06/25/2013 10:41 am ET Updated Aug 25, 2013

Can the OECD Be Trusted on Base Erosion?

After years of creating rules that allow multinational corporations to shift profits and income to whatever jurisdiction they like, the OECD is now very concerned about base erosion. In fact, it is drafting a major report on base erosion and profit shifting (commonly called BEPS). Pascal Saint-Amans, director of the OECD Centre for Tax Policy Administration, has been making the rounds asserting that the OECD is now very serious about protecting national tax bases. But just how concerned is the OECD about preventing BEPS, and does its position really matter?

One hint that the OECD isn't really that trustworthy on the issue is how quickly it has been backtracking on transfer pricing and BEPS issues. In a June 2012 draft report on transfer pricing, the OECD seemed to take the position that physical activity was critical to determining where intangible profits should be sourced. The business community was livid -- primarily because it wants to source intangible profits to the jurisdiction where subsidiaries that fund the development are located (in other words, no-tax and low-tax havens). The draft has been submitted to the business community for comment, and it is expected that the final report won't be quite so anti-base-erosion. In fact, at a recent House Ways and Means Committee hearing, Saint-Amans implied that funding could be a significant factor in sourcing if there was some physical activity present. Martin Sullivan wrote that both Saint-Amans and Ways and Means Chair Dave Camp seem to be leaving the door open for multinationals to continue to use tax havens even under a reformed international tax system.

The BEPS draft might not fare any better than the transfer pricing one. The United States has emphasized repeatedly that it will not allow the concept of a service permanent establishment to be significantly changed by the OECD. Treasury officials have also spoken extensively about the need to preserve the core principles of the arm's-length method. Frankly, at this point, the arm's-length method is merely a euphemism for sourcing profits to low-tax countries. While one Treasury official recently conceded that the days of multinationals being able to shift all profits to zero-tax locations are over, the United States is hardly an enthusiastic supporter of a major BEPS initiative.

Viewed in the most positive light, the OECD is playing catch-up. Many European and developing world governments are disgusted with the state of international taxation, and the consensus in favor of the arm's-length method, at least as developed by the OECD, has completely broken down. The OECD might be trying to play a part in creating a new international consensus. Or it might be seen as desperately trying to preserve as much of its work as possible. In the most negative light, the organization, which has been accused of being a tool of U.S. and U.K. multinationals, wants to blunt the momentum toward tougher BEPS rules by proposing milquetoast reforms at the edges of the system. (During the initial clamor over the UBS scandal, a similar tactic was used by Senate Finance Committee Chair Max Baucus to get FATCA passed instead of Sen. Carl Levin's much harsher Stop Tax Haven Abuse Act.)

Companies should realize, however, that regardless of what the OECD and the United States do, many tax administrators are not going to allow the same level of profit shifting that they have in the past. The world might not be able to completely eliminate so-called stateless income, but the days of rapidly eroding tax bases and tax rates in the single digits or lower seem to be finally coming to a close.

Scott is editor of Tax Analysts' Tax Notes magazine.