handbook-tb

Eric M. ZoltThe insight here is that increasing the relative tax burden of thoseactivities not qualifying for tax benefits will increase the relative attractivenessof conducting activities that qualify for tax incentives. Phraseddifferently, foreign investors have two options for decreasing tax liabilityrelated to activities in a country — they can use base erosion and profitshifting techniques to avoid paying taxes, or they can seek tax incentives.By reducing the availability of techniques to shift profits outsidethe country, the relative attractiveness of tax incentives will increase.4.2.2 Relative tax burdens in doing business in developing anddeveloped countriesIf the OECD project on BEPS succeeds in better matching economicactivity with reported taxable income, then the cost of doing businessin developed countries will increase. 46 This increase in tax burdens indoing business in developed countries will likely make the tax regimes ofdeveloping countries relatively more attractive. The key determinationis whether tax reform changes resulting from the BEPS project increasethe tax burdens of doing business in developed countries more thanthey increase the tax burdens of doing business in developing countries.There are two primary reasons why the effective increase in taxburdens will be greater in developed than in developing countries. First,some of the proposed recommendations may be more easily adoptedand implemented in countries that have the capacity to administerand enforce very complex rules to counter very complex structures toavoid tax liability. Second, if multinational enterprises can no longerconduct operations in developed countries and shift profits to low-taxjurisdictions, then the relative attractiveness of locating economicactivity in developing countries will increase, especially with theavailability of tax incentives.4.3 Additional toolsOne exciting aspect of the OECD project on BEPS is the potential toprovide tax authorities with additional tools to improve tax collection46International Monetary Fund, “Spillovers in International CorporateTaxation,” (2014) IMF Policy Paper.492