handbook-tb

Tax incentives: protecting the tax base4.2 Relative change in tax burdensThe effectiveness and desirability of tax incentives have the potentialto change substantially if the OECD project on BEPS succeeds inbetter matching reported taxable income with level of economic activity.This section examines two areas where tax changes resulting fromthe OECD project on BEPS could alter the relative attractiveness oftax incentives: first, the relative tax burdens between activities in adeveloping country that are not eligible and those that are eligible fortax incentives; and second, the relative tax burdens between activitiesconducted in developed and developing countries.4.2.1 Relative tax burdens of activities that qualify or do notqualify for tax incentivesA key factor in considering the effectiveness and desirability of taxincentives is how much the tax liability is reduced because of taxincentives compared to the tax liability incurred by the foreign investorin the developing country under the regular tax regime. While theprimary focus of the OECD project on BEPS is on how multinationalentities reduce their tax liability in developed countries, it is importantto appreciate that these corporations have used similar techniques indeveloping countries to shift taxable profits outside of the developingcountries while still conducting substantial sales and manufacturingactivities within the country.As discussed below, the OECD project on BEPS has the potentialto provide developing countries with additional tools that wouldaid in improving the ability of these countries to tax foreign investors.For example, it may set forth proposed measures to strengthen CFCrules or limit base erosion via interest deductions that would provideguidance to countries on how best to reform their tax rules to moreeffectively tax the income of foreign investors. Similarly, proposalsthat improve the quality of information available to tax authorities indeveloping countries have substantial potential to improve tax compliance.Here, improved rules regarding transfer pricing documentationand other OECD efforts with respect to country-by-country reportingwill likely aid increasing both the level of tax compliance and the effectivetax burden of doing business in a developing country.491