Original Paper Base Erosion and Profit Shifting Exploration of Tax Differences and Tax Economics

Multinational companies transfer profits to countries with low tax rates via tax planning. In response to the request from G20 nations, the OECD launched a total of 15 BEPS (Base Erosion and Profit Shifting) actions, hoping to prompt the reform in tax systems in different countries. This paper conducts a case study in the examination of taxation differences created by multinational companies by leveraging various tax rates in different countries. Expert interviews are conducted to examine the adjustments and responses of tax planning and investment structures in the corporate world in the wake of the amendments to CFC and PEM tax codes, as well as the correlation between tax revenues and economies. Finally, this paper presents suggestions so that taxes and profits are operated in a fair and efficient environment. This will benefit economic developments and promote effective resources utilization.


Introduction
The pursuit of national interests and economic gains has resulted in differing tax rates and trade wars between countries. However, this has evolved into an unfair trade competition. All the governments and companies know well that this is not an even playing field, but they take their chances by testing the legal boundaries before any major punishments are imposed. This paper sets to explore the following issues: (1) the reason why governments and companies scramble for improper tax efficiency; (2) relevant laws and regulations on anti-tax avoidance. The legislation in place in Taiwan (i.e., the Act on the Use and Taxation on the Inward Remittance of Overseas Funds) is not enforced yet as the Cross-Strait Tax Agreement has not taken effect. Without any further disruptions, the Anti-Tax Avoidance Rules should bring in significant tax revenues for the Taiwan government. This begs the question whether an increase in tax revenues boosts the economy; (3) some companies have inked tax agreements before the OECD's implementation of the BEPS actions. It is a challenge to deal with tax disputes and conflicts according to the principle of legitimate expectation and the principle of non-retroactivity, so that the different opinions from three parties can be balanced and reconciled.
Based on these three research objectives, this paper hopes to identify the maximum common grounds in environment. This will contribute to the prosperity of the economies.

A Fair Taxation Environment
Adherence to tax laws are an obligation to all. Tax burdens should be fairly distributed because taxes come with an expense of property rights and involves the issue of fairness. Fair distributions should be hinged on the legitimacy (lawfulness) of tax items. Tax justice is a fundamental principle of constitutions and the core of tax laws. The principle of fairness in tax laws entails "horizontal equity" and "vertical equity". Horizontal equity demands comparable taxes to be paid by individuals or corporates with the same incomes. In other words, those with equivalent economic affordability should assume the same tax burdens. Vertical equity imposes different tax burdens to those with different affordability. Put differently, rich people or highly profitable companies should pay more taxes. Those with lower incomes can pay less. The ability to pay principle dictates that different taxes are imposed to those with different paying abilities. Tax neutrality in tax laws refers to competitive neutrality and fair competition in tax burdens (Chen, 2016). Fair taxation is the core value of tax laws. This is the underpinning for the sustainability of companies, as well as the research objective and central concept in this paper.
(Note 1) The OECD believes that competitive neutrality aims to foster a fair environment for competition. It is necessary to revisit the existing laws and administrative regulations in the framework of competitive neutrality. For instance, it is a prerequisite to ensure state-owned enterprises or other companies subsidized by the government operate in an even playing field with other companies, as much as possible. Meanwhile, competitive neutrality demands a high level of information transparency.
The purpose is to reduce government incentives so that different types of companies can operate in a fair market and business environment, with competitive neutrality introduced to the competition laws, other laws and regulations. Competitive neutrality is also extended into corporate governance codes to mitigate the competitive advantage supported by the government. According to the OECD, the incorporation of competitive neutrality will bring about reforms to state-owned enterprises and subsidized companies as never before. Regulators should also issue warnings to policymakers for any identified measures intended by governments to distort market competition by sponsoring one or multiple companies. How can competitive neutrality policies be put in place? The OECD says that it should be materialized in the competition laws in different countries. Competition laws can stay on top of any governmental or commercial behaviours detrimental to competition. If competitors are assessed with unfair taxes, this violates the principle of fairness and the concept of competitive neutrality. Tax neutrality demands no effects of tax levies on operating decisions and resource allocations for the economic activities by private sectors (consumers and producers). In public finance, tax neutrality requires no change in relative prices of goods or services as a result of tax assessments, in order to avoid the optimal allocation of resources and the distortion of the market economy. This is to avoid the loss of monetary value due to unhappy feelings of people for paying taxes higher than the monetary value of tax revenues. The loss due to unhappiness is known as deadweight loss, excess burden or welfare cost of taxes in public finance.

Tax Planning and Profitability Scale
Cross-border economic and trading activities are increasingly frequent as the world continues to move towards globalization. The ubiquitous nature of ecommerce and economic transactions cross borders involve more and more offshore investments, transactions, and import/export of labour. To avoid even more tax disputes in the era of globalization, governments around the world can no longer work in silo.
It is necessary to come up with a legal and response mechanism and synchronize the legal orders on a global scale. Consistent implementation and application are key to the mitigation of tax conflicts in the international community. The question now is how to construct a uniform, fair and reasonable tax environment with harmonization of tax codes in different countries.

BEPS Action 3:
Investment incomes from Controlled Foreign Companies (CFC) should be consolidated into the taxable incomes of the parent company during the year. BEPS Action 7 BEPS Action 7: The substance over from principle emphases the Place of Effective Management (PEM).

BEPS Action 6:
This prevents the abuse of tax agreements. The structuring and signing of tax agreements concerning double taxation, non-taxation in two statements and fair distribution of tax revenues by signing countries, the access to tax data from other countries, and assistance in tax collections require the tax agreement between two countries, signing of multinational agreements for taxation data or other tax sharing. It is also necessary to work with relevant domestic laws and regulations to ensure enforcement and compliance with the principle of international fairness and mutual benefit.

BEPS Actions 11 to 14:
Information transparency is achieved with Automatic Exchange of Information (AEOI) and other information sharing mechanisms, as well as Common Reporting Standard (CRS).
BEPS Actions 8 to 10: The stipulations regarding transfer pricing of intangible assets define beneficiary owners.

BEPS Action 13: Transfer Pricing Documentation and Country-by-Country Reporting
This requires a three-layer structure of literature, i.e., global master files, country-by-country reporting and country-specific files.
The BEPS 15 Actions will influence tax planning and tax avoidance by multinational enterprises and steer towards a fair, reasonable and uniform taxation environment.

Tax Economics
The 15 BEPS Actions aims to avoid the abuse of taxation agreements by effectively combating harmful tax competition. This is achieved with the transfer pricing of intangible assets consistent with the capital value and transaction risks. According to the Finance Ministers and Central Bank Governors' Meeting for G20 countries in Fukuoka Japan in June 2019, the final report will be released in 2020.
First, a tax policy should be established regarding the taxable payments by a company selling products/services in a jurisdiction but without any physical premise in that jurisdiction. If the company can identify a low-tax or offshore haven, the second policy will be applied. In this instance, all the governments in the world shall levy taxes based on the lowest tax rate in the world. Both the OECD with its BEPS 15 Actions and the G20 finance ministers with their tax policies strive for fair and just tax systems around the world. The governments adopting low tax rates wish to pursue their own economic prosperity. Of course, taxations and economies are closely integrated. This paper intends to www.scholink.org/ojs/index.php/jbtp Journal of Business Theory and Practice Vol. 7, No. 4, 2019 158 Published by SCHOLINK INC. explore whether tax revenues and economic developments can grow at the same time by imposing higher corporate tax burdens on after the enactment of the Anti-Tax Avoidance Rules.

Case Study-Amazon.com Inc.
The U.S. online retailer heavyweight Amazon.com Inc. was ordered by the European Union on (Note 2) October 4, 2017 to repay €250 million (or NT$9 billion or so) in back taxes on the following grounds: (1) Amazon.com Inc.'s holding company in Luxembourg was its European headquarters, charging patent fees from affiliated companies. However, the Luxembourg offices had no employees or offices. It was not an PEM, as it had no commercial activities; (2) The investigation from the European Union suggests that the patent fees collected by the holding company in Luxembourg did not comply with the principle of transfer pricing or at arm's length. In fact, these expenses were higher than the prevalent market prices; (3) The tax agreement reached between the Luxembourg government and Amazon.com Inc. in 2003 was improper tax subsidies, as the holding company in Luxembourg did not pay taxes for nearly 3/4 of its profits. The incentives provided by the Luxembourg government were hence not fair to other companies not enjoying the lower tax rates. This affects fair competition (Chang & Huang, 2017).
Amazon's spokesperson responded that Amazon holds the intellectual properties entitled to tax benefits in support the development of industries. These intellectual properties are owned by its holding company in Luxembourg. The Luxembourg government also indicated that the tax benefits granted to Amazon were totally legal at that time. Amazon had been paying taxes according to international laws and Luxembourg's tax codes, without any preferential treatments. Therefore, the Luxembourg disagreed with the decision by the European Union by emphasizing that its tax system was in compliance with all the laws and stipulations of the European Union. The Luxembourg government stood up for Amazon Inc. in the tax fight with the European Union. Luxembourg is a smaller economy and seeks to boost its economic development by attracting multinational enterprises to establish their European headquarters there by offering tax rates lower than in other member states of the European Union (Sing Tao Daily, 2017).

Opinions from the Author
The author expresses the following opinions regarding the European Union vs. Luxembourg and Amazon.
The first issue is the determination of value of intangible assets. Amazon's holding company in Luxembourg has the legal ownership of the intangible assets. Were the loyalties it charged for the contribution of the intangible assets and the risks assumed for the ownership appropriate? The guiding principle of risk control stated in the BEPS Action 10 mentions that the provision of funding alone does not equate to the ownership of the value and return of the intangible assets. Without risk control or management capability, the offering of capital only deserves the return equivalent to risk-free rates. To validate whether the transaction of intangible assets between affiliated parties is at arm's length, the OECD conducts an analysis on the risks and rewards concerning the development of intangible assets, the enhancement, maintenance and protection of values, and the contribution of developed and utilized assets. If the owner of intangible assets in question is not involved in implementations or undertaking of relevant risks, it does not deserve the profits generated by the intangible assets. In other words, transfer pricing should be based on economic substances, as well as the functions and risks assumed by The second issue is whether the transaction between Amazon. com Inc. and its holding company, European headquarters in Luxembourg makes unique and valuable contributions to both parties. Was it a model so highly integrated that the contributions from transaction parties were difficult to be valued?
Was there joint undertaking of major economic risks or sole assumption of relevant risks that it was difficult to assign the distribution of calculated values from transaction profits?
The third issue is that the holding company in Luxembourg had no employees or offices. It performed no commercial activities. The companies with PEM onshore become foreign companies registered in low-tax jurisdictions. The incomes onshore and offshore should both consolidated into the parent and calculate corporate income taxes and personal income taxes accordingly.

Finally, the fourth issue is the tax agreement reached in 2003 by the Luxembourg government and
Amazon's holding company in Luxembourg. On February 12, 2013, the OECD released the BEPS Actions in response to the request from G20 countries. Apparently, the tax agreement was signed in accordance with international laws and Luxembourg's tax codes then, long before the publication of the 15 OECD action plans. In law, the general principles are non-retroactivity and reasonable trust for the protection of people and companies in an honest and credible manner, As the tax agreement between Amazon and the Luxembourg government was inked before the enactment of the OECD action plans, administrative government agencies should adhere to the principle of trust and guarantee, without extending the interpretations and making exceptions applicable to facts or legal relations finished before the effectiveness of later laws and regulations. The maintenance of legal stability is the key determinant of judgement.

Optimal Taxations and Economics
To examine whether an increase in tax revenues after the implementation of anti-tax avoidance measures such as CFC and PEM can boost the economic growth, this paper interviewedwith Professor in order to compete in the international market. Some companies receive generous incentives and subsidies from local governments. If the superficial fairness is desired and functional incentives are cancelled to put all industries in an even tax paying regime, some industries in Taiwan will face unfair competition from foreign peers who benefit from low tax rates and other incentives. This may result in an exodus of successful industries from Taiwan to other countries where incentives are on the table. Emerging industries may also find it difficult to compete with competitors from other countries and hence become unwilling to stay in Taiwan. All these will hinder the economic development in Taiwan. A well-known incentive to retain domestic talents and attract foreign talents is to reduce the highest rate of income taxes for locals and the income tax rate for foreigners. Brain drain is a more serious problem than industry exodus as a result of higher effective tax rates. In sum, seemingly unfair taxations are in fact a remedy for economic stagnation.
The Finance Ministers and Central Bank Governors' Meeting for G20 countries in Fukuoka Japan in June 2019 (Note 3), discussed how to prevent tax avoidance by global tech giants such as Google, Amazon, Facebook and Apple. The final communique proposes a dual-ladder policy: (1) taxation on multinational companies for local earnings in the countries of product/service sales, regardless of whether physical premises are set up in these countries; (2) the global minimum tax rates applicable to the earnings channelled to low-tax countries. The author asked Professor Ho whether different countries in the world would abide by the minimum tax rates set by the G20 finance ministers and central bank governors. He explained with the prisoner's dilemma, the best example for zero-sum games in the game theory (Note 4). It shows that the optimal decisions by individuals are not the optimal decisions for the group. In other words, rational decisions by individuals often result in collective irrationality. In a prisoner's dilemma, if prisoners collude and refuse to tell the truth, it will bring the best outcome for all. However, unable to communicate with each other, they seek their own interest by selling out others. Whilst betraying each other is a violation of the best interest for all, it is the decision for personal best interest. Whether countries around the world will conform to the global minimum tax rates can be examined in the context of the prisoner's dilemma. Governments and multinational enterprises pursue economic growth and their own interests amid fierce competition. If a government and a company come up with their own tax incentives or subsidy schemes without complying with the uniform minimum tax rates, other countries will follow suit. This will trigger a tax war. The price competition between players from two countries will damage national economies and company profitability, i.e., the outcome of mutual betrayals.
Thanks to information transparency in a globalized world, Professor Ho believes that global minimum tax rates can be a possible if most countries abide and work together to combat those who do not.
Professor Ho explained the correlation between taxes and economies by using the tax-spend hypothesis.
To resolve government deficits, the focus should be on cost reductions, not tax or other revenue increases. Taiwan has failed to stimulate its economy with budgetary hikes, as shown in research.
Professor Ho argued that an increase in tax revenues (after the implementation of measures to crack down on tax avoidance) will not necessarily benefit the economy. An ideal tax environment is desirable.
However, the seemingly unfair tax incentives or subsidies to boost growth in the ear of slim margins do contribute to the economy. This then begs the question whether governments around the world will adhere to the global minimum tax rates. Conflicts of interest of all kinds are everywhere as companies want to make money and governments wish to boost economies. Professor Housed the prisoner's dilemma to explain that individuals or groups prioritize their own interests in a two-party or multi-party game. In the short term it will not look easy to make all countries in the world to conform to the minimum tax rates set up with good intentions. However, the majority may be able to force a small number of governments to comply in the long run.

International Anti-Tax Avoidance Measures & Suggestions
The Anti-Tax Avoidance Rules has been signed but not yet enactment. (Note 5) The Cross-Strait Tax Agreement and the Act on the Use and Taxation on the Inward Remittance of Overseas Funds have just taken effect.
In order to get a broader view of international control and measures for anti-tax avoidance, this paper interviewed Professor Gui-Duan Chen, Feng Chia University, who is also a CPA with En Wise CPAs & Co. Professor Chen pointed out that the frequently used anti-tax avoidance measures in the international community are (1) foreign exchange control; (2) substance over form principle of taxations. He suggests the assurance of capital transparency with CRS. Therefore, companies should enhance their international investment structure, international capital planning and cross-border tax risk management. Below is a summary of his comments.

Foreign Exchange Control
This is to prevent money laundering or tax avoidance by not allowing multinational companies to avoid taxes via tax havens. Banks may refuse to handle remittances or report to regulators for inspections in the case of any suspicious or improper capital flows. However, foreign exchange control may affect financial liberalization and internationalization. Professor Chen thinks it is necessary to take a cautious approach in its implementation.

Substance over Form Principle of Taxations
The Anti-Tax Avoidance Rules in Taiwan covers PEM and defines CFCs. It also stipulates that undistributed earnings shall be taxed in Taiwan In the case of tax assessments on Taiwanese companies based on the principle of substance over form, Professor Chen pointed out the principle of legitimate expectation and the principle of non-retroactivity.
There is a lot of grey area regarding the existing economic and tax affairs of offshore entities before the enactment of the legislation. It is necessary to review each case individually. Litigations particularly take efforts and time.
One of the reasons for the delay in enactment of the Anti-Tax Avoidance Rules is the outstanding issue concerning the taxation of repatriated capital from offshore. This is the reason for the legislation of the Act on the Use and Taxation on the Inward Remittance of Overseas Funds. According to the Act, filing is required for repatriated capital. Taxations will be on the amnesty basis. The capital can be divided into capital or incomes, with burden of proof imposed. The remittance of offshore capital back to Taiwan helps to boost domestic investments (except for real estates) and hence economic developments.
Meanwhile, the income tax issues will be highly complex once the stipulations governing CFCs and PEM are in effect. This may trigger many tax litigations. As in the case study on Amazon, multinational enterprises leverage the tax rate differences between countries and channel earnings, legally, to the jurisdictions with low tax rates. This is the result of taxation rights exercised by individual governments. The European Commission posited that the taxation was unfair and argued that the levy of domestic taxes should comply with the international tax standards created by the UN and the OECD, without favouring any companies.
The European Union ordered back taxes, but Amazon stated that all the tax agreements were completely legal. This became a case of European Union vs. Amazon and Luxembourg government.
Professor Chen indicated that international organizations can impose restrictions on member states but claim no sovereignty on tax issues for the companies operating in member states. The European Commission's demand for back taxes ignited the heated debate regarding the domestic tax sovereignty in the context of international bodies and international taxations. Professor Chen questioned whether international organizations have the right to impose taxes on corporates as this involves international trade and the rights over resources circulation.

After the Implementation of CRS, Companies Are Advised to Enhance Their International Investment Structures, International Capital Planning and Risk Management in International
Taxations Essentially CRS is the information sharing among financial institutions in different countries on the data of bank accounts owned by non-local taxpayers and the presentation of accounts information to tax authorities in the countries of residence for these non-locals. The purpose is to ensure reporting of overseas incomes by taxpayers and hence the transparency of taxations in different countries with effective evidence on tax avoidance. Taiwan has released its CRS regulations, scheduled to take effect in 2019. The first batch of information sharing with other countries or regions will be in 2020. Professor Chen believes that by implementing CRS clauses, Taiwan will join the global bandwagon of anti-tax avoidance and work with tax authorities in other countries to enhance information transparency by implementing CRS clauses. This combined with the measures governing CFCs and PEM increases the risks associated with global tax audits on multinational companies who seek to retain profits with offshore entities and allocate profits not consistent with economic substance. In conclusion, Professor Chen suggests companies enhance their international investment structures, international capital planning and risk management in international taxations.
Meanwhile, Professor Chen highlighted the complex uncertainties in relation tothe Act on the Use and Taxation on the Inward Remittance of Overseas Funds, and the anti-tax avoidance clause stipulated in the third paragraph and the fourth paragraph of Article 43 of the Income Tax Act on CFCs and PEM.
These clauses have passed the third reading by the Legislative Yuan and yet to take effect. Companies are advised to plan for the utilization of offshore capital parked in offshore entities and implement risk management in overseas taxations. Professor Chen indicated that CRS clauses will be soon promulgated, and the OECD is promoting the BEPS 15 Actions. All the governments around the world are working together to combat tax avoidance by using tax havens. The income tax data will be soon shared under the CRS scheme so companies should sign tax agreements with different countries as soon as possible. The order for back taxes may also come with punitive measures and damage reputations.

Conclusion and Suggestions
This paper explains the speculative behaviour taken by companies to reduce effective tax rates by using the prisoner's dilemma in the science of psychology. Will the promulgation of the Anti-Tax Avoidance Rules increase tax revenues, and thus in turn, economic growth? The in-depth interviews indicate that higher income tax revenues do not have significant contribution to the economy. Rather, only by expanding the tax base and hiking consumption taxes will it be possible to promote economic developments. Governments are advised to cut back deficits in order to stabilize the economy. The Anti-Tax Avoidance Rules in Taiwan will soon take effect. The Ministry of Finance warned that taxes will be assesses in accordance with the principle of substance over form if the National Taxation Bureau gets hold of evidence concerning CFCs and PEM. Accountants and scholars indicate that according to taxation by law, any matters on rights and obligations of people shall be governed by law.
The principle of clarity dictates that any issues shall be dealt in favour of taxpayers. The principle of substance over form must be operated in the framework of taxation by law, in order to avoid any abuse.
In the case of European Union vs. Amazon and the Luxembourg government, the European Union maintains its stance on the principle of taxations and compliance of tax laws. The litigation is still ongoing.
This paper presents the following suggestions and research findings as a template for the improvement of tax environments and the policymaking for economic stimulus.
i. Formulation of international tax standards 1) Redefinition of international tax standards by adhering to laws, regulations and policies 2) Establishment of global fairness initiations to reconcile the differences in tax collections and tax determinations 3) Setup of a global mechanism for minimum tax rates to impose taxes on items that erode the tax base. It is suggested that no deductions are allowed for the taxes paid by affiliated parties in the countries or territories that grant low tax rates or tax incentives under tax agreements. ii. Legal aids on tax matters 1) Increase of international aids to countries with tax problems 2) Training of professionals in laws and taxes so that they can offer assistance on a pro bono basis 3) As the Anti-Tax Avoidance Rules will be implemented soon, assistance should be extended to corporates so that they can adjust investment structures, engage in appropriate tax planning and improve corporate governance.
iii. Establishment of a fair tax environment 1) Enhancement of cooperation among stakeholders and tax issues associated with tax iv. Economic stimulus measures 1) The enactment of the Anti-Tax Avoidance Rules will increase tax burdens on companies.
Therefore, the government should expand the tax base and boost the economy with higher indirect taxes but lower direct taxes 2) Fostering of a good investment environment and adoption of appropriate tax incentives to encourage the repatriation of offshore capital and bring domestic companies to an even playing field with international peers 3) The government should reduce expenses and budgetary deficits by measuring incomes vs.
outlays, in order to afford tax cuts to stabilize and boost the economy.
Whilst the anti-tax action plan has accomplished its task for this stage, not all the countries have implemented the CFCs and PEM measures, the Automatic Exchange of Information (AEOI) or the Common Reporting Standard. As the OECD is still discussing the determination of the prices and values of intangible assets with high risks, it is not possible to conduct an empirical analysis on whether the global economic movements contribute to fair taxations in terms of tax revenues and profit distributions. This is the research limitation of this paper. It is suggested that future studies explore in-depth the change of global tax revenues, national economic movements and taxation fairness once the anti-tax avoidance campaign has been implemented. Hopefully the global economy grows collectively in a fair tax environment toward world peace.