On April 16, 2015, the Organization for Economic Co-operation and Development (OECD) issued a discussion draft on the collection of data and construction of indicators to analyze the scale (fiscal effects) and economic impacts of base erosion and profit shifting (BEPS) under Action 11 (improving analysis of BEPS) of the BEPS project. The document, BEPS Action 11: Improving the Analysis of BEPS (the Discussion Draft or the Draft), assesses currently available data, recommends potential indicators and reviews existing empirical studies of the scale and economic impacts of BEPS.

The Discussion Draft includes a statement that it does not represent conclusions of the OECD Committee on Fiscal Affairs or the working group responsible for Action 11. It intends to provide a preliminary assessment and substantive options for public comments.

Comments are requested to be submitted by May 8, 2015. A public consultation on Action 11 is scheduled for May 18, 2015. The BEPS Action Plan calls for the work on methodologies to collect and analyze data on BEPS to be completed by September 2015.

Detailed discussion

The Action 11 Discussion Draft first assesses the existing data that could potentially be used to develop BEPS indicators and to analyze the scale and economic impacts of BEPS and BEPS countermeasures. It discusses the usefulness and limitations of different types of data. The Draft then proposes seven indicators that fall into five broad categories to track the scale and economic impacts of BEPS. The indicators are based on data at different levels of aggregation. Finally, the Draft summarizes the common approaches that have been adopted in the studies of BEPS and reviews the empirical economic literature by academics, as well as fiscal estimates by individual country governments.

The Discussion Draft concludes that the existing data have various limitations that severely constrain the ability of both researchers and governments to analyze how BEPS affects tax revenue and the economy. To overcome these limitations, the Draft recommends collecting more detailed and comprehensive data on multinational corporations (MNCs) and developing "best practices" to help countries collect and use their data in a more coordinated way. The collection of improved data would also allow the construction of a set of indicators proposed in the Draft to monitor the changes in BEPS over time.

In addition to assessing existing data and the proposed indicators, the Discussion Draft also assesses the advantages and disadvantages of two existing approaches used in the economic analysis of BEPS. One approach estimates the overall impacts of BEPS based on the estimated responsiveness of profit to tax rate differentials and the other approach estimates the impacts of specific BEPS channels.

Summary of assessment results of currently available data relevant for the analysis of BEPS

The Discussion Draft lists several criteria for assessing existing data relevant for BEPS analysis. The criteria include coverage/representativeness, usefulness for separating real economic effects from tax effects, ability to focus on specific BEPS activity, level of detail, timeliness and access. The Draft states that data coverage concerns the countries for which macro-level data are available, the financial information included in firm-level data, whether the included firms are representative and whether tax return information collected by countries' tax administrations covers foreign affiliates without a permanent establishment in their countries.

The Discussion Draft states that BEPS affects both tax revenue and many non-tax economic variables so analyzing the impacts of BEPS requires separating real economic activity independent of tax, real economic activity related to non-BEPS tax factors and BEPS-related activities. The Draft notes that many data sources have significant limitations for the analysis of BEPS due to the lack of the information needed to disentangle real economic activity from BEPS-related effects. The book/tax difference between tax return and financial accounting data also imposes a significant limitation on using non-tax financial data to analyze specific tax-related BEPS issues. In addition, the Draft indicates that the access to timely information and detailed data, specifically unconsolidated financial account data and information on related-party transactions, is critical for policy makers to better analyze BEPS and to respond faster in countering new BEPS channels that may arise over time. Finally, the Draft states that restrictions by governments on access to individual tax return data by the public impose another limitation on using existing data to analyze BEPS.

Based on these criteria, the Discussion Draft reviews several data sources that have been used to analyze BEPS, including macro-aggregated data, micro-firm/group-level financial account data, tax return data and detailed reports of individual MNCs. In general, the assessment results suggest that firm-level data is needed for the best analysis of BEPS and more complete information about global MNC activity is needed. In addition, tax return information needs to be better processed for the purpose of BEPS analysis and countries should make the most of currently available data based on best practices of several countries.

Potential indicators for BEPS analysis

The Discussion Draft provides several potential indicators that can be used to analyze the scale and economic impacts of BEPS. It states that the indicators were developed with existing available data and new data sources that may become available in the future. The indicators fall into five broad categories: 1) disconnect between financial and real economic activities; 2) profit rate differentials within top global MNCs; 3) domestic vs. foreign profit rate differentials; 4) profit shifting through intangibles, and 5) profit shifting through leverage.

The Discussion Draft describes several advantages of using the indicators to analyze BEPS. First, indicators can be constructed annually to track the changes in BEPS over time. Second, some indicators can be updated on a timely basis. Third, indicators can be calculated with both existing data and improved data that become available in the future. Fourth, the construction of indicators can be refined and extended by academic and other researchers, making the process transparent. Fifth, using multiple indicators or a "dashboard of indicators" may help broaden the insight into BEPS, as no single indicator can provide a complete picture of BEPS. The Draft states, however, that the indicators have significant limitations. For example, the variation of the indicators that may be explained in part by non-BEPS-related tax factors or non-tax economic factors. Moreover, the availability and quality of the data used to construct the indicators also vary across countries, time and types of data.

As more comprehensive and improved data become accessible in the future, the Draft predicts that the proposed indicators can be extended in several ways to provide greater insights into BEPS. For example, an increase in data accuracy could reduce the ratio of signal-to-noise of the indicators. In addition, a global indicator can be extended to specific countries or industries to help control for some variation in real economic activity, if permitted by data.

Review of economic literature on the scale and impacts of BEPS and countermeasures

The Discussion Draft states that the existence of BEPS was found in numerous academic and empirical studies, although the scale or extent to which BEPS is occurring is still largely uncertain to researchers and policy makers due to the significant data limitations previously mentioned and the lack of a clear methodology for the analysis of BEPS.

The Discussion Draft focuses on two major approaches that have been taken in many studies to analyze BEPS. The first approach relies on the aggregate tax rate differential to measure the overall scale and economic impacts of BEPS by comparing the world with BEPS with an unobserved world without BEPS (i.e., "counter-factual"). Many factors related to real economic activities are held constant in this approach, which helps to separate BEPS-related effects from real economic activity of MNCs. The Draft notes that whether such an approach can successfully identify the effects of BEPS depends on what activity generates profits and where profits are generated. There is, however, considerable disagreement over the answer to those two questions. The Draft notes that studies have suggested that profits can be generated by factors of production or sales or a combination of both. The Draft states that problems associated with the measurement of production factors and sales also exacerbate the quality of the approach. For example, the Draft states that the extent to which companies use intangible assets to generate profits is very difficult to determine given the mobility of those assets. In addition, difficulties in determining the location of factors that generate profits also make it more difficult to determine where profits are in fact generated.

The Discussion Draft suggests that there are several advantages to using the aggregate tax rate differential approach. That approach attempts to cover all BEPS channels, allows the separation of real economic effects from BEPS-related effects, and can be applied broadly to typical MNCs. This approach also has several disadvantages, such as requiring a good estimation of profitability, relying on correct and relevant tax variables, and failing to identify BEPS if hidden in available data.

The second approach included in the Discussion Draft would measure BEPS by reference to specific BEPS channels that have been identified in the BEPS Action Plan, including Actions 2 through 10. The Draft notes that Actions 11 through 15 do not directly identify specific BEPS channels but may offer new BEPS countermeasures that would help to address BEPS-related issues more effectively. The Draft states that the total scale and economic impacts of BEPS can be obtained from aggregating effects estimated from the individual BEPS channels and their interactions. That approach usually provides more direct estimation of BEPS and is in line with the BEPS Action Plan, but usually requires more detailed data and estimation of potential synergies of multiple BEPS channels.

The Discussion Draft notes that the OECD reviewed numerous studies that used one of the two approaches. The Draft notes that both evidence of the overall scale and economic impacts of BEPS and evidence of specific BEPS channels have been identified in the existing economic literature. According to the Draft, most of the analyses used data on developed countries due to the availability and the quality of the data. Empirical research on BEPS in developing countries, however, is quite limited. The Draft states that other than tax revenue, BEPS also affects other economic variables, such as economic efficiency, growth, capital structure and administration costs of BEPS countermeasures. It proposes to involve some new analyses on these other aspects of BEPS to complement the existing studies when improved data sources become available over time. The limitation of the data sources also needs to be taken into consideration, according to the Draft, in order to properly assess the estimated results on the scale and economic impacts of BEPS.

Implications

The Discussion Draft provides insight into the assessment of academic and empirical studies of BEPS. Given the significant limitations of currently available data, existing studies of the scale and economic impacts of BEPS face severe constraints and the implications drawn from the existing studies should be cautiously qualified. The Draft suggests that more detailed and comprehensive data are needed in order to construct appropriate indicators that monitor BEPS globally and to better understand how BEPS affects countries' tax revenue and economic growth. According to the Draft, improved data in terms of quality and access would lead to better policies for countries to track and counter BEPS activity.

Companies should continue to monitor developments in the OECD and in the countries where they operate or invest and consider participating in the dialogue regarding the BEPS project and the underlying international tax policy issues.

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