Page 11 - Working Paper (Measuring BEPS and Its Countermeasures in Indonesia: A Preliminary Research Guide)
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DDTC Working Paper 1717
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                   especially the first three, represent the pool of the   Further economic and  statistical  assumptions
                   whole financial transaction or financial investment   could be made to enable more advance analysis to
                   flow in which artificial profit shifting take part. The   generate more idea about the magnitude of BEPS.
                   last one – CIT revenue – measures the magnitude   Nevertheless, it does not increase the reliability of
                   of BEPS from the fiscal impact it has produced. In   the estimation accuracy.
                   short, macro approach treats every BEPS activities
                   are identical, since what matters is to get insight of   It  gets  even  more  difficult  when  we  go  from
                   the total estimation.                            measuring  BEPS in a group of  countries  to  do
                                                                    similar purpose in one individual  country. The
                      In most cases, the key variable that are mostly   reason  is  basically two-fold. First, at individual
                   used as the multiplier of BEPS activities is CIT rate   country level, the number of  observations are
                   difference between countries. The reason is that it   drastically reduced, which brings both  technical
                   is more directly related to how much tax burden   statistic limitation and lower  reliability  in the
                   is reduced due to the practices. It also represents   result. Second,  the nature  of  the data is  changed
                   mathematical  reasoning from  MNEs  in  making   from panel  data  – which comprised  of many
                   business  decision  regarding  profit  maximization   countries data across a series of time – into time-
                   choices  of  action, including the consideration of   series  data.  This change  brings us  particular
                   cost  for  shifting  profits  (e.g.  paying  consultant,   complication regarding the determination of which
                   more costly tax  division, probability  of getting   kind of regression to be used.
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                   punished).   However,  the consequence is that  it
                                                                       Econometrically  speaking,  time-series  data
                   does  not  distinguish  CIT  rate  difference  between
                                                                    regression  requires  two stages of  important
                   two countries  and between a country with tax
                                                                    examination before any result could be generated.
                   haven jurisdiction. This implication is significant,
                                                                    First, we should test whether  the data  for each
                   since  BEPS behavior  could be different if  the
                                                                    variable is stationary or not. There is a probability
                   jurisdiction destination is a tax haven.
                                                                    that stationary data from  involved  variables
                      Alternative  measurement  using  FDI  could   could  generate  a  strong  significant  relation  with
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                   be  possible  without  using  CIT  rate  difference,   high R .  This kind of result would lead us to false
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                   although  FDI  flow  is  significantly  influenced  by   conclusion,  since such correlation shown does not
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                   taxation.   This  method  was  used  by  UNCTAD   represent any true relationship between variable.
                   (2015), where identifying suspicious movement is   When two unrelated  variables have certain
                   the key here to determine whether a flow can be   similar tendency  of  non-stationary movement,
                   categorized as BEPS substance or not. There might   spurious correlation would appear, while the true
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                   be potential to develop this method to measure the   correlation  between the two is still  unknown.
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                   BEPS magnitude.  The finding firstly identifies the   Conclusively, seemingly correlated non-stationary
                   existence of BEPS by analyzing certain FDI outflow   data would lead to a misled interpretation. In
                   and  inflow  that  are  concentrated  to  tax  haven   handling such situation, taking first differentiation
                   countries. Then the research continues by finding   – or second  differentiation – of  each  variable is
                   the correlation between magnitude of utilization of   the logical  subsequent step. This  way, we would
                   offshore investment hubs for FDI and the level of   get stationary form  of  each variable  and we can
                   rate of return using OLS model. This method could   continue to proceed the regression process.
                   be  promising, but  still  has limitation  in bringing
                   this tool from group of countries level – which uses   Second, having the data  stationary, we
                   panel  data – to individual-country level – which   proceed  into selecting  which regression  method
                   uses time-series data.                           to  be  used.  The  possible  methods  include vector
                                                                    auto  regression  (VAR),  vector  error  correction
                      Difficulty  arises  when  we  try  to  differentiate   model  (VECM),  and  ordinary  least  square  (OLS).
                   between part that is real investment flow or real   Selecting one of them is quite complicated, since
                   business transaction and part that is profit shifting   each  existing regression  method  has  their  own
                   activities.  It is  plausible,  since macro data does   boundaries  and they are  unable  to  provide  ideal
                   not provide  the  underlying motivation behind   measurement. It also depends on the nature of the
                   the  financial  decisions  represented  in  the  data.   data. For instance, if we are to use VECM, we have
                                                                    to  examine  first  whether  there  is  co-integration
                                                                    relationship between related variables.
                   32. Clemens Fuest, Shafik Hebous, dan Nadine Riedel. “International
                   Profit Shifting and Multinational Firms in Developing Countries”,
                   International Growth Centre Working Paper (2011): 5.   35. See Simon P.  Burke dan John Hunter,  Modelling Non-Stationary
                   33. OECD, Tax Effects on Foreign Direct Investment: Revent Evidence   Time Series: A Multivariate Approach (New York: Palgrave Macmillan,
                   and Policy Analysis (Paris: OECD Publishing, 2007).  2005), 8-37.
                   34. UNCTAD, “An FDI-driven  approach to measuring the scale and   36.  Helmut Lutkepohl,  “Univariate  Time  Series Analysis”,  in  Applied
                   economic impact of BEPS”, Technical background paper accompanying   Time Series Econometerics, Helmut Lutkepohl and Markus Kratzig, eds.
                   the UNCTAD Working Paper on “FDI, Tax, and Development” (2015).  (Cambridge: Cambridge University Press, 2004): 11.
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