How do you solve a problem like profit shifting?

Turkey G-20 Summit (Anadolu Agency via AP Pool)

In the acronym-heavy world of economic policymaking, even the phrase “the OECD and G-20’s new BEPS project” can furrow some brows. In clearer terms, it’s a project focused on the problems of base erosion and profit shifting in corporate taxation, put forward by the Organisation for Economic Co-operation and Development and the Group of Twenty, a forum for the world’s largest economies.

Even after sorting through the jargon, the plain-English description still doesn’t jump out at the average reader. But the proposed reforms are a good window into the complicated world of corporate taxation—and the possible paths to reforming the system.

To pull back slightly, let’s address what base erosion and profit shifting actually are. In essence, the two problems are really one. With the current global corporate taxation system, companies have found ways to shift their profits to countries that have very low corporate tax rates or even no corporate tax rate at all. This, in turn, erodes the tax base for the country where the economic activity actually occurred. In short, profits get taxed at a lower rate, and the home countries have a smaller amount of money to potentially raise revenue from.

These two trends make the tax system less progressive in two ways. The first way is by reducing the taxation of profits that will end up going to the shareholders, who are disproportionately higher-income households. The second way is by reducing the amount of potential tax revenue—and raising the same amount of revenue from the population may require increasing taxes on households lower down on the income ladder.

So how would the BEPS project go after the problem of profit shifting? The proposals are numerous and varied, including very specific calls for changing specific tax treatments. But the central call is to make sure that so-called “stateless income,” or income that can’t be traced back to a specific country, is no longer stateless. One suggestion from the proposal is to make companies report where they pay corporate taxes, and how much they pay. Such reporting would make corporate taxation more transparent and allow governments see where profits are flowing.

The idea of more centralized information sharing about the flows of corporate profits has spooked some in the business community. But for some critics of the current corporate taxation system, the reforms don’t go far enough. In a piece for The Guardian, University of California, Berkeley economist Gabriel Zucman writes that the reforms just paper over the inherent flaws in the system. A move toward formulary apportionment at the international level, says Zucman, would help make sure profits are taxed where the economic activity actually occurs.

The problem of opacity isn’t restricted to the profits of public corporations, however—business income in the United States is increasingly shifting toward forms of businesses that are less transparent, such as partnerships. In a paper tracing the source of business income, researchers found that 30 percent of partnership income was hidden in some way.

The process of reforming the global corporate tax system will be a complex and lengthy process. But it seems clear that having stateless income hidden from the light isn’t a solid state of affairs moving forward. Income that’s got it made in the shade should, perhaps, be taxed.