Base erosion
Base erosion is the reduction of a country's taxable corporate profit through deductible payments, such as interest, royalties or management fees, made to related parties in lower-tax jurisdictions. When a company borrows internally from a low-tax affiliate, or pays it heavy royalties for intellectual property, those deductions eat away the profit that would otherwise be taxed locally. The profit does not vanish; it reappears as income somewhere that taxes it lightly or not at all. The OECD's entire BEPS project exists to address this. The OECD's 2015 assessment put the global revenue loss from these tools at roughly US$100-240bn a year.
ByLoopholeKiln EditorialPublished
Figures current as of·Corrections
← Tax-avoidance glossary: 31 terms in plain English
Example: an Australian retailer is owned by a Bermuda holding company that charges it a "management fee" worth 30% of revenue, wiping out most of the Australian taxable profit.
Why it matters to a small business: your tax base cannot be eroded because you have no low-tax parent to pay fees to. Every pound of profit you earn is taxed in full, where you earn it.