Action Plan 11 — Measuring and Monitoring BEPS

SUITS THE C-SUITE By Joemyl J. Baloro

Business World (03/14/2016 – p.S1/4)

In previous weeks, we discussed the various Action Plans issued by the Organisation for Economic Co-operation and Development (OECD) resulting from the work done for the Base Erosion and Profit Shifting (BEPS) initiative. This week, we focus on Action Plan 11. Unlike the other Action Plans which seek to address specific causes or sources of BEPS, Action Plan 11 seeks to measure the fiscal and non-fiscal consequences of BEPS, and to monitor the implementation of the OECD’s recommendations to curb aggressive tax planning strategies which result in the artificial shifting of profits.

More specifically, Action Plan 11: (i) identifies the key issues in measuring and monitoring BEPS; (ii) determines, based on available resources, indicators of BEPS behaviors which may be used to gauge its economic impact; and (iii) recommends ways to improve the collection and analysis of BEPS information.

KEY ISSUES IN MEASURING AND MONITORING BEPS

BEPS has adverse economic effects, particularly on government corporate income tax (CIT) revenues, and this cannot be denied. The findings of the work performed since 2013 estimate global CIT revenue losses due to BEPS at between $100 and $240 billion, representing around 4% to 10% of global CIT revenues. In addition to significant tax revenue losses, BEPS causes other adverse economic effects, including tilting the playing field in favor of tax-aggressive Multinational Entities (MNEs), exacerbating the corporate debt bias, misdirecting foreign direct investment, and reducing the financing of needed public infrastructure.

While there have been several empirical studies and statistics which support the finding of BEPS occurrence through different channels (such as transfer mispricing, strategic location of intangibles and debt, treaty abuse and use of hybrid mismatch arrangements), all analyses of BEPS are severely constrained by the limitations of the currently available data. The available data are not comprehensive across countries or companies, and often does not include actual taxes paid. At present, most records are limited to individual countries or regions, and there is not one complete global database detailing activities of MNEs.

In addition, the analyses of profit shifting have found it difficult to separate the effects of BEPS from real economic factors and the effects of deliberate government tax policy choices. Improving the tools and data available to measure BEPS will be critical for measuring and monitoring BEPS in the future, as well as evaluating the impact of the countermeasures developed under the BEPS Action Plan.

While recognizing the need to maintain appropriate safeguards to protect the confidentiality of taxpayer information, Action Plan 11 also recognizes that some of the information needed to improve the measurement and monitoring of BEPS is already collected by tax administrations, but not analyzed or made available for analysis.

Action Plan 11 recommends improved access to and, in particular, enhanced analysis of existing data, with new data proposed to be collected under Action Plans 5 (improved transparency through free exchange of tax rulings and information), 13 (transfer pricing documentation), and Action Plan 12 (mandatory disclosure rules). For this purpose, Action Plan 11 recommends that the OECD work closely with policy makers and tax administrations in the reporting and examination of BEPS-related information, specifically the latter’s cooperation in the new methods of tax data collection proposed under Action Plans 5, 13 and 12.

IDENTIFYING INDICATORS OF BEPS BEHAVIOR

To assist in measuring and monitoring BEPS over time, Action Plan 11 discusses six indicators of BEPS activity which highlight BEPS behavior. These indicators — which use different sources of data, employ different metrics, and examine different BEPS channels — are intended to be viewed like a meter or gauge, capable of measuring trends and variations that point to the existence and severity of BEPS and BEPS repercussions. These six indicators in the following five categories are:

A. Disconnect between financial and real economic activities
· Concentration of Foreign Direct Investment (FDI) relative to a country’s gross domestic product (GDP). This indicates that investments placed in such country are disproportionate to the real economic activity (as measured in GDP) undertaken therein.

B. Profit rate differentials within top (e.g. top 250) global MNEs
· Differential profit rates compared to effective tax rates (ETRs) — high profit rates of low-taxed affiliates of top global MNEs compared to those in high-tax countries.

· Differential profit rates between low-tax locations and worldwide MNE operations — The profit rates of MNE affiliates located in lower-tax countries compared with the profit rates of their own global group.

C. MNE vs. “comparable” non-MNE effective tax rate differentials
· The ETRs paid by large MNE entities are estimated to be 4 to 8.5 percentage points lower than similar enterprises with domestic only operations, to the disadvantage of local businesses and non-tax aggressive MNEs.

D. Profit shifting through intangibles
· Concentration of high levels of royalty receipts relative to research and development (R&D) spending.

E. Profit shifting through interest
· Interest expense to income ratios of MNE affiliates in high-tax locations.

Two additional indicators are also described that could be calculated when new data become available:

(1) a comparison of profit rates and ETRs of MNE domestic (headquarter); and (2) foreign operations, and differential rates of return on FDI investment from special purpose entities.

No single indicator can be used to provide a complete picture of the scale or economic impact of BEPS, and the six indicators are meant to be read as a “dashboard of indicators,” which, while referring to different dimensions, may provide more concrete data on the occurrence of and trends in BEPS when all point to the same direction.

The OECD recognizes that improving the tools and data available to measure BEPS will be critical for monitoring its effects, as well as evaluating the impact of the countermeasures developed under the Action Plans. Through these measures, more accurate information on BEPS trends may be gathered, which will in turn lead to improved analysis of BEPS fiscal and economic impact. This will allow the development of the necessary safeguards to curtail the adverse effect of BEPS.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Joemyl J. Baloro is a Tax Associate Director of SGV & Co.