"Taxation of profits should take place where the economic activities generating those profits are carried out, and where value is created," said Vienna University of Economics and Business Assistant Professor Rita Szudoczky. She explained that this is the language used to explain the primary purpose of the G20/OECD project on Base Erosion and Profit Shifting (BEPS). In a presentation at the CEU School of Public Policy on December 11, Szudoczky made a compelling case for the need for a more effective and equitable tax system. Szudoczky, who is a graduate of the CEU Department of Legal Studies (IBL 2002), made her presentation to students enrolled in SPP Visiting Professor Izabella Barati-Stec's course on Public Finance and Emerging Economics. "I always look for opportunities to invite practitioners to my classroom who can provide students with valuable insight that connects what we learn with real life."
Szudoczky noted that in 2010 the British Virgin Islands was the second largest investor in China (after Hong Kong and before the United States). In that same year Mauritius was the largest investor in India. These were just two of many examples that she provided to demonstrate how "treaty shopping" (i.e. exploiting favorable tax treaties in countries where there is no substantial economic presence) or other actions that companies take to shift profits to low- or no-tax locations solely for the purpose of reducing their tax burdens distorts the global financial picture. In recent years, there has been growing attention paid to the way in which companies like Amazon, GE, Apple, and McDonald's, for example, have been able to structure their global operations so as to drastically reduce their tax burdens. In some jurisdictions where these companies actually operate and make substantial profits, they pay no or hardly any taxes.
As Szudoczky pointed out, what these companies are doing is legal. Many argue, however, that it is not ethical, and that it violates these same companies' stated commitment to corporate social responsibility. These legal arrangements also have real consequences: they threaten the integrity of tax systems worldwide; reduce government revenues; undermine voluntary compliance by tax payers; and distort competition.
In 2013, the G20/OECD launched the BEPS project to counter aggressive tax planning and base erosion and profit shifting activities by multinationals. The goal is to propose changes to the existing international tax regime to better align the rights to tax with real economic activity. The initiative enjoys broad support from G20 leaders who have urged "other countries to join with us and to take the necessary individual and collective actions to implement these proposals and recommendations in a timely manner." The BEPS Project delivered its reports in October 2015 proposing what Szudoczky described as "the most fundamental changes to international tax rules in a century." The changes that have been proposed are dramatic. It is too soon though to know what impact – if any – these changes will have. "The focus now is on implementation," said Szudoczky, "which should be facilitated and monitored in a framework which allows all interested countries to participate on an equal footing."