Is Sunlight the Best Disinfectant? Reassessing BEPS Action 5's Tax Ruling Transparency

The OECD's BEPS Project was a major attempt to harmonize tax principles between jurisdictions and prevent tax motivated artificial profit shifting. One aspect of the BEPS Project is Action 5's tax ruling transparency framework. High-profile instances of tax avoidance, such as LuxLeaks and the Apple-Ireland state aid case, have only elucidated the extent to which tax authorities can use rulings to facilitate tax avoidance. However, it should not be expected that Action 5's tax ruling transparency will materially curb the use of rulings to aid tax avoidance.

For Action 5's transparency framework to achieve its goal, it must deter either countries from issuing favorable rulings that depart from the issuing country's tax laws and principles and other international tax norms or firms from utilizing these favorable rulings. This paper argues that Action 5 does not have this deterrent effect. However, when tax ruling transparency is coupled with a disgorgement mechanism, such as EU state aid law enforcement, transparency is likely to reduce the number of instances where tax rulings will serve as an effective tool to induce tax motivated income shifting. As such, this paper argues that a disgorgement mechanism, analogous to EU state aid law enforcement but with a different substantive backdrop, should be implemented to effectuate the desired behavioral responses to Action 5's tax ruling transparency.