“The peer review process has proven instrumental in ensuring consistent implementation across jurisdictions, though significant capacity-building support remains essential for developing countries to achieve meaningful compliance with international standards and maintain the integrity of the global tax framework.”

BEPS 2.0 implementation particularly intensifies these disparities, imposing heightened reporting demands that strain developing countries’ administrative capabilities. The complexity of digital economy taxation rules and transfer pricing documentation requirements creates additional burdens for nations with limited resources and evolving legislative frameworks.

Power dynamics in international tax governance significantly influence implementation equity. Developed countries’ dominance in standard-setting processes often results in frameworks that reflect their administrative capabilities and economic interests, potentially marginalising developing nations’ perspectives and constraints.

Achieving effective multilateral coordination while preserving national sovereignty requires balanced approaches that acknowledge varying implementation capacities. Policymakers must prioritise capacity-building initiatives, technical assistance programs, and flexible implementation timelines to ensure equitable participation in global tax reform efforts while maintaining the integrity of international tax standards.

The impact of BEPS initiatives

The BEPS initiatives have fundamentally transformed the international taxation landscape, successfully addressing USD 100-240 billion in annual tax losses through comprehensive multilateral reforms. This unprecedented global cooperation has established new standards for tax transparency, substance requirements, and profit allocation mechanisms that have strengthened the integrity of international tax systems.

BEPS 2.0 represents the natural evolution of these efforts, with Pillar One and Pillar Two introducing groundbreaking approaches to digital economy taxation and global minimum tax standards. The implementation of the global minimum tax across over 50 jurisdictions by 2025, projected to generate USD 150 billion in additional revenues, demonstrates the tangible impact of coordinated international action.

However, significant challenges persist, particularly for developing countries facing capacity constraints and the ongoing complexities of digital economy taxation. These challenges underscore the critical importance of sustained multilateral cooperation and targeted technical assistance to ensure equitable participation in the evolving tax framework.

Moving forward, tax authorities and policymakers must remain committed to developing adaptive frameworks capable of addressing emerging challenges in an increasingly digitised and interconnected global economy. The success of future international tax reforms will depend on maintaining the collaborative spirit that has defined the BEPS process while ensuring that solutions remain practical, enforceable, and responsive to the needs of all jurisdictions.

How can Kreston Global help?

Kreston Global’s presence in more than 100 countries around the world can help businesses in this era of tougher rules and extensive reporting requirements that can affect SMEs in the multinational supply chain. Businesses could look at Kreston Global:

• To assist in discussions with tax authorities and handle paperwork.
• To conduct knowledge-sharing sessions so as to increase awareness of the requirements of the three-tier TP documentation structure.
• To perform a diagnosis and assist in getting ready for the new compliance obligations.
• Analyse intangibles and determine whether all stakeholders who contribute to the development, enhancement, maintenance, protection and exploitation of intangibles are getting their revenue share appropriately.
• Develop processes and procedures to meet TP documentation deadlines so as to ensure that there is an alignment between local and global documentation.

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