Previous Year Question
The term ‘Base Erosion and Profit Shifting’ is sometimes seen in the news in the context of
mining operation by multinational companies in resource-rich but backward areas
curbing of the tax evasion by multinational companies
exploitation of genetic resources of a country by multinational companies
lack of consideration of environmental costs in the planning and implementation of developmental projects
Correct Answer: B
Detailed Solution
Base Erosion and Profit Shifting—BEPS refers to tax-planning strategies through which multinational enterprises exploit gaps and mismatches between national tax systems to shift profits to jurisdictions where the applicable tax rate is low or zero.
The expression has two components:
Base erosion: Artificially reducing taxable income and thereby eroding the tax base of the country where substantive economic activity occurs.
Profit shifting: Using accounting or legal arrangements to report profits in a jurisdiction where the tax rate is very low or zero.
For example, a multinational enterprise may undertake substantial sales and economic activity in country ‘A’ but use royalties, interest payments or transfer-pricing arrangements to report most of its profit in low-tax country ‘B’. This reduces both its taxable profit and corporate-tax liability in country ‘A’.
Common BEPS arrangements include:
Manipulation of transfer pricing between associated enterprises.
Locating intellectual property in a low-tax jurisdiction and making excessive royalty payments.
Claiming unusually high interest deductions on intra-group loans.
Abuse of tax treaties through treaty shopping.
Artificial avoidance of permanent-establishment status.
Use of hybrid mismatch arrangements.
Shifting profits to tax havens without corresponding substantive economic activity.
The OECD and G20 launched the BEPS Project in 2013. A 15-Action Package was delivered in 2015, covering the digital economy, hybrid mismatches, controlled foreign-company rules, interest deductions, harmful tax practices, treaty abuse, permanent establishment, transfer pricing, country-by-country reporting and dispute resolution.
Option (b) uses the expression “tax evasion.” Technically, BEPS primarily concerns aggressive tax avoidance that exploits legal gaps and mismatches, although it may also overlap with unlawful tax evasion. The intended meaning of the option is international action to prevent multinational enterprises from avoiding legitimate tax liabilities.
The remaining options concern mining, genetic resources and environmental costs and are unrelated to BEPS.
Current position (2026)
International cooperation on BEPS is now pursued through the OECD/G20 Inclusive Framework on BEPS, involving more than 140 countries and jurisdictions.
Four minimum standards are particularly important:
Countering harmful tax practices.
Preventing tax-treaty abuse.
Country-by-Country Reporting—CbCR.
Improving the resolution of cross-border tax disputes.
Under Pillar Two of BEPS 2.0, the objective is generally to ensure a minimum 15% effective tax rate for large multinational groups having consolidated annual revenue of at least €750 million.