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DDTC Working Paper 1717

                   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
                   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
                   (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
                   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
                   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
                                                                    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
                                                                       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.
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