Page 12 - Working Paper (Measuring BEPS and Its Countermeasures in Indonesia: A Preliminary Research Guide)

DDTC Working Paper 1717
12

VECM is ideal to examine whether selected other factors that are very difficult to be utilized in
variables in the model have long-term and stable econometric model, like set of opportunities to shift
relationship. It thus enable us to identify the profit through each BEPS scheme, the existence
moving relationship during certain period of time of set of BEPS countermeasures, availability of
and estimate the future relationship along with mismatch corporate tax regulations that can be
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their determinants. But despite these advantages, exploited, advancement of tax planning, tax treaty
VECM is mostly unfeasible due to the characteristic networks, number of tax-haven jurisdiction, and
of BEPS. Recall that, in terms of outward many others.
characteristic, the attribute of BEPS is similar to
other form of real financial activity. In other words, Macro approach is also not useful to accurately
the portion of BEPS is most likely not significant in measure the effectiveness of specific BEPS
the total financial activity of a MNE. It then makes countermeasures. It can only estimate the influence
us difficult to catch robust relationship between of BEPS countermeasures in aggregate, without
main variables. specifying each of its effectiveness and quality of
the administrative implementation. Subsequently,
For example, if we use CIT revenue as impact- it can only take the outcome as the result of the
of-BEPS representation and CIT-rate difference existence of the countermeasures, but it cannot
as the variable incentivizing MNEs to artificially give hints or produce examinations on how specific
shift their profit, most likely there would be no countermeasure can or cannot perform well to
co-integration relationship between the two. The reach the policy objectives.
reason is basic, which is that the movement of CIT
So far, we can infer that macro approach might
revenue during certain period of time is influenced
give general idea about how big the magnitude
by many factors, with CIT-rate difference is only
of BEPS impact is, but produce low practicability
one among many other factors. Neutralizing the
for policy recommendations. Nevertheless, it does
influence by adding more variables representing
not imply that macro approach is not important.
the determinants besides CIT-rate difference can
Rather, macro approach is ideal as preliminary
be useful, but then another problem would rise
research which takes role as the basis for further
again: under time-series scenario, using VECM,
researches. It provide ground for succeeding other
we could not add too many variables. This would
approach and gives idea on which studies are
violate the degree of freedom level, especially if the
necessary and priority to be held.
length of time period is not big enough.
Then, if this is the case, OLS regression would IMF (2014) and Crivelli de Mooij and Keen
be the realistic approach. It is the method where (2015) have proceeded such approach giving idea
there is not much data specification requirements for the significance of BEPS practices among all
and relatively simpler. Using prior example, by countries and some group of countries. It does
using OLS, we can get result indicating the semi- not only support the proof that BEPS exists in
elasticity of CIT revenue due to the change of tax every countries, but also hints the difference of its
rate differential. However, we should remind that magnitude between countries that have relatively
OLS has some limitations in making interpretation. proper anti-tax avoidance rules and those who
One of the most important underlying assumptions are not between certain region – Europe and Non-
from OLS is that it regards the influence of CIT-rate Europe –, and between poor and rich countries.
difference toward CIT revenue to be constant over They find that the significance of BEPS is higher
time, or technically speaking, the relationship is among developing countries, especially in those
assumed to be linear during the time period. Thus, who are not equipped with solid anti-tax avoidance
although using OLS is a useful method of research, rules.
it oversimplifies the nature of BEPS.
4.3.2. Micro Approach
Overall, by using macro approach, we are
limited in determining the main determinant Unlike macro approach, the micro one is
representing the incentive of BEPS activity. We can not a suffice method to measure the aggregate
only use CIT-rate difference to be used as the factor magnitude of BEPS practices. Rather, it is more
that motivates or gives incentive to BEPS practices, ideally purposed to comprehend the idea about
since it is the only available factor that could be the BEPS actor behavior, not the magnitude of
quantified. But in fact, financial decision regarding BEPS itself. The term ‘micro’ itself hints that the
to BEPS practices is very complex. There are many measurement is done in corporate level, while
indicating the possibility of targeting certain
scheme of BEPS specifically.
37. Stata Manual. Internet, accessible through: http://www.stata.com/
manuals13/tsvecintro.pdf.