Page 8 - 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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                   for other countries due to differences in tax rates   identifiable  (and  available)  in  tax  or  financial
                   and tax rules, differences in the industry mix and   accounts databases.
                   other country differences.
                                                                       Hence, it is vital to establish an understanding
                      In  addition, those studies do not  provide an   of the currently available data – the coverage and
                   estimate of fiscal effects. Fiscal estimates require   representativeness of that data; whether it is tax
                   significantly more information than just the average   return or financial account data; whether it is macro
                   responsiveness of financial profits to a change in   or micro-level data; its reliability and robustness
                   tax  rates.  Financial  statement  profits  generally   (what  quality  control  measures  are  in  place  for
                   differ  from taxable  income  due to differences  in   the  data  collection);  whether  it  is  comparable
                   accounting and tax rules. Companies with negative   across jurisdiction; and who has access to it. Such
                   taxable  income in a given year generally cannot   assessment  will  provide  insight on what  are the
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                   receive a tax refund in that year, but rather carry   choices than can be utilized.
                   forward any tax losses to future years. Further, the
                                                                       OECD  outlines  a  set  of  criteria  to  be  used  for
                   relationship between income and tax liability is not
                                                                    evaluating the different types of data with respect
                   proportional due to the extensive use of tax credits
                                                                    to their  usefulness for analyzing BEPS.  Having
                   in many countries.
                                                                    a thorough understanding of the available  data
                      While  academic studies have increasingly     will  provide  a solid base for working  towards
                   focused  on individual company data,  several    ‘best practices’ in future data collection to ‘fill the
                   international  organizations   have    used      gaps’ and strive for more comprehensive data and
                   macroeconomic  data  to estimate the effects     comparability  across countries, recognizing the
                   of BEPS.  These  studies  focus on the effects of   trade-offs between the objectives of improved
                   “tax  haven”  countries  and  FDI  through  special   tax  policy analysis  and the need  to  minimize
                   purpose entities. Although macroeconomic  data   administrative costs for tax  administration  and
                   cannot capture detailed firm-level behavior, it can   businesses. The set of criteria could be considered
                   capture some dimensions of BEPS which may not    are as follows:
                   be  reflected  in  micro  data  due  to  its  incomplete
                   coverage. One limitation  with using macro  data,   •  Coverage/Representativeness  –  Determining
                   though, is that it is difficult – if not impossible –   the scope or length  of  coverage of  the
                   to completely differentiate the impact of taxes on   underlying data is key in assessing the results of
                   both real economic activity and BEPS.               any analysis with reliability and accuracy. Most
                                                                       databases are limited to individual countries or
                      This is important, since in macro data, we can   a region, and there is not truly comprehensive
                   only know the outward change of  the variables.     global database of MNE activity.
                   The real factors driving the movement is unknown,   •  Usefulness for separating real economic effects
                   thus lowering the accuracy of the estimation. In    from tax  effects – Separating  BEPS-related
                   most occasions, researchers used control variables   activity from real economic activity is not only
                   to  neutralize  the  significance  eroded  CIT  base   important, but also need to be estimated. In this
                   caused by other factors. Although adding control    regard,  firm-level  data  provides  researchers
                   variables could be handful, it can never  help to   with more information to attempt to more
                   reach optimum accuracy and form adequate model      accurately separate BEPS-related activities
                   that  can best explain  the BEPS behavior. More     from a firm’s real economic activities.
                   explanation about macro approach will be detailed
                                                                    •  Ability  to  focus  on  specific  BEPS  activity  –
                   in section 4.3.1.
                                                                       BEPS is  practiced through various  practices
                   4.2.  Criteria in Assessing the Data                that artificially segregate taxable income from
                                                                       the real economic activities. A MNE’s financial
                      It  is indisputable  that  the results obtained   profile can be very different between financial
                   from any analysis  are only as robust  as the data   and tax  accounts. Moreover, information
                   and methodology underpinning them. This  is         provided  in the country of resided  MNE
                   particularly true in the case of analyzing BEPS, since   affiliate  can  differ  from  the  firm’s  country  of
                   BEPS  involves  multinational  enterprises  (MNEs)   incorporation. Utilizing different information
                   that  can establish  intra-group arrangements that   in  order  to  identify  specific  international  tax
                   achieve no or low taxation by shifting profits away   avoidance  would generate useful insight in
                   from jurisdiction where activities creating  the    measuring certain BEPS activity.
                   profits  are  taking  place.These  intra-group  cross-
                   border arrangements are often very complex,
                   involving multiple related  entities, and related   31.  See  Clemens Fuest and Nadine  Riedel,  “Tax  Evasion  and Tax
                                                                    Avoidance: The Role of International Profit Shifting”, Oxford University
                   party transactions  are typically not separately   Centre for Business Taxation Working Papers No. 10/12 (2010).
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