Page 12 - Working Paper (Measuring BEPS and Its Countermeasures in Indonesia: A Preliminary Research Guide)
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DDTC Working Paper 1717

                      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
                   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:
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