Page 6 - Working Paper (Measuring BEPS and Its Countermeasures in Indonesia: A Preliminary Research Guide)

DDTC Working Paper 1717
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2.2 The Implication of BEPS Although measuring the scale of BEPS proves
challenging given the complexity of BEPS and
BEPS practices has basically fiscal impact in the serious data limitation, today we know that
terms of the loss of government revenues, but the fiscal effects of BEPS are globally significant.
there are also other negative effects. For instance, The finding of many works performed even since
changes in corporate income taxes due to BEPS before 2013 highlight the magnitude of the issue.
behaviors and countermeasures also result in real Within economics literature on income shifting, the
economic effects, including effects on the incidence approach is mainly developed by Hines and Rice
(or economic burden) of taxes, business model (1994), while other approach from Dharmapala
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and corporate structure , debt bias and strategic and Riedel (2013), Kristiaji (2015), Crivelli, De
location of debt, misdirecting foreign direct Mooij and Keen (2014) and by Dyreng and Markle
investment (FDI) flow, investment and economic (2013) are notable as well.
growth and tax competition between countries
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(spillover effects) . These are all inefficiencies A representative consensus estimate from
produced due to business decision made by MNEs. the literature, based on a meta-regression study
by Heckemeyer and Overesch (2013), is a semi-
In addition, BEPS practices distort fairness and
elasticity of reported income with respect to the
equality in national development as well. Low tax
tax rate difference between an affiliate and its
paid by the MNEs shift the tax burden to domestic
parent (e.g. because the tax rate in the affiliate’s
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corporations and the society in general. In result,
country falls from 35% to 25%) would increase the
effective tax rate encountered by MNEs is lower
pretax income reported by the affiliate by 8% (for
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than the one faced by domestic corporations. This
example, from $100.000 to $108.000). This shift
circumstance would lead further inequality, since
from aggregate country-level datasets to firm-level
local corporations get difficult to compete with the
micro data has enhanced the credibility of more
MNEs.
recent estimates of BEPS.
3. The Need to Measure and Monitor Meanwhile, OECD suggests six indicators of
BEPS activity highlighting BEPS behaviors using
different sources of data, employing different
During the meeting held in Mexico in June
metrics, and examining different BEPS channels.
2012, The G-20 leaders have declared commitment
When combined and presented as a dashboard
stating that: “We reiterate the need to prevent
of indicators, they confirm the existence of BEPS,
base erosion and profit shifting and we will follow
and its continued increase in scale in recent years.
with attention the ongoing work of the OECD in
They include concentration of high levels of FDI
this area.” Subsequently, an action plan on BEPS
relative to GDP, differential profit rates compared
was produced in July 2013. It consists of fifteen
to effective tax rates, differential profit rates of top
specific substance that are intended to facilitate
MNEs between countries with different CIT rate,
multilateral cooperation among governments
effective tax rates of large MNE affiliates relative
with regard to the taxation of MNCs. The general
to non MNE entities with similar characteristics,
aim is to “better align rights to tax with economic
activity.” 24 concentration of high levels of royalty receipts
relative to research and development (R&D)
Accordingly, an important consideration is the spending and interest expense to income ratios of
magnitude of tax-motivated income shifting by MNE affiliates in high-tax locations. 25
MNCs. Diverse empirical approaches have been
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OECD reports find that :
used and each have its own way on describing
what is known about the magnitude of BEPS, and
• Higher profit rates of MNE affiliates are found
on interpreting the implications o these findings.
in lower-tax countries than other affiliate from
the same group located in higher-tax countries.
• MNE entities paid effective tax rates 4-8.5%
20. See, for example, Channing Flyinn and Stephen Bates, “The Impact lower than domestic enterprises with similar
of BEPS on the Digital Economy”, in BEPS is Broader than Tax: Practical
Business Implication of BEPS, International Tax Review (London: operations.
Euromoney Trading Limited, 2016).
• Foreign direct investment (FDI) increasingly
21. In the beginning, race-to-the-bottom competition in terms of CIT rate
was only purposed to attract real investment. But with the emerging of tax concentrated. Countries having FDI volume
haven jurisdictions, the pressure for such decision is getting stronger to two-fold of their GDP increased from 38 times
reduce BEPS practices as well. See OECD, Action Plan on Base Erosion higher than all other countries in 2005 to 99
and Profit Shifting (Paris: OECD Publishing, 2013): 17.
22. OECD, OpCit., 7-8. times higher in 2012.
23. See OECD, “BEPS Action 11: Improving the Analysis of BEPS”, BEPS
Public Discussion Draft (13 May 2015) 2015): 15-16. 25. OECD, Measuring and Monitoring BEPS, Action 11 – 2015 Final
24. See OECD, Action Plan on Base Erosion and Profit Shifting (Paris: Report (OECD, 2015): 47.
OECD Publishing, 2013): 8. 26. OECD, OpCit., 5.