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BASE EROSION AND PROFIT SHIFTING (BEPS) IN LOW-INCOME NATIONS BY

THE MULTINATIONALS: A CRITICAL REVIEW OF LITERATURE

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DOI: 10.31838/jcr.07.05.107

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 Journal of Critical Reviews
ISSN- 2394-5125 Vol 7, Issue 5, 2020

Review Article

BASE EROSION AND PROFIT SHIFTING (BEPS) IN LOW-INCOME NATIONS BY THE

MULTINATIONALS: A CRITICAL REVIEW OF LITERATURE
1Martins Mustapha Abu, 2Umar Bello, 3Zayyanu Mohammed
Department of Business Administration, Nile University of Nigeria, Abuja, Nigeria
1abu_martins@yahoo.com (Corresponding Author)
2muhdbello01@yahoo.co.uk, 3mmzayyan@gmail.com

Received: 19.01.2020 Revised: 15.02.2020 Accepted: 04.03.2020

Abstract
The myriad of attention being given to the issue of erosion of tax bases and profit shifting generates opportunities for important researches
and tax reforms. BEPS strategies are accomplished by either shifting income to lower tax jurisdiction or shifting deductible expenses to
higher tax jurisdictions.
Purpose – The purpose of this paper was to critically review how BEPS strategies by MNES impact the revenue-generating ability of low-
income nations with a view to identifying gaps and advance recommendations for policy-makers and future studies.
Methodology – The Systematic Quantitative Assessment Technique (SQAT), introduced by Pickering & Byrne (2013), was adopted to
search for data used in the critical analysis of 53peer-reviewed articles obtained from 10 high impact academic databases. Most of the
articles reviewed were empirical studies.
Findings – The findings revealed that the rate at which MNEs shift income and profit out from low-income nations to tax havens is regarded
as one of the major problems undermining the development of these countries. The discussion provides researchers, with a critical view
of the discourse on the subject exposing researchable gaps that will assist policymakers in the countries on how to put in place necessary
legal framework to tackle tax avoidance through BEPS.

Keyword: base erosion, profiting shifting, multinational enterprises, SQAT, low-income nations

© 2019 by Advance Scientific Research. This is an open-access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
DOI: http://dx.doi.org/10.31838/jcr.07.05.107

INTRODUCTION
The volume of financial outflows from Africa has at various time
been estimated and the net financial resource of outward
transfers is estimated to be between US$597 billion and US$1.4
trillion over the period 1980-2017 (Okojie, 2018; Bradbury, &
O’Reilly, 2018; Janský, & Šedivý, 2019).In a similar manner, it was
estimated that African nations have been losing over US$50 billion
annually to illicit financial flows over the last 50 years (Matsuoka,
2018; Neubig, & Wunsch-Vincent, 2018; Adeleke, 2019). A good
percentage of these illicit flows was through trade and service
mispricing by multinational enterprises (MNEs) facilitated
through tax havens (Morse, 2018; Asongu, Uduji, & Okolo-Obasi,
2019; Mills, 2019). Several related reports also revealed that the
financial outflows from Africa exceeded the official development
assistance to the continent (Paul, 2017; Cnossen, 2018; Janský, &
Palanský, 2019). Currently, the Nigerian tax/GDP ratio is only 6%,
South Africa- 26%, Morocco-28% with the average for African
countries 17% and the OECD average of 34% also, in India the tax
loss is estimated to be about 5% of the Indian GDP (Price
Waterhouse Coopers, 2017; Cobham, &Janský, 2018; Janský, &
Šedivý, 2019).
Associated with the above, the burden of debt by the low-income
nations has ballooned to an unprecedented level with many
developing countries presently reeling under mounting debt
(Burgers, & Mosquera, 2017; Cobham, & Janský, 2018; Garita,
2018). At the UNCTAD’s 12th International Debt Management
Conference and other fora, it was revealed that more shocks are
sure to come, which will result in subdued global economic
growth, increase in trade wars, climate emergencies and threats
to multilateralism contributing to more uncertainty (Ezenagu,
2017; Rustomjee, 2018; Matsuoka, 2018). From far away
Argentina to Zimbabwe, the rising debt levels have severely
exposed many emerging economies to global economic and
financial volatility irrespective of their income level (Fung, 2017;
Hearson, 2018; Mills, 2019). The report further stated that global
debt stocks have risen to the highest levels ever since 2017 even
beyond the levels experienced at the period of the global financial
crisis in 2008 with the low-income countries’ debt-to-GDP ratios
increasing to almost 92% (Cobham, & Janský, 2018; Asongu, et al,
2019; Van Apeldoorn, 2019). This unacceptable dependence on
debt for funding economic growth is limiting these low-income
nations’ progress towards attaining the Sustainable Development
Goals (SDGs) (Bird, & Davis-Nozemack, 2018; Griffiths, 2018;
Rustomjee, 2018). As a result, the Addis Ababa Accord
emphasized the significance of domestic resource mobilization for
funding the much desired development, and it was agreed that
domestic resource mobilization and its effective utilization is the
crux of the common quest of sustainable development(Matsuoka,
2018; Neubig, &Wunsch-Vincent, 2018; Adeleke, 2019).
Globalization has benefited most nations as it has boosted
international trade, and as the different nations tilt to universal
integration, likewise are businesses (Ezenagu, 2017; Kudrle,
2017; Herzfeld, 2017). The MNEs account for a large proportion of
global GDP as intra-firm trade represents an increasing share of
global trade (Van Apeldoorn, 2018; Cobham, & Janský, 2018;
Janský, & Šedivý, 2019). With the aid of technological
advancement, there is a shift from country-specific operational
models to worldwide models with matrix management
organizations that centralize a number of functions at a regional
or global level (Herzfeld, 2017; Bradbury, & O’Reilly, 2018;
Asongu, et al., 2019). The growing digital economy has facilitated
the location of design and productive functions in different
countries and serves their customers located in other nations
(Herzfeld, 2017; Burgers & Mosquera, 2017; Christian &
Apeldoorn, 2018). These arrangements increased the complexity
through which tax planners identifies and exploits the legal
loophole(s) as avenues of tax planning, giving the MNEs extra
confidence in taking aggressive tax positions with the intent of

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 BASE EROSION AND PROFIT SHIFTING (BEPS) IN LOW-INCOME NATIONS BY THE MULTINATIONALS: A CRITICAL
REVIEW OF LITERATURE

minimizing their tax burden (Herzfeld, 2017; Burgers &
Mosquera, 2017; Christian & Apeldoorn, 2018).
Base Erosion and Profit Shifting (BEPS) strategies are referred to
as the application of diverse tax regulations with the aim of
achieving double non-taxation or less than ideal level of tax
(Herzfeld, 2017; Bird, & Davis-Nozemack, 2018; Vlcek, 2019). It is
an instance of arranging the affairs of the business that results to
no tax or low tax burden, by shifting profits from the jurisdictions
with activities creating these profits to other jurisdiction where it
is reported (Herzfeld, 2017, Burgers &Mosquera, 2017; Christian
& Apeldoorn, 2018). Low tax or no tax burden should not be an
issue, but it becomes one when it is linked with the practices of
artificially isolating taxable income from those activities that
generate such profit (Christians, & van Apeldoorn, 2018;
Bradbury, & O’Reilly, 2018). BEPs by the MNEs have become an
issue of concern especially in developing nations, where the
limited tax revenue leads to gross underfunding for public
infrastructural development that could promote economic growth
and development (Brown, 2017; Herzfeld, 2017; Hearson, 2018).
Also, occasions where a loophole in tax laws exist, it allows
businesses to seek for ways to decrease their tax burden by
moving and report their income away from income producing
jurisdictions, the other taxpayers in that jurisdiction bear a
greater tax burden. For example, businesses that operate only
within the domestic markets, such as the family-owned companies
or local innovative firms, cannot compete favourably under fair
competition with MNEs that can shift their profits across borders
to avoid or reduce tax by the distortions induced through BEPS
(Darcy, 2017; Herzfeld, 2017; Bradbury, & O’Reilly, 2018).
Therefore, an overhaul of the international tax system is long
overdue because MNEs operations have challenge global tax rules
and there are studies that revealed MNEs remit little or no tax
(Herzfeld, 2017; Burgers & Mosquera, 2017; Christian
&Apeldoorn, 2018). This prevailing situation is particularly
detrimental to low-income nations, depriving them of the much-
needed revenue that would aid in achieving greater economic
growth, reduction of poverty and ultimately meeting the UN 2030
targeted sustainable development goals (Elkins, 2017; Griffiths,
2018; Asongu, et al., 2019). The IMF analysis has revealed that the
non-OECD countries are collectively losing close to US$200bn in
fiscal revenue every year, or close to 1.3 % of their gross domestic
product, owing to MNEs shifting profits to tax havens, this calls for
a fundamental rethinking of international taxation (Fung, 2017;
Adeyemi, 2018; Morse, 2018).
Various studies also highlighted the impact of BEPS by MNEs on
the revenue-generating ability of nations with attempts by OECD,
UN and the IMF to examine various possibilities in the perspective
of fundamental criteria for better-addressing profit shifting and
aggressive tax competition, to ensure the interests of low-income
countries are guaranteed, but the implementation has remained a
mirage (Fung, 2017; Herzfeld, 2017; Herzfeld, 2017). More and
improved researches in the field will enable international
institutions as well as concerned governments to make policies
and regulations favourable to enable revenue collection that will
finance human development.
This study focuses on a critical review of relevant researches on
BEPS with the view to identifying gaps that may inform the
possibility for future studies. In line with the objective, the next
sections of this article provide a detailed discussion of SQAT
methodology adopted in this study to search for peer-reviewed
articles on the subject. This is followed by the findings, discussions
and directions for future research based on these findings. The last
section focuses on the conclusion and recommendation where the
limitations are stressed and suggestions for future research based
on these limitations highlighted.
METHODOLOGY:
This study is anchored on a critical analysis of an aspect of
international taxation focusing on how tax strategy of MNEs
through base erosion and profit shifting impacted the revenue-
generating ability of the low-income nations. The methodology
adopted for data collection is the Systematic Quantitative
Assessment Technique (SQAT) advocated by Pickering and Byrne
(2013). This study found SQAT to be logical, simple in application
because it can easily be replicated, which is an essential
component of any good review. Also, it was considered suitable
because it aids the researcher to glaringly revealed research gaps
to enable for further studies based on the articles under
assessment.

Table 1: Description and application of SQAT

Step Application in the current study
Base erosion and profit shifting strategies by the multinational
1 Define topic enterprise (MNEs) and revenue-generating ability of low-
income Nations
Critical research question:
2 Formulate research question How has base erosion and profit shifting strategies of MNEs
impacted the revenue generation ability of low-income nations?
3 Identify keywords “base erosion and profit shifting (BEPs)”, “low-income nations”,
1. 10 databases utilized: Cambridge, Elsevier, Emerald, Harvard,
Hein Online, JSTOR, Oxford, Springer, Taylor and Francis, and
4 Identify and search databases Wiley
2. “anywhere in article” search using two search combinations:
“base erosion and profit shifting” + “low-income nations”
1. Abstracts of papers found were read to ensure that they were
dealing with BEPS strategies of MNEs and low-income nations
subjects in a public finance and international taxation context.
5 Read and assess publications
2. Literature from book chapters and conference proceedings were
not included; only peer-reviewed conceptual and empirical
papers are used for the review and analysis.

From Table 1, the articles on BEPS were sourced from 10
electronic databases: Cambridge, Elsevier, Emerald, Harvard,
HeinOnline, JSTOR, Oxford, Springer, Taylor and Francis, and
Wiley utilizing “anywhere in the article” search for a single
combination for “base erosion and profiting shifting(BEPs)” +
“low-income nations”, on Google Scholar advanced search menu.
Scholarly research papers published in English language journals
on international taxation/public finance aspect of the subject
were obtained. This process ensured that only 53 English
scholarly papers which were found to be significant to the review

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 BASE EROSION AND PROFIT SHIFTING (BEPS) IN LOW-INCOME NATIONS BY THE MULTINATIONALS: A CRITICAL
REVIEW OF LITERATURE

subject were selected. The abstracts of the papers found were read
to ensure that they were dealing with BEPS strategies of MNEs and
low-income nations subjects in public finance and/or
international taxation context. The extent of inclusion or exclusion
Journal Titles
From each original research paper examining BEPS strategies of
MNEs with respect to low-income nations, the following items of
information collected were recorded in a tabular form for the
purpose of analysis thus: (i) Journal(s), (ii) Number of Articles(s).
This breakdown is as presented in Table 2, which reveals the
numbers of articles in these journals publications that touch on
of each paper in the research process was thus determined. In this
critical review of literature, book chapters and conference
proceedings were not included; only peer-reviewed conceptual
and empirical papers are used for the review and analysis.
the subject of BEPS. A number of high impact journals, 53
sampled in total, were the channels for the publication of these
MNEs’ BEPS strategies studies. The Springers publication with
(17) had the most articles for this review, it was followed by the
Hein Online (11). While, Taylor and Francis (8), Wileys, JSTOR
and Emerald (4) each. Others are Elsevier (2), Cambridge (1),
Harvard (1), and Oxford (1) which had the least numbers of
articles.

Table 2: Journals with BEPS articles

Journal Titles Number of Articles
Cambridge 1
Elsevier 2
Emerald 4
Harvard 1
Hein Online 11
JSTOR 4
Oxford 1
Springers 17
Taylor and Francis 8
Wileys 4
Source: Google Scholar search report, 2019

DISCUSSION OF FINDINGS generation ability both in developed economies but most

This section provides findings of studies on the impact of BEPS especially emerging economies with special focus on low-income
strategies adopted by the MNEs in their global operations, it nations. The essence of this discussion is seeking to identify
furthermore highlighted BEPS strategies as challenges to revenue possible gaps and make recommendations for possible solutions.

Time Distribution of Base Erosion and Profit Shifting Articles

15

11 Number of Papers

7
6
5 5
1 1 2

2011 2012 2013 2014 2015 2016 2017 2018 2019

Years
Figure 1. Time distribution of Base Erosion and Profit Shifting articles

From the sampled articles used for the purpose of this study, it
was revealed that in the year 2011, which was the commencement
year specified for this study (2011-2019), not many articles were
recorded as only 1 publication was discovered this is because
research in this area was quite limited. However, the trend of only
one publication remained steady in 2012 and increased to 2
articles in 2013, in 2014 and 2015 articles found was 6 each, it
increased to 7 in 2016 peaking at 15 in 2017 and then dropped to
11 articles in 2018 and further decline to 7 in 2019 as depicted in
Figure 1.

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 BASE EROSION AND PROFIT SHIFTING (BEPS) IN LOW-INCOME NATIONS BY THE MULTINATIONALS: A CRITICAL
REVIEW OF LITERATURE
Classification of papers
Empirical
43%
Conceptual
Figure 2. Classifications of Peer-reviewed Paper
From Figure 2, evidenced-based research was 43%, while
conceptual papers represent 57% of the articles used for this
review. The implication is that there is the need for researchers to
carry out more empirical study of the problem posed by BEPs in
low-income nations which in turn will improve the revenue-
generating ability of these countries. This may be an important
objective that is worth the time, effort and resources of
researchers around the world.
Base Erosion and Profit Shifting (BEPS) Strategies
For critical reviews of academic literature on profit shifting, the
three principal channels that have been identified are; strategic
transfer pricing, thin capitalization and the location of intangible
assets (Breslin, 2013; Matsuoka, 2018; Mills, 2019). These
strategies are used by the MNEs with the aim of reducing their
global tax liabilities through artificial shifting of their profits,
income and assets to countries with lower tax rates, sometimes
referred to as tax havens, thereby eroding the tax bases of the
source nations, (Alm, & Finlay, 2013; Kudrle, 2015; Dover, 2016).
First, through thin capitalization strategy, MNEs implement a
scheme of granting large proportion of loans at high-interest rates
to profitable group member located elsewhere instead of equity
investment from any of the MNE group member located in a low-
tax jurisdiction. This often results in a disproportionate ratio of
debt to equity (Herzfeld, 2017; Burgers & Mosquera, 2017;
Christian & Apeldoorn, 2018). The essence is to generate interest
expenses which are deductible before tax. These interests are
thereafter paid to the tax haven business for serving of loans (Alm,
& Finlay, 2013; Kudrle, 2015; Mills, 2019).
Another method is the strategic location of intellectual property
and intangible assets e.g. research and development, trademark or
brands. These are artificially situated in a subsidiary located in a
tax haven. Thereafter, service fees like royalties, R & D expenses,
technical fees are paid by other firms in the group to the firm
housing the intangible assets usually located in tax havens(Alm, &
Finlay, 2013; Breslin, 2013; Kudrle, 2015). The pricing of these
intangible assets poses numerous challenges, making it
fundamentally difficult to separate profit-shifting effects from
actual prices (Herrington, 2015; Fung, 2017; Mills, 2019).
Also, MNEs use strategic transfer pricing to manipulate the prices
of products and services being transferred among the various
subsidiaries of the group in different jurisdictions to minimize the
tax burden of all the countries in aggregation (Brown, 2017;
Asongu, et al., 2019; Mills, 2019). There are occasions where there
is the manipulation of prices of business operational transactions
between the parent’s entity and its subsidiaries, associates and/or
related entities, especially outside the normal arm’s length
transactions (Oguttu, 2015; Herzfeld, 2017; Mills, 2019). The
abuse of transfer pricing is intentional under or over-
invoicing/pricing of goods and services in business transactions
Journal of critical reviews
Conceptual
57%
Empirical
involving an MNE and its subsidiaries for the purpose of reducing
tax.
Impact of BEPS Strategies on Revenue Generation ability of
Low-income Nations
The effects of BEPS are probably more significant for developing
economies (Hearson, 2018; Vlcek, 2019). While tax revenues in
OECD countries represent around 35% of their gross domestic
product (GDP), developing countries obtain on average only a
little above 13% (Vlcek, 2019). The low amount of tax raised by
developing countries often leads to the inability to obtain the
financial resources required to guarantee citizens’ access to
essential services, such as healthcare, clean water and sanitation,
and education (Hearson, 2018; Mills, 2019). In addition, low tax
revenues often imply the need for governments to increase debt
and source for aids (Chowdhury, & Jomo, 2016; Fung, 2017;
Cnossen, 2018).
Gurrıa (2008), revealed that low-income nations could be losing
more than three times the amount received in aid as a result of
profit shifting through tax havens by the MNEs. This justifies the
reason for tax havens being incorporated into their analysis as one
of the major variables of the systems and the strategies associated
with BEPS practices (Janský, & Šedivý, 2019). The two main
reasons advanced to explain that tax havens play a significant role
are: tax havens offer low to nil tax rates (through the bilateral tax
treaties) and can present a major incentive for MNEs to shift their
income from high-tax jurisdictions through tax-haven subsidiaries
either housing the trademark, R & D or granting unwanted loans
to other of its firms in high tax jurisdictions (Oguttu, 2015;
Herzfeld, 2017, Burgers & Mosquera, 2017). Also, these tax havens
may also offer secrecy provisions (in areas of banking secrecy,
non-exchange of tax information with other tax jurisdictions,
hidden beneficial ownership, etc.), and have therefore enabled
BEPS practices to thrive, by allowing the taxpayer to remain
hidden from tax authorities elsewhere (Lewis, 2013; Alm, &
Finlay, 2013; Cockfield, 2017; Vlcek, 2019).
The low to nil tax rates and shrouded secrecy – combine to
increase the capacity of tax havens to attract foreign capital, which
is much easier to move between countries as a result of the
intensity of globalization and financial de-regulation (Fleming,
Peroni, & Shay, 2016). According to Janský, & Šedivý, 2019, the
role of the third jurisdictions (tax haven) in profit-shifting may not
be restricted to just low tax rates and financial secrecy, because
some might be part of tax-treaty networks. Whenever countries
create unnecessary incentives for other countries to enter into
bilateral tax treaties, this opens new avenues for tax avoidance
and increases secrecy through the complexity in international
taxation rules (Kudrle, 2015; Janský, & Palanský, 2019;
Vlcek,2019).
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 BASE EROSION AND PROFIT SHIFTING (BEPS) IN LOW-INCOME NATIONS BY THE MULTINATIONALS: A CRITICAL
REVIEW OF LITERATURE

The low level of tax revenues raised in developing countries is
caused majorly by the abuse of tax incentives (for example tax
holidays) to attract foreign direct investment from MNEs, and
BEPS strategies implemented by these MNEs being identified as
the most significant causes, coupled with the existence of weak
institutional capacity to expand the tax base and enforce
taxpayers’ compliance (Alm, & Finlay, 2013; Kudrle, 2015; Swank,
2016). It was estimated that developing countries could have lost
as much as US$285 billion (£188.6bn) in the last 20 years from
this action of the MNEs (Cobham, & Janský, 2018; Rigo, Bolwijn, &
Casella, 2018).
Figure 3 revealed the tax revenue loss to BEPS strategies of MNEs
as a share of GDP. This was revealed in a comparative study by
Cobham, & Janský, (2018) on estimated tax loss to avoidance by
the MNEs.

Cobahm & Jansky, (2018)

High Income OECD Nations (22)

High Income Non-OECD Nations (3)

Category

Upper middle Income Nations (6)

Lower-middle Income Nations(18)

Low Icome Nations (9)

0 0.5 1 1.5 2 2.5 3 3.5 4

Total Revenue Loss (% of GDP)

Figure 3. Tax revenue loss as a share of GDP

Justifying how MNEs avoid tax through BEPS strategy, studies
have revealed that Apple was reported to have shifted its income
and profits to Ireland; - a low tax jurisdiction compared to many
low-income nations, resulting in revenue loss to source countries
(Breslin, 2013). In like manner, Cadbury, Starbuck and Microsoft
avoided paying more taxes by shifting its profits from low-income
nations (Cobham, & Janský, 2018), Also, Microsoft was reported to
have used BEPS strategy to shift profit to Luxembourg- a low tax
rate jurisdiction (Breslin, 2013; Shay, 2014). Google’s BEPS
strategy resulted in shifting profit to its subsidiary in Bermuda
(Darcy, 2017). Other businesses, like Vodafone, Hewlett-Packard,
through BEPS strategies shift billions offshore through their
subsidiaries in Belgium and the Cayman Islands to avoid paying
tax on the profits (Dover, 2016; Fleming, Peroni, & Shay, 2016).
This negative impact of profit shifting is more pronounced in low-
income nations that usually lack the ability to check the aggressive
practices of MNEs in their jurisdictions (Swank, 2016).
OXFAM a non-governmental organization has attempted to
quantify tax revenue lost to be about US$ 50 billion tax revenue by
low-income nations due to activities of MNEs (Ezenagu, 2017;
Adeleke, 2019). This figure may increase to US$172 billion if not
check (Adeleke, 2019). In India alone, the estimated losses could
have been as high as 5% of GDP, while Nigeria has a low tax to GDP
ratio of 6% (Cobham, & Janský, 2018; Janský, & Šedivý, 2019).
Supporting study also attempted to demonstrate the tax revenue
loss as a share of GDP depicted in Figure 4.

Jansky, (2019)

High Income OECD Nations (20)

Category

High Income Non-OECD Nations (9)

Upper middle Income Nations (17)
Lower-middle Income Nations(26)
Low Icome Nations (9)
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Total Revenue Loss (% of GDP)

Figure 4. Tax revenue loss as a share of GDP

Also, staggering figures were suggested in recent research by Tax Quite a number of the existing research also explored the effect of
Justice Network-Africa and ActionAid International (2012) on the BEPS by MNEs on developing countries using the trade price data.
use of BEPS by MNEs in East and Central Africa (Christian & These trade price data based studies examined trade mispricing
Apeldoorn, 2018). through transactions between both related and unrelated parties

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 BASE EROSION AND PROFIT SHIFTING (BEPS) IN LOW-INCOME NATIONS BY THE MULTINATIONALS: A CRITICAL
REVIEW OF LITERATURE
(Alm, & Finlay, 2013; Shay, 2014; Ajayi, & Ndikumana, 2015;
Kudrle, 2015; Janský, &Palanský, 2019; Vlcek, 2019). The general
notion of these studies was to identify unusually mispriced import
and export transactions. For example, Janský, &Palanský, (2019),
used the trade data collected, to estimate the level of revenue lost
by the nations through trade mispricing strategies. It is estimated
that during 2005-7 the capital flow through mispricing was in the
region of £229.7bn to EU countries and £351.7bn to the US and
total of £581 billion from other countries made up majorly of low-
income nations to the developed economies. As a result, the total
tax loss to predominantly low-income countries was estimated at
US$160bn (£105.9bn) (Janský, & Palanský, 2019).
Other recent researches in their findings have also suggested that
MNEs engaged widely in profit-shifting strategies through high-
interest burden. They analysed data at company level from a
selection of countries and concluded that; MNEs reported less
profit as a result of high-interest burden, royalties and pay less to
no-tax than the local companies. According to Rigo, et al., (2018),
around US$ 420 billion in corporate profits are shifted from the 79
low-income countries in their sample, this accounting for almost
4% to 5% per cent of these countries’ GDP, which represents 6%
of all corporate profits and 37% of MNEs’ corporate profits.
Another estimate of shifted profits implies that at least US$125
billion is lost in tax revenue, which is around 10% of corporate tax
revenue (Dover, 2016).
The lack of or low capacity in most developing countries to gather
useful data on taxpayers and counter harmful BEPS practices by
some MNEs significantly contribute to the problem (Alm, 2012).
Currently, many developed countries have adopted some
measures to check profit outflows from their jurisdictions, like the
general anti-avoidance rules, the thin-capitalization rules, some
specific transfer-pricing, and the controlled foreign company
(CFC) rules and regulations (Elkins, 2017; Brown, 2017). These
strategies often focus on detecting, deterring, and to respond to
any aggressive tax planning (Vlcek, 2019). Nevertheless, these
measures are non-existent in many developing nations, and even
where they do exist, the studies have not been conducted to
determine their effectiveness. Within this context, identifying new
research avenues to explore the magnitude and mechanics of
profit-shifting strategies by MNEs operating in developing
countries can provide valuable information for policy-makers.
RECOMMENDATIONS
This study therefore recommends that in the interim, MNEs and
other firms should make elimination of thin capitalization and
transfer pricing regulations compliance a priority. There is an
urgent need for MNEs to review their tax planning activities to
ensure compliance with the country’s extant tax laws, by
establishing the open market pricing of their connected associates
and partners’ transactions cross-border.
In terms of policy recommendations, this study further supports
the significance of BEPS inclusive framework initiatives by the
OECD to be further extended to the need of the developing nations
as suggested by some studies so that their tax revenues can be
guaranteed from the operations of the MNEs. In this study, in line
with Janský, & Prats, (2015) modifications to the current
international tax rules should seek to address; The unfair
distribution of the global tax base. Every nation should be able to
levy tax on a fair share of the profits earned by MNEs on
operations within its territory. Also byy ensuring that MNEs pay
their taxes in jurisdictions where their economic activities and
investment are located, rather than where the presence of the
MNEs is sometimes shrouded driven by tax-avoidance strategies.
In this vein, some studies have supported an evolution towards
having a unitary taxation approach for the MNEs (Kudrle, 2017;
Brown, 2017; Morse, 2018). This is unlike the current practice of
Journal of critical reviews
separate-entity approach reported in each jurisdiction. The
proposed unitary taxation approach seeks to globally compute the
income of the MNEs holistically with profit apportionment base on
the jurisdictions’ contribution to the overall income would be
more appropriate for the taxation of MNEs and will result to a
fairer international tax system. Although some studies also
suggested that the unitary taxation may not be a perfect system
with quite a number of gaps that will require further studies, like
how to define an MNE’s global tax base and finding appropriate
formulas that will fairly split profits among the different
jurisdictions where the company operates.
CONCLUSION
This paper has examined the tax impact of BEPS strategies of
MNEs perpetuated through transfer pricing, thin capitalization,
and location of intangible assets within their associated
businesses and connected parties. Also, it was revealed that the
current transfer-pricing regulations in use and counter-measures
in the low-income nations might not be effective in tackling tax
evasion occasioned by MNEs’ profit-shifting. As stated in the
introduction, the current international tax system is not in tune
with the prevailing business environment. The major challenge
relates to the fact that the different separate legal entities that
constitute an MNE are being treated from a tax perspective as if
they were independent, but in reality, these different legal entities
adopt an overall business strategy, which has their management
and reporting structures links that are clearly beyond the national
boundaries.
The underlying goal to maximize profit margins go beyond taking
advantage of tax avoidance gaps to exploitative tendencies,
depriving countries legitimate tax revenues, and gain undue
advantage over their operational host countries, they also
capitalize on the countries weak tax administrative enforcement
system to reduce their tax liabilities. Furthermore, it is evidenced
that MNEs’ reason for manipulating transfer pricing with the
purpose of profit shifting is a global phenomenon. The findings of
this study revealed that MNEs with links to tax havens are engaged
in profit shifting with greater intensity than those with no link.
These tax haven linked MNEs reported lower or no profits and
paid less to nothing in tax than those not linked with tax havens.
Profit-shifting by MNEs have significantly reduced the tax
revenues raised by low-income nations where revenue to GDP
ratio are very low, this revenue forgone have seriously limited
efforts to tackle the prevailing poverty and investments in human
development.
Also as suggested by the extant literature reviewed, the existing
OECD Action Plan to address BEPS may be one of the steps in the
right direction to curb BEPS. More concretely, it offers new
research avenues to better understand the magnitude of, and the
strategies adopted for, profit-shifting into lower tax jurisdictions.
Also in it is new requirements for taxpayers to disclose their
transfer pricing arrangements which should help tax
administrations improve the efficiency and effectiveness of risks
assessments through the adoption of country-by-country
reporting.
However, this paper is limited in that, as opposed to the original
intent of the researchers, the paper could rely on only peer-
reviewed journal articles as points of reference as these number
of scholarly articles specifically discussing the impact of BEPS on
low-income nations are lacking and the little available ones are
neither comprehensive nor holistic enough. It is therefore
proposed that potential researchers seize the opportunity to
explore this field of international taxation, especially at such a
time when the issue of BEPS is a trending topic in the world of
public finance. In addressing some of the highlighted limitations,
future studies should be centred on the evidence-based approach
507
 BASE EROSION AND PROFIT SHIFTING (BEPS) IN LOW-INCOME NATIONS BY THE MULTINATIONALS: A CRITICAL
REVIEW OF LITERATURE
to estimate profiting shifting to tax havens and estimated
associated revenue losses from low-income nations.
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