BEPS: The OECD’s ill-fated effort to save the corporate tax in the face of global tax competition

The corporate tax is clearly on the wane throughout the world, as every year more and more countries reduce their corporate tax rate to attract increasingly globalized corporate investment.  

The OECD and G20 are engaged in an extensive effort to preserve the corporate tax, via the Base Erosion and Profit Shifting (BEPS) project.  

However, the project seems likely to fail, if only because there are dozens of countries outside the OECD and G20 that are also competing for corporate investment via low tax rates. The pressures of globalization have exposed the many weaknesses of the corporate tax, revealing it to be fundamentally incoherent and ill-suited for the modern economy.

Corporate tax competition continues apace

The average corporate tax rate among OECD countries has dropped from close to 50 percent in the 1980s to about 25 percent today, and a number of developed countries will reduce their rate further this year, e.g. the U.K., Japan and Spain. These rate cuts have usually come without significant broadening of the corporate tax base, i.e. these are net tax cuts.

Furthermore, many developed countries have instituted so-called patent or knowledge boxes that tax profits from highly mobile intellectual property at substantially lower tax rates, generally in the single digits.

Ireland, which has the lowest corporate tax rate in the OECD, at 12.5 percent, is introducing a knowledge box with a rate of 5 percent. this year. Of course, many smaller countries have no corporate tax at all, making them major destinations for multinational corporate profits.

All of this puts increasing pressure on the U.S. to cut its corporate tax rate, which at 39.1 percent counting federal and state levies, is the highest in the developed world and the third highest in the entire world. The issue has become front page news in the U.S., as a number of household names, e.g. Burger King, have recently moved their headquarters out of the U.S. and into lower tax locals via corporate inversion.

This technique, in which a large U.S.-based multinational corporation merges with a smaller foreign-based corporation and moves the headquarters abroad, is designed to avoid another uncompetitive aspect of the U.S. corporate tax: worldwide taxation.

Most developed countries have a territorial system of corporate tax that exempts dividends received from foreign subsidiaries. Instead, the U.S. taxes those foreign dividends at the same, high corporate tax rate, providing a foreign tax credit for taxes paid abroad.

The U.S. worldwide system with foreign tax credits involves massive compliance and administration costs, fundamentally because of the difficulty in defining precisely what constitutes a repatriated foreign dividend and what qualifies for a foreign tax credit.

Corporate tax built on a shaky foundation

The definitional problems of the corporate tax do not end there. Corporate tax was built upon a foundation of financial accounting applied to physical assets, which is less and less able to deal with a world of intangible assets, such as patents and brands that can be located anywhere in the world and can be used for production by multiple entities also located anywhere globally.

Likewise, the corporate tax has traditionally distinguished between debt and equity, allowing for the deduction of interest payments but not dividend payments, even though there is something of a continuum between fixed interest payments and variable dividends payments.

The OECD and the G20 are engaged in an uphill battle to try to shore up these definitional problems via transfer pricing rules and, most ambitiously, the Base Erosion and Profit Shifting (BEPS) project. Unfortunately, no amount of white papers and conferences can resolve the fundamental complexity of taxing net corporate income based on the source of production and residence of the corporate entity.

These concepts were always complicated, and the corporate tax is always difficult to administer and comply with, but modern globalization, finance and production make the corporate tax essentially impractical.

Corporate tax the most economically damaging tax

The OECD’s efforts to preserve the corporate tax at its current levels run counter to its own findings that the corporate tax is the most economically destructive of all the major taxes, i.e. more destructive than taxes on personal income, consumption and property.

That result has been confirmed by dozens of empirical studies by academic economists. It is not surprising when one remembers that the corporate tax is a tax on profits, and it is the search for profits that drives production, investment, risk-taking, innovation and wealth creation. In other words, the corporate tax is very much like sand in the gears of the market process. 

The overwhelming downsides to corporate taxation have become apparent in one form or another to most policy makers throughout the world, which explains why countries are engaged in a “race to the bottom” on the corporate tax rate.

As it stands, those countries in the OECD that have been on the leading edge of that race have outperformed their peers both in terms of economic growth and tax revenue. Ireland, the U.K. and Canada, for example, have aggressively cut their corporate tax rates over the last 15 years, and the result has been above-average economic growth and above-average tax revenue.

In fact, corporate tax revenue in these countries is about twice what it is in the U.S., as a share of GDP. Plus, GDP is higher because the low corporate tax rates have fostered business expansion domestically and also attracted business activity from abroad, which, in turn, has led to higher wages and other incomes.

Double taxation of corporate income

It is strange that the stated goal of the OECD BEPS project is to prevent so-called “stateless income” or “double non-taxation.”

This completely ignores the fact that most countries, and every OECD country, have shareholder taxes on either dividends, capital gains, or both. That means even if corporate taxes were completely eliminated, corporate income would still be taxed at the shareholder level. It also means that any loss of corporate tax revenue due to profit shifting would eventually be picked up, to a large degree, as higher shareholder tax revenue, depending on the relative tax rates and the share of corporate equities owned domestically.

As it stands, the existence of both corporate and shareholder taxes represents a classic problem of double-taxation of corporate income. Many if not most countries reduce this double-taxation by integrating the corporate and personal income taxes in some fashion, e.g. by crediting shareholders for corporate taxes paid. In a shareholder credit system, any reduction in the corporate tax rate directly increases the tax rate on shareholders.

The U.S. does not integrate the corporate and personal tax but instead taxes shareholders at a preferential rate of 23.8 percent at the federal level. One proposal is to lower the U.S. corporate tax rate in exchange for a higher tax rate on shareholders, which would probably make sense given the aforementioned problems with corporate taxation of foreign profits and the differential treatment of debt and equity financing. In addition, this proposal would increase transparency, because, unlike corporate taxes, shareholder taxes are directly paid by voters.


Faced with intense corporate tax competition and the sophisticated maneuverings of multinational corporations, governments around the world are expending tremendous effort to preserve the corporate tax and their corporate tax revenues. However, if revenue is truly a concern, history indicates that the only proven way to generate substantial corporate tax revenue is to maintain a competitive level of taxation.

Indeed, the countries that have been the most aggressive in cutting their corporate tax rates have generally seen the most growth in their corporate tax revenue.

For example, in the OECD, eight countries have reduced their corporate tax rates by roughly half or more since the 1980s.

All eight countries have seen their corporate tax revenue increase as a share of GDP. The reason is that lower corporate tax rates attract business activity from abroad and also foster it at home.

Eventually, of course, as corporate tax rates approach zero, so too will corporate tax revenue. This is at least a couple of decades away for OECD countries, where the average corporate tax rate is 25 percent and dropping at a rate of almost 1 point per year. Even if corporate tax revenue was completely eliminated, the task of replacing it is not nearly as daunting as most assume.

The corporate tax today generates less than 10 percent of total tax revenue in the average OECD country. Most countries also tax corporate income at the shareholder level, so eliminating the corporate tax will generally mean substantial increases in tax revenue from dividends and capital gains.

In other words, the race to the bottom on the corporate tax is not likely to produce significant losses of tax revenue for the world’s governments, but it is likely to produce significant benefits for the world’s economies. The OECD’s BEPS project does not seem to recognize these benefits, and instead appears aimed at preserving the corporate tax at all costs.

Unfortunately, the costs could be large for those countries that agree to it, as it involves more reporting requirements for companies, more compliance costs, and more complicated rules for transfer pricing, foreign income and controlled foreign corporations. This would create the incentive for even more tax planning around corporate tax, and reduce the incentive for companies to invest in the affected countries.

Ultimately, the BEPS project is about preserving the corporate tax, even though the tax is incoherent, economically destructive, and raises little revenue. Better that we let nature take its course, let countries find better ways to raise tax revenue, and move on to more important things.


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William McBride

William McBride is Chief Economist at the Tax Foundation. He holds a Ph.D. in economics from George Mason University, where his dissertation involved using agent-based modeling and simulation to analyze the effect of various banking regimes, including free banking, on asset prices. While at George Mason, William was a research assistant at the Interdisciplinary Center for Economic Science, which was established by Nobel laureate Vernon Smith as a center for research in experimental economics.

William McBride
Chief Economist
Tax Foundation
Washington, DC 20005

T: (202) 464-6200
E: [email protected]


Tax Foundation

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