Base Erosion Profit Shifting Outsourcing
Definition
Base Erosion Profit Shifting Outsourcing
Base erosion and profit shifting in outsourcing describes arrangements moving taxable profit to low-tax countries through offshore structures. A global minimum tax now sets a floor under it, though a 2025 deal carved out United States parented groups.
The phrase covers a spectrum. At one end sits genuine offshore delivery that happens to be cheaper — at the other, structures whose only function is to relocate profit.
Tax authorities stopped trying to police that spectrum case by case. The response was a minimum rate applied everywhere, which makes the location of profit matter less.
Outsourcing buyers meet the rules through their own offshore entities rather than through supplier contracts — which is a narrower reach than the phrase suggests.
Key takeaways
- The global minimum applies a 15% effective rate to large multinational groups.
- Three rules operate in sequence: a domestic top-up, an income inclusion rule, then a backstop.
- The 2025 side-by-side understanding excludes United States parented groups from two of them.
- Substance matters more than structure, because real people doing real work still justify real profit.
How it works
The minimum tax works by calculating an effective rate for each jurisdiction and charging a top-up wherever it falls below the threshold. Which country collects that top-up is decided by a fixed order of priority.
The European Parliament’s research service sets out the sequence. Pillar Two “applies a 15 % global minimum effective tax rate using a hierarchical rule order”, implemented in the European Union by Council Directive (EU) 2022/2523.
| Rule | Who applies it | What it does |
|---|---|---|
| Qualified domestic minimum top-up tax | The low-taxed jurisdiction | Takes first claim on its own undertaxed profit |
| Income inclusion rule | The ultimate parent’s jurisdiction | Tops up remaining low-taxed foreign profit |
| Undertaxed profits rule | Other group jurisdictions | Acts as a backstop where neither of the above applies |
The architecture changed direction in 2025. The Group of Seven issued a statement on 28 June under which “a side-by-side system would fully exclude U.S. parented groups from the UTPR and the IIR” in respect of both their domestic and foreign profits.
That exclusion recognises the existing United States minimum tax on foreign earnings rather than abolishing the idea of a floor — and the package codifying it was released in early 2026.
Substance-based carve-outs run through all of it. Groups can exclude a return on tangible assets and payroll in each jurisdiction, which deliberately protects arrangements where real people do real work offshore.
Examples
The rules reach outsourcing through group structures rather than through vendor relationships, which is a distinction buyers routinely get backwards. The four cases below show where they bite and where they have nothing to work on.
A group with a Manila delivery entity paying a low effective rate under local incentives finds that the top-up simply relocates the saving to another government, which changes the value of the incentive.
A technology company holding its intellectual property in a low-tax jurisdiction while its engineers sit in Kraków faces the awkward question of which country the profit belongs to.
A multinational that buys the same work from an independent Philippine provider is unaffected. There is no controlled entity, so there is no profit to reallocate.
A United States parented group operating captives in India and the Philippines falls outside the income inclusion and backstop rules under the side-by-side understanding, while its competitors headquartered elsewhere do not.
Related terms
These rules interact with incentive regimes and with the choice between owning and buying offshore capacity. The entries below cover both sides of that decision.
- Tax outsourcing: the compliance function that has to model all of this.
- BPO tax incentives: local reliefs whose value a minimum tax can erase.
- Tax incentives and fiscal incentives: the wider category of location-based reliefs.
- SEZ India: Indian zones offering exactly the kind of relief now capped.
- PEZA: the Philippine equivalent, with the same interaction.
- Captive center: the owned structure that brings a group inside these rules.
- Global capability center (GCC): the same exposure under a newer name.
FAQ
Does this apply to buying services from a third party?
No. The rules reach entities inside a multinational group. An arm’s length contract with an independent provider does not create profit to reallocate.
What is the threshold rate?
15%, measured as an effective rate per jurisdiction rather than as a headline statutory rate.
Do offshore tax incentives still work?
Partly. A group inside scope may find the benefit topped up elsewhere, though substance-based carve-outs protect a return on local payroll and assets.
What did the side-by-side deal change?
It excludes United States parented groups from the income inclusion rule and the undertaxed profits rule, recognising their existing domestic minimum tax instead.
Which groups are in scope?
Large multinational groups meeting the revenue threshold. Smaller buyers and most independent providers sit outside the regime entirely.
Does substance still matter?
Yes, more than before.
See how delivery location and tax structure interact across markets at Outsource Accelerator.
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