What Are the BEPS Tax Rules for Multinationals?

Multinational corporations operate across many countries, creating opportunities to minimize their global tax payments through strategies known as Base Erosion and Profit Shifting (BEPS). These strategies involve moving profits from high-tax jurisdictions, where business activities occur, to low-tax or no-tax jurisdictions. This erodes the tax base of the higher-tax countries, reducing government revenues where economic value is created. In response, the Organisation for Economic Co-operation and Development (OECD) and the G20 led a collaboration of countries to create a unified framework to combat BEPS. This initiative closes gaps in international tax rules and creates a more level playing field for all companies.

The Core Problem of Base Erosion and Profit Shifting

The primary issue of base erosion is the loss of tax revenue for countries where profits are generated. When a multinational enterprise (MNE) shifts profits to a tax haven, that country loses the corporate income tax it would have collected. This practice also raises fairness concerns, as domestic companies cannot use the same strategies and may face a higher tax burden, distorting competition.

A common BEPS strategy is transfer pricing, which involves setting artificial prices for goods or services exchanged between subsidiaries of the same company. For instance, a subsidiary in a high-tax country might pay an inflated price for a component from another subsidiary in a low-tax country. This reduces the reported profit in the high-tax jurisdiction while increasing it in the low-tax one.

Another technique is placing valuable intangible assets, like patents and trademarks, in a subsidiary located in a low-tax jurisdiction. This subsidiary then charges substantial, tax-deductible royalty fees to other group companies in high-tax countries, effectively moving profits to the low-tax location. The rise of digital services with no clear physical location has made these challenges more complex.

The Original BEPS Action Plan

In 2015, the OECD and G20 released the BEPS Project, a package of 15 Actions to combat tax avoidance. The measures focused on three goals: coherence in tax rules, requiring substance for economic activities, and promoting transparency. Coherence aimed to neutralize financial arrangements that exploited gaps between countries’ tax systems. The principle of substance sought to align taxation with genuine economic activity, preventing profit allocation to entities with little real business operations.

The most prominent transparency measure was Action 13, which established Country-by-Country Reporting (CbCR). This rule mandates that large MNEs with annual consolidated group revenue of €750 million or more must provide tax authorities with a detailed annual report breaking down financial data for every jurisdiction in which they operate.

The Two-Pillar Solution

To address the tax challenges of the digital economy, the OECD developed the Two-Pillar Solution. While many jurisdictions are implementing it, the framework’s future is uncertain after the United States announced in early 2025 that it would not adopt the rules and may take countermeasures against countries applying them to U.S. companies. This has fractured the global consensus. In parallel, the United Nations has begun developing its own international tax convention, with negotiations scheduled through 2027.

Pillar One – Re-allocation of Taxing Rights

Pillar One proposes a new way to allocate taxing rights beyond a company’s physical presence, but its implementation is stalled. The rules would apply only to the largest MNEs, generally those with global revenues over €20 billion and profitability above 10%. The main component, “Amount A,” would reallocate a portion of an MNE’s residual profits to market jurisdictions where its customers are located. Residual profits are defined as those exceeding a routine level of return, and this mechanism ensures countries can tax profits from local consumers regardless of a company’s physical presence.

Another part, “Amount B,” simplifies pricing for baseline marketing and distribution activities. This was incorporated into the OECD’s Transfer Pricing Guidelines in February 2025, allowing jurisdictions to apply this standardized framework.

Pillar Two – Global Minimum Tax

Pillar Two introduces a global minimum corporate tax rate of 15%. It ensures that large MNEs, those with annual revenues of €750 million or more, pay a minimum effective tax rate on their income in every jurisdiction where they operate. If a company’s effective tax rate in a country is below the 15% floor, the rules trigger a “top-up tax” to bring the total tax paid on those profits to the minimum level.

The mechanics of Pillar Two are implemented through the Global Anti-Base Erosion (GloBE) rules. The primary rule is the Income Inclusion Rule (IIR), which is applied by the country where the MNE’s ultimate parent entity is located. If a subsidiary of that MNE pays an effective tax rate below 15% in a low-tax jurisdiction, the IIR allows the parent company’s home country to collect the top-up tax, effectively taxing the undertaxed foreign income.

A secondary backstop rule, the Undertaxed Payments Rule (UTPR), comes into play if the IIR cannot be applied. This can happen if the ultimate parent entity’s jurisdiction has not implemented the IIR, as is the case with the United States. The UTPR then allows other countries in which the MNE group operates to collect any remaining top-up tax, often by denying tax deductions for payments made to the low-taxed entity.

A related component is the Subject to Tax Rule (STTR), a treaty-based rule allowing developing countries to apply a source-country tax on certain intra-group payments like interest and royalties. This applies when the income is subject to a nominal corporate tax rate below 9% in the recipient’s country. The STTR takes priority over the GloBE rules, and any tax paid under it is credited when calculating the GloBE top-up tax.

Compliance and Reporting Requirements

The BEPS framework includes significant data gathering and reporting obligations for MNEs. These requirements provide tax authorities with the information needed to assess risks and enforce the rules from both the original BEPS project and Pillar Two.

Country-by-Country Report

Introduced under Action 13 of the original BEPS plan, the Country-by-Country (CbC) Report is a transparency tool. Large MNEs with annual consolidated revenue of €750 million or more must file this report annually. It requires the company to provide an aggregate breakdown of financial and operational data for each tax jurisdiction where it has a constituent entity. This information gives tax administrations a high-level overview of the MNE’s global allocation of income and economic activity, helping them to spot indicators of potential profit shifting. Required data points include:

• Total revenues, broken down between related and unrelated parties
• Profit or loss before income tax
• Income tax paid on a cash basis and income tax accrued
• Stated capital and accumulated earnings
• The total number of employees
• The net book value of tangible assets

GloBE Information Return

The implementation of Pillar Two introduced the GloBE Information Return (GIR). This standardized return is required for all MNEs within the scope of the Pillar Two rules. The purpose of the GIR is to provide tax administrations with the data needed to calculate a company’s effective tax rate (ETR) and any top-up tax liability in each jurisdiction.

The GIR demands a vast amount of standardized data, often exceeding what was required for previous tax filings. Companies must gather detailed information from their financial accounting systems on items needed to compute the GloBE income or loss. The return is structured to walk through the complex GloBE calculations, from determining the MNE group’s structure to computing the ETR and allocating the top-up tax under the IIR and UTPR. The GIR is filed in a standardized XML format, facilitating automatic exchange of information between tax authorities.