The Other Side of the Equation for BEPS Achievement By George Salis, Senior Tax Compliance Principal and Certified Business Economist (CBE) at Vertex.
BEPS is a plan with profound fiscal and global economic consequences; when implemented, its rules will transform fiscal policy and international taxation (and probably trade).
To varying degrees, BEPS will economically affect individual taxpayers, corporations, and governments worldwide. Therefore, it is crucial that we pause and consider several critical macro-consequential concerns as we advance toward potential major market changes that BEPS could cause. For BEPS to succeed, there must be political will and economic fortitude by national governments to commit to BEPS — and not only in certain convenient measures, such as revenue collection. However, this is easier said than done. However, in order to realize the BEPS plan, governments — including the US and others — must be willing to revise their national tax codes, update and link their fiscal policy to real economic conditions, and spark cross-sectoral efficiency. This means moving toward a truly integrated global dynamic tax model that is interactive, and is international in kind, not just purely domestic. This is not novel, however, it must be also be systemic and with global amplification in order to keep pace with the global business economy.
Dynamic tax modeling would generate economically progressive, synchronized tax systems that acknowledge and embrace global fluctuations. Such tax systems must be revenue neutral, and must be periodically adapted and improved while maintaining conformance with regional fluctuating economic conditions. A global dynamic tax model would also need to keep adjusted tax rate scales low and move towards economic growth and competitiveness by shifting to advanced territorial tax systems, while enhancing open, nondiscriminatory trade. Further, we should bear in mind that BEPS guidelines are only part of the equation; there is another side to this complex dilemma: national commitment.
The first question is one that most business economists are asking: What will be the real social cost of BEPS? A primary concern is that all of these impending policy outcomes are merely economic and fiscal extrapolations. While these inference-based policy outcomes are as likely BEPS impacts, no one knows what the eventual fiscal results of the regulatory unintended consequences will be. For example, BEPS could disrupt less mature, already-stressed economies that depend on income from financial centers in the absence of other national revenue. Second, is most of the world fiscally, politically, and economically committed to ending tax competition and tax arbitrage? This remains unclear in a world that abounds with continuing economic and trade discords, declining national revenue, wealth disparity, and growing regional and domestic economic inequalities. Many nations have heard these concerns before, only to become disillusioned when it comes time to follow through during declining business cycles. Even now, many developing countries are expressing reservations about BEPS. Third, will BEPS eventually become the new universal deadweight loss, creating excess burden in global taxation, in a world hindered by transactional costs? These glitches, combined with financial crises and trade imbalances, have brought us to our current bleak fiscal condition.
Most economists agree that the international tax system is archaic and ineffective. This disorder is the result of years of neglect and using outdated, inefficient static tax models designed for mostly domestic use in an age of wholly independent economies. For this acronym to become an effective vehicle for economic transformation, BEPS must be embraced from within by all countries, in a sort of creative fiscal destruction of their own tax codes. Consequently, the overall success of BEPS begins with each country’s commitment to domestic tax reform and a global dynamic tax model.