The Emergence of a New International Tax Regime: The OECD’s Package on Base Erosion and Profit Shifting (BEPS)

Itai Grinberg & Joost Pauwelyn
October 28, 2015


International tax law is rarely discussed amongst public international lawyers. Tax policy is highly technical and perceived as one of the last bastions of Westphalian sovereignty. Cross-border tax cooperation is difficult, as it is inevitably distributional: tax revenues, the “lifeblood of the state,” are split among countries. With origins in work undertaken by the League of Nations in the 1920s, international tax law is centered on a network of more than 3,800 bilateral tax treaties.  Little progress had been made towards a multilateral tax regime, until recently. 

In October 2015, the Organisation for Economic Co-operation and Development (OECD) released its final “Base Erosion and Profit Shifting” (BEPS) Package.[1] This Package, negotiated in just over two years, includes reports on fifteen “actions” ranging from countering harmful tax practices and treaty shopping to addressing transfer pricing, interest deductibility, and transparency to exploring the tax implications of the digital economy.  G20 leaders are expected to formally approve the BEPS Package at their next summit in Antalya, Turkey from November 15–16, 2015.  According to the OECD, the BEPS Package “represents the first substantial—and overdue—renovation of the international tax standards in almost a century.”[2]

What enabled this unprecedented standard-setting effort in such a challenging area, at a time when multilateralism seems broken in other fora, ranging from the United Nations (UN) to the World Trade Organization (WTO)?  Will the BEPS Package be implemented? And what systemic challenges does it raise for international tax law and public international law more broadly?

Explaining the BEPS Success

Three main factors explain the BEPS negotiating outcomes: political salience, informality of process, and variable normativity of outputs.[3]

First, the financial crisis and resulting public austerity elevated international tax issues onto the global political agenda.  Citizens around the world became more focused on the erosion of the corporate income tax base than ever before.  As a result, corporate tax avoidance—estimated by the OECD to cost countries between 100 and 240 billion US$ annually[4]—is of increasing concern in both developed and developing countries.  Interests are aligned, in this limited sense, facilitating cooperation.  Increased political salience moved international tax discussions beyond technical expert committees at the OECD and into the limelight of the G20.  Higher political salience also increased the propensity for broad agreements of principle among the strongest states.  In two years, BEPS produced agreement on issues that technical experts had not even been prepared to broach for decades. 

Second, like the recent spurt in international financial cooperation, the BEPS Package was spearheaded politically by the G20, which sets the broad agenda, and then convenes working groups at the technical level in specialized, club-style settings: for tax, the OECD; for finance, institutions like the Basel Committee or Financial Action Task Force.[5]  In both rulemaking ventures, the UN was sidelined.  Negotiating issues amongst experts within a smaller club of more developed and larger economies facilitates agreement.  Yet this approach has also faced criticism for lack of inclusiveness and legitimacy.  At the July 2015 UN summit on financing for development in Addis Ababa, Ethiopia, civil society groups and developing countries attempted to move the tax debate to the UN, including by upgrading the UN expert committee on tax to a new UN agency and giving all countries a seat at that table.[6]  These attempts failed. At the same time, the OECD did make efforts to become more inclusive. Reaching beyond the 34 OECD members and 8 non-OECD members of the G20, the BEPS Package was developed with “more than 60 countries directly involved in the technical groups and many more participating in shaping the outcomes through regional structured dialogues.”[7]

Third, not only the BEPS process but also its output is non-traditional, both in comparison to formal international law and relative to traditional OECD outputs in the tax area.  The BEPS Package, though formally approved by all OECD and G20 members, is not a legally binding treaty.  Rather, it comprises reports containing a variety of commitments.  BEPS changes to the existing OECD Model Treaty and Transfer Pricing Guideline continue in the tradition of OECD soft tax law.  Other agreements in the Package take the form of “minimum standards,” to which countries make a political commitment (e.g. on treaty shopping, country-by-country reporting, or fighting harmful tax practices) or set out best practices or recommendations (e.g. on hybrid mismatch arrangements or interest deductibility). 

The Package contains hard law too: Action 15 launches negotiations towards a binding multilateral treaty to update the global network of bilateral tax treaties to implement treaty-based BEPS measures in a synchronized manner. This technique is similar to that used by the 2014 multilateral Mauritius Convention,[8] which updated the transparency provisions in scores of bilateral investment treaties by using the lex posterior rule in Article 30 of the Vienna Convention on the Law of Treaties.

Will BEPS Work?

Whether the BEPS Package will be implemented and achieve its stated goal to “restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created” remains an open question.[9]

Beyond the specifics of the proposed rules are three important dynamics.

BEPS is Partly Self-Enforcing

There is little doubt that major parts of the BEPS Package will be implemented:  in particular, BEPS measures reflected in changes to the OECD Model Tax Treaty or Commentary that are unusually self-enforcing for soft law.[10] In what is something of an aberration to many public international lawyers,[11] in many countries (including non-OECD members), the OECD Model Treaty and Commentary are in large measure automatically incorporated into existing tax treaties through interpretation by national courts or reliance by national tax administrations.[12] No formal treaty amendments or national ratifications are required to achieve this impact. Rather than under-compliance, over-compliance may be the concern here, especially in (developing) countries that were not involved in the BEPS negotiations in the first place.

U.S. courts have not followed this trend, and they rely less on the OECD Model. U.S. observers have also been among the most vocal critics of BEPS.[13] BEPS implementation in the United States may therefore lag behind. In most other fields, non-cooperation by the United States would be fatal. Not so in international tax, where the bargaining power of the U.S. is relatively weak and multilateral discussions without U.S. support can constrain U.S. national interests. This is the result of a high U.S. corporate tax rate and the “deferral” system the U.S. uses to tax foreign subsidiaries of U.S.-resident multinational corporations (U.S. MNCs). The U.S. rules are globally aberrant and the subject of legislative reform efforts. For now, however, to level the playing field with foreign competitors, U.S. MNCs rely heavily on the tax treatment of “foreign-to-foreign” cross-border transactions between their foreign subsidiaries abroad. As a result, for U.S. MNCs, what foreign parliaments do and how they tax cross-border income between foreign subsidiaries can matter as much as or more than developments in the U.S. Congress. Put differently, the impact of BEPS on U.S. MNCs depends largely on what foreign countries do. The result is an absence of U.S. veto power in the international sphere. That is bad news for the United States. But it also facilitates implementation of the BEPS Package, with or without U.S. cooperation.

Ensuring compliance with BEPS measures outside the OECD Model may prove more difficult. The BEPS Package establishes monitoring and peer review, but like all soft or informal law, implementation of measures with a clear distributional impact—such as most tax cooperation rules other than transparency and exchange of information—may prove particularly difficult.

BEPS Needs Binding Arbitration

As much as the increased public salience of tax policy across the globe facilitated reaching broad political agreement on BEPS, the injection of politics into the process also made the rules vaguer and more flexible. For example, pre-BEPS rules on transfer pricing were broadly criticized, but they were also firmly established and limited the range of disputes faced by taxpayers engaged in cross-border trade and investment. Broadly framed BEPS changes may make political sense, but because of their vagueness, in practice they are likely to lead to major differences in interpretation and disputes between tax authorities. Indeed, in public presentations, the national delegates that participated in negotiations of the revised transfer pricing guidelines are already providing conflicting interpretations of agreed language. Meanwhile, improved corporate tax transparency thanks to BEPS will also highlight the “tax pie” to be divided among countries, potentially fueling additional disputes and creating serious barriers to cross-border trade and investment.

In the context of more transparency, vaguer standards, and important distributional consequences, third-party dispute settlement will be indispensable. Action 14 identifies mainly non-binding ways to make dispute resolution mechanisms under bilateral tax treaties (the so-called Mutual Agreement Procedure or MAP) more effective. But it falls short of imposing binding arbitration. Twenty countries (including the United States, Canada, Japan, Australia, and several European countries) declared their commitment to provide for mandatory binding arbitration in their bilateral tax treaties. However, no developing country is on this list, and future disputes between, for example, the United States and India or Brazil are those most likely to bog down the post-BEPS tax environment (54% of U.S. MAPS currently pending are with India). In addition, where current tax treaties do provide for binding MAP arbitration, it is purely bilateral and mostly “baseball style” (each party discloses its final offer and the arbitrator’s task is simply to pick one of the two proposals). In the wake of BEPS, tax disputes are likely to be multi-country income-based (rather than two-country transaction-based) disputes. “Baseball style” arbitration is by definition between only two parties and does not develop case law.  At least in some cases, reason-based arbitration will be needed to clarify and refine the new, vaguer rules.

Effective implementation of BEPS will require effective third-party arbitration. If tax treaties do not provide that outlet, litigants will draw in neighboring regimes and use, for example, investment treaties or WTO or free trade agreements to settle tax disputes. This trend has already begun, most prominently with the Yukos arbitration under the Energy Charter Treaty[14] and the Panama/Argentina Tax Haven dispute before the WTO.[15] These neighboring investment and trade treaties do provide for compulsory adjudication (albeit with limited tax carve-outs) but are not the most appropriate fora to interpret and develop the meaning of complex tax rules. If tax authorities and ministries of finance want to retain control, they would be well advised to establish dedicated tax tribunals. The alternative is to be sidelined by trade officials or foreign affairs/state department diplomats.

BEPS and International Trade and Investment Law

The OECD heralds the BEPS Package as a “holistic response” to tax avoidance and tax base erosion.[16] As comprehensive as the Package may be within the international tax field, it builds no bridges to other fields of international cooperation, especially international trade and investment law. The main tax imperative of the day is, granted, the problem of “stateless income.” However, double taxation is not far off and is consistently raised as one of the top concerns of companies trading or investing across borders. To the extent tax policy is inextricably linked to cross-border trade and investment, the BEPS Package will need to be implemented with an eye to BEPS countries’ WTO and other trade and investment treaty commitments. If not, inconsistencies loom, and BEPS outcomes may be undone or warped beyond recognition (to the displeasure of tax administrations, companies, or both) at the WTO or under bilateral investment treaties.


Public international lawyers should take notice of exciting developments in international tax law. After close to a century of relative stagnation, at the multilateral level major reforms are under way, just as global coordination in other international economic law disciplines is slowing. A new international tax regime is emerging, and with it novel ways of binding arbitration will need to be designed. Meanwhile, in this new environment, international tax lawyers and negotiators should be aware that they operate on a larger scene and carefully examine the interactions of tax law with other fields of international law, especially trade and investment law.

About the Authors: Itai Grinberg, an ASIL Member, is Associate Professor, Georgetown Law. He previously served in the Office of International Tax Counsel of the United States Treasury, where he represented the United States at the OECD. Joost Pauwelyn, an ASIL Member, is Professor, Graduate Institute, Geneva and Visiting Professor, Georgetown Law.


[1] Organisation for Economic Co-operation and Development [OECD]/G20, Base Erosion and Profit Shifting (BEPS) Package (2015), available at

[2] OECD/G20 BEPS Project, Explanatory Statement ¶ 8 (2015) [hereinafter Explanatory Statement].

[3] See Joost Pauwelyn, Ramses Wessel & Jan Wouters, When Structures Become Shackles: Stagnation and Dynamics in International Lawmaking, 25 Eur. J. Int’l L. 733, 733–763 (2014).

[4] Explanatory Statement, supra note 2, ¶ 2.

[5] See Itai Grinberg, Breaking BEPS: The New International Tax Diplomacy, Geo. L. J. (forthcoming 2016); Chris Brummer, Soft Law and the Global Financial System (2d ed. 2015).

[6] See Eliza Anyangwe, Glee, Relief and Regret : Addis Ababa Outcome Receives Mixed Reception, The Guardian (July 16, 2015),

[7] Explanatory Statement, supra note 2, ¶ 4.

[8] United Nations Convention on Transparency in Treaty-based Investor-State Arbitration [Mauritius Convention], adopted Dec. 10, 2014, 54 I.L.M. 747.

[9] Explanatory Statement, supra note 2, ¶ 1.

[10] See Grinberg, supra note 5.

[11] Michael Lang, Tax Treaty Interpretation 25–27 (2001).

[12] Id.

[13] See Gary Hufbauer, Euijin Jung, Tyler Moran & Martin Vieiro, The OECD’s  Action Plan  to Raise Taxes on Multinational Corporations,  Peterson Institute for International Economics, Sept. 2015.

[14] Yukos v. Russia, PCA Case No. AA 227, Final Award (Perm. Ct. Arb. 2014),

[15] Panel Report, Argentina – Measures Relating to Trade in Goods and Services, WTO Doc. WT/DS453/R (adopted Sept. 30, 2015) (under appeal).

[16] Webcasts: Launch of 2015 BEPS Report, Press Conference with Pascal Saint-Amans, OECD (Oct. 5, 2015),