This foundational lesson explores the core principles of international taxation, including jurisdiction to tax, the source vs. residence dichotomy, and the problem of base erosion and profit shifting (BEPS) that the OECD/G20 project seeks to address.

• The Need for International Tax Rules: As multinational enterprises (MNEs) now represent a significant proportion of global GDP, with around 60% of world trade taking place within MNEs, the interaction of domestic tax systems has become critically important. While international tax law aims to eliminate double taxation to facilitate global economic growth, gaps and mismatches between domestic tax rules have created opportunities for tax avoidance. This legal arbitrage—where businesses exploit differences between tax systems to reduce their overall tax burden—is the core problem that BEPS seeks to address. According to IMF estimates, tax avoidance through profit shifting is estimated at around $400 billion for OECD countries and $200 billion for lower-income countries.

• Understanding Base Erosion and Profit Shifting (BEPS): BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real economic activity but where taxes are low, resulting in little or no overall corporate tax being paid. This undermines the integrity of the tax system, as reporting of low corporate taxes is perceived as unfair, and individual taxpayers in affected jurisdictions bear a greater share of the burden. The 2008-2009 financial crisis and its associated fiscal pressures made these concerns more acute, leading to the BEPS initiative.

• The OECD/G20 BEPS Action Plan: In September 2013, OECD and G20 countries joined forces to develop a 15-point Action Plan to address BEPS. The plan was structured around three fundamental pillars: (i) introducing coherence in domestic rules affecting cross-border activities; (ii) reinforcing ‘substance’ requirements in existing international standards, aligning taxation with the location of value creation and economic activity; and (iii) improving transparency and tax certainty. In November 2015, the comprehensive BEPS package was delivered to G20 Leaders, representing the first substantial renovation of international tax rules in almost a century.