BEPS- Action 11: Pay Attention!

BEPS- Action 11: Pay Attention!

Sun 19 Apr 2015

On 16 April 2015, the OECD has invited public comments on a discussion draft which deals with Action 11 – Improving the analysis of BEPS. 

Action 11 of the BEPS Action Plan focuses on improving the availability and analysis of data on BEPS, including to monitor the implementation of the Action Plan and to evaluate the effectiveness and economic impact of actions to address BEPS on an ongoing basis. 

This discussion draft sets out the context and background to the work on Action 11, and includes chapters that focus on three key areas as follows:

  • Chapter 1 is an assessment of existing data sources relevant for BEPS analysis, describing the available data and their limitations for undertaking an economic analysis of the scale and impact of BEPS and BEPS countermeasures.
  • Chapter 2 provides potential indicators of the scale and economic impact of BEPS and their various strengths and limitations.
  • Chapter 3 sets existing empirical analyses of BEPS and proposes two complementary approaches to estimating the scale of BEPS.

Working Party No. 2 of the Committee on Fiscal Affairs (CFA) has examined a number of empirical economic analyses on BEPS and BEPS countermeasures and the data currently used in those analyses. This discussion draft presents an initial assessment of the currently available data, as well as a number of questions about the data needed for analysis of BEPS and BEPS countermeasures. The discussion draft also develops some recommendations for indicators of the scale (fiscal effects) and economic impacts of BEPS, and seeks comments on the proposed and other potential indicators. Finally, the discussion draft provides a high-level overview of the available economic analyses of the scale and impact of BEPS and BEPS countermeasures. Two complementary approaches to estimating the scale of BEPS are proposed, and a number of questions about economic analyses are raised. The discussion draft does not discuss new tools to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis, or new types of data that might be useful in helping to analyse BEPS into the future.

In particular, this discussion draft includes consideration of the following issues:

  • What is the currently available data to analyse BEPS and BEPS countermeasures?
  • What are best practices in governments collecting and making available for research available data?
  • Whether there are additional indicators of BEPS that might be provided.
  • Whether the proposed indicators could have their “signal-to-noise” ratio enhanced.
  • Whether there are additional empirical analyses of BEPS and BEPS countermeasures, particularly in developing countries.
  • Whether there are alternative approaches or refinements of the two proposed approaches to estimating the scale of BEPS.

Why is it important?

The following example illustrates how BEPS behaviours affect corporate tax payments and company financial accounts, and also countries’ National Accounts.

Company A is located in Country A that has a statutory tax rate of 30%, while Company B, its affiliate, is located in Country B with a statutory tax rate of 10%.

Company B sells goods to Company A for 150 that would have been sold for 100 to an independent party. As a result, the sales in Company B are overstated by 50 while the purchases in Company A are overstated by 50. This has ramifications for the value added measures in the National Accounts by overstating valued added in Country B and understating valued added in Country A. This example shows how BEPS behaviours can distort GDP figures across countries. Only very few National Statistical Offices are able to adjust even partly for this distortion, especially in cases concerning payments for (if recorded) and transfers of intellectual property

The discussion draft points out that publicly-available, private-source micro-data has limitations in analysing BEPS. The proprietary databases integrate publicly-available financial information reported to various governmental agencies. The coverage and completeness of the data varies significantly across countries. In addition, the available financial information reflects accounting concepts, not tax return concepts. As a result, these databases still provide only indirect information about the presence of BEPS (tax return data would provide a more direct source of information). In addition, the ability of researchers using this firm-level data to isolate BEPS depends critically upon the empirical methods used to control for any differences in profitability explained by real economic factors. More complete information about global MNE activity is needed to analyse BEPS.

BEPS Indicators

One of the key components of Action 11 is the development of “indicators” that can be used to identify the scale and economic impact of BEPS, to track changes in BEPS over time and to monitor the effectiveness of measures implemented to reduce BEPS. The following chart provides an overview of the different analyses to be carried out under Action 11.

The discussion draft proposes seven separate indicators that are presented in the following five categories:

A. Disconnect between financial and real economic activities

Concentration of high levels of net foreign direct investment (FDI) relative to GDP

B. Profit rate differentials within top (e.g. top 500) global MNEs

 Differential profit rates compared to effective tax rates

 

Differential profit rates between low-tax locations and worldwide MNE operations

C. Domestic vs. foreign profit rate differentials

Differential profit rates between MNE group domestic and foreign operations

 

Differential effective tax rates between MNE affiliates and comparable domestic firms

D. Profit shifting through intangibles

Concentration of high levels of royalty payments received relative to R&D spending

E. Profit shifting through leverage

Interest expense to income ratios of MNE affiliates in high-tax locations

 

Source: OECD website

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