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Direct Tax Laws & International Taxation · Fundamentals of BEPS

Introduction to BEPS and the OECD/G20 Project (CA Final International Taxation)

Updated 5 October 2026 · Fact-checked

BEPS (base erosion and profit shifting) means tax planning by multinational enterprises that uses gaps and mismatches in tax rules to shift profits to low-tax places where little real activity exists, eroding the tax base of other countries. The OECD/G20 BEPS project responds with 15 Action Plans. To answer, define BEPS, give causes, state objectives, then list the actions under their themes.

Understand Introduction to BEPS and OECD/G20 Project

Base erosion means a country's taxable base shrinks because income is deducted away or moved out. Profit shifting means profits are moved on paper to a low-tax or no-tax jurisdiction, even though the real activity, people and assets are elsewhere. Together they are called BEPS.

BEPS mostly does not involve breaking the law. It uses gaps, mismatches and loopholes between the tax systems of different countries, and weaknesses in treaties and transfer pricing rules. That is why it is described as aggressive tax planning or avoidance, not evasion.

Why it arose: domestic tax rules were built for businesses that operated within borders, and treaty rules were designed to prevent double taxation. Globalisation and the digital economy let groups earn income with little physical presence. Intangibles, intra-group financing and risk allocation are easy to move. Treaties and mismatched rules sometimes produced double non-taxation. After the 2008 financial crisis, governments under budget pressure and public concern about low taxes paid by large groups pushed the issue onto the political agenda.

The response: the G20 asked the OECD to act. The OECD published a report on addressing BEPS and then an Action Plan in 2013. The 15 Action Plans were delivered as final reports in October 2015 and endorsed by the G20. The project was later extended through the Inclusive Framework on BEPS, so that more countries, not only OECD and G20 members, take part on an equal footing.

Objectives: align taxation with where economic activity and value creation take place, restore the effectiveness of international tax rules, improve coherence of domestic rules across countries, increase transparency, and give more certainty to taxpayers and tax administrations. The OECD groups the actions under four themes: coherence, substance, transparency and certainty. Actions 2, 3 and 4 fall under coherence. Actions 5, 6, 7 and 8 to 10 fall under substance. Actions 11, 12 and 13 fall under transparency. Action 14 (dispute resolution) is the certainty element. Action 5 is placed under substance but also has a transparency element, because it requires spontaneous exchange of information on certain tax rulings. Action 1 (digital economy) and Action 15 (multilateral instrument) are cross-cutting actions that are not tied to a single theme.

Key rules to remember

Meaning of BEPS
BEPS = Base erosion (shrinking taxable base) + Profit shifting (moving profits to low-tax places without matching activity)
Use this one-line definition at the start of any theory answer.
Three guiding themes
Coherence + Substance + Transparency (plus certainty and dispute resolution)
Coherence of domestic rules, alignment of taxation with substance and value creation, and transparency.
15 Action Plans (grouped)
1 Digital economy | 2 Hybrid mismatches | 3 CFC rules | 4 Interest deductions | 5 Harmful tax practices | 6 Treaty abuse | 7 PE status | 8-10 Transfer pricing outcomes and value creation | 11 Measuring BEPS | 12 Mandatory disclosure | 13 Transfer pricing documentation and CbCR | 14 Dispute resolution | 15 Multilateral instrument
Learn the numbers with their themes. Actions 8 to 10 cover intangibles, risks and capital, and other high-risk transactions.
Minimum standards
Actions 5, 6, 13 and 14
These are the four minimum standards that participating countries in the Inclusive Framework committed to implement.

How to solve Introduction to BEPS and OECD/G20 Project questions

Use this method for theory questions and case scenarios on BEPS background and the project.

  1. 1Define BEPS in one sentence: base erosion plus profit shifting, using gaps and mismatches, usually not illegal.
  2. 2If a case is given, identify the structure used: low-tax entity, intra-group payment, hybrid instrument, treaty route or artificial absence of presence.
  3. 3State why the rules allowed it: mismatch between countries, weak anti-abuse rules, or lack of nexus rules for the digital economy.
  4. 4Link the structure to the matching Action Plan by number and name.
  5. 5State the objective that action serves: coherence, substance or transparency.
  6. 6Say whether the action is a minimum standard, a common approach or best practice, where the question asks.
  7. 7Conclude with the effect: profit is taxed where activity and value creation occur.

Quickest way: Theme-to-action mapping

When to use it: When time is short and the question asks you to list or match Action Plans.

  1. Write the four themes: coherence, substance, transparency, certainty.
  2. Put actions 2, 3 and 4 under coherence and anti-mismatch domestic rules.
  3. Put actions 5, 6, 7 and 8 to 10 under substance and alignment with value creation. Note that Action 5 also has a transparency element, because of the exchange of information on rulings.
  4. Put actions 11, 12 and 13 under transparency (measuring BEPS, mandatory disclosure, and documentation with country-by-country reporting). Put Action 14 under certainty (dispute resolution).
  5. Add Action 1 for the digital economy and Action 15 for the multilateral instrument as cross-cutting actions.
  6. Mark actions 5, 6, 13 and 14 as minimum standards.

Common mistakes in Introduction to BEPS and OECD/G20 Project

  • Calling BEPS tax evasion

    Both reduce tax paid, so they sound alike.

    Fix: BEPS exploits gaps within the law and is avoidance, often aggressive. Evasion is illegal concealment.

  • Saying BEPS is a binding treaty or law

    The word project is mistaken for legislation.

    Fix: The OECD/G20 outputs are recommendations, standards and tools. Countries implement them through domestic law and treaties, and the multilateral instrument modifies treaties.

  • Mixing up action numbers

    Students memorise the list without themes.

    Fix: Learn by group: 2 to 4 coherence, 5 to 7 and 8 to 10 substance, 11 to 13 transparency, 14 certainty (dispute resolution). Actions 1 (digital economy) and 15 (multilateral instrument) are cross-cutting. Remember that Action 5 sits under substance but also has a transparency element (exchange of rulings).

  • Listing only OECD members as participants

    The project is called OECD/G20 and the Inclusive Framework is forgotten.

    Fix: Mention that non-OECD and non-G20 countries also take part through the Inclusive Framework. India, as a G20 member, participated from the beginning.

  • Treating all actions as mandatory

    Minimum standards are not separated from other outputs.

    Fix: State that only actions 5, 6, 13 and 14 are minimum standards. Others are common approaches or best practices.

  • Writing only the definition and skipping causes and objectives

    Students assume the topic is short.

    Fix: Cover meaning, causes, response, objectives and structure so each marking point is earned.

Worked examples

Example 1

A multinational group sells software worldwide. Its Indian subsidiary earns small margins and pays large royalties to a group company in a country with a very low tax rate. That company has few employees and no real development activity. (a) Name the phenomenon. (b) Explain why it arose. (c) Identify the relevant objective of the OECD/G20 BEPS project.

Show the solution
  1. The royalties are deductions in India, so the Indian base shrinks. The income lands in a low-tax entity. This is base erosion and profit shifting.
  2. It arose because the tax rules treat group entities separately and allow deductions for intra-group payments. The low-tax entity has legal ownership of the intangible but little substance, and country rules did not test where value was created.
  3. The BEPS project aims to align taxation with economic activity and value creation, so the profit from intangibles should follow the people performing the important functions, not just legal ownership. The related work is under Actions 8 to 10 on transfer pricing outcomes.
  4. The arrangement is aggressive tax planning using the rules, not necessarily evasion.

Answer: This is BEPS: base erosion in India through royalty deductions and profit shifting to a low-tax entity without substance. It arose from gaps in separate-entity and intra-group pricing rules. The BEPS objective of aligning taxation with value creation, mainly Actions 8 to 10, addresses it.

Example 2

A student says: 'The BEPS project is a convention of the OECD that forces all countries to change their tax laws, and it has 15 actions that are all minimum standards.' Evaluate the statement.

Show the solution
  1. The BEPS project is an OECD/G20 initiative. It produced reports with recommendations, not a convention that compels countries.
  2. Countries implement through domestic law and treaty changes. The multilateral instrument under Action 15 is a separate convention that countries choose to sign, to update treaties.
  3. Only four actions are minimum standards: 5 harmful tax practices, 6 treaty abuse, 13 transfer pricing documentation and country-by-country reporting, and 14 dispute resolution. Participating countries in the Inclusive Framework commit to these and are peer reviewed.
  4. The other actions are common approaches or best practices that countries may adopt.

Answer: The statement is wrong. BEPS outputs are not binding on their own, and only Actions 5, 6, 13 and 14 are minimum standards. Others are recommended approaches or best practices.

Exam tips

  • Start every theory answer with the meaning of BEPS and then structure the rest as causes, response, objectives and actions.
  • Learn the 15 actions by theme and number. Marks are often given for correct name and number.
  • In case scenarios, name the structure first and then map it to the relevant action.
  • Keep the minimum standards (5, 6, 13, 14) ready, because they are frequently asked.
  • Do not quote figures on revenue loss unless the question gives them.

Practice questions from Fundamentals of BEPS

Introduction to BEPS and OECD/G20 Project: frequently asked questions

What is BEPS in simple words?

It is the practice of using gaps and mismatches in tax rules to move profits to low-tax places where little real activity takes place. This reduces the tax paid in the countries where the business is actually carried on.

How many Action Plans are there in the OECD/G20 BEPS project?

There are 15 Action Plans. The final reports were released in October 2015. They cover the digital economy, hybrid mismatches, CFC rules, interest deductions, harmful tax practices, treaty abuse, PE status, transfer pricing, data, disclosure, documentation, dispute resolution and the multilateral instrument.

Is BEPS legal?

Most BEPS arrangements use the existing rules and gaps between systems, so they are avoidance, not evasion. Countries respond by changing laws and treaties, and anti-avoidance rules can deny the benefit.

What are the minimum standards under BEPS?

They are Actions 5, 6, 13 and 14. These cover harmful tax practices, treaty abuse, transfer pricing documentation with country-by-country reporting, and dispute resolution. Countries in the Inclusive Framework commit to implement them.