Future Research Issues for Better Understanding BEPS

Many researchers may have missed a significant contribution of the BEPS Action 11 report identifying important areas for future economic research.  These are some of the questions that arose in the course of the progress made in measuring BEPS.  A good analysis often raises more questions than answers.  Hopefully this report provided both. See the text of the BEPS Action 11 report on pages 122-124 of Chapter 3. 

"Future areas for economic research to better measure the scale and economic impact of BEPS with better data

The mandate for Action 11 included developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. This chapter summarises the current understanding of the scale and impact of BEPS based on academic studies, other international organisations’ analyses, as well as some new OECD research. Progress is being made in better understanding BEPS and countermeasures, and the economic analysis show that BEPS is significant and affects many economic decisions of both taxpayers and governments. The issue of BEPS and appropriate geographic allocation of income and expenses relative to measures of value creating activities is important not only to the current corporate income tax, but also would affect other taxes proposed by some academics such as a business cash-flow tax or a comprehensive business income tax.

The current body of empirical research into the fiscal and economic impacts of BEPS demonstrates that the stakes are high, but there is still much further research needed to be undertaken. ... A number of areas for future research beyond the Action 11 mandate but which will add to the understanding of BEPS and MNEs are highlighted, since better data alone will not be sufficient for the best possible analysis of BEPS.

The following are some of the areas where additional analysis is needed:

·      The prevalence and intensity of BEPS. How pervasive are BEPS behaviours? Is BEPS limited to a small number of MNEs or more widespread? Are some MNEs more intensively exploiting BEPS than other MNEs, and if so why (e.g. costs of tax planning, corporate governance, risk profile)? Would largely unrestricted BEPS encourage smaller MNEs to start engaging in BEPS and encourage domestic companies to go global for the BEPS tax benefits?

·      Differences in the profitability of MNEs vs. comparable domestic entities. Are there inherent economic differences between MNEs and domestic entities which make comparisons of ETR difficult? If so, how can competitiveness between MNEs and domestic entities be evaluated?

·      Factors contributing to group profitability. What contributes to the profitability of a global consolidated MNE? How much can be explained by tangible capital, labour and/or sales compared to other factors such as different types of intangible assets, public infrastructure, country risk diversification, etc.

·      Factors contributing to affiliate profitability. What contributes to the profitability of individual MNE entities? How can functions, assets and risks be incorporated in future analyses of BEPS, since they are the basis of arm’s length pricing? How much can be explained simply by tangible capital, labour and/or sales compared to other factors such as the intangible assets of their global MNE, public infrastructure, labour force qualities and stability in a country, etc.? How can these other factors which may change over time be incorporated more fully than just dummy variables?

·      Other tax factors in location decisions. Corporate taxes are only one source- based tax affecting location decisions. How do these other business taxes affect MNEs’ tax decisions? How can measures of profit shifting separate the effects of non-BEPS tax preferences from BEPS?

·      Effects of uncertainty, reputation and compliance costs, and disclosure. Companies face the equivalent of implicit taxes from uncertainty, reputation and compliance costs. Can these be measured and included in the economic analysis of taxes and BEPS? What effects do disclosures to tax administrations have?

·      Mobility of different types of labour and capital. How mobile are different forms of real economic activity, such as top level executives, R&D scientists, production workers, back-office workers, buildings, equipment, different types of intangible assets, etc.?

·      Governments’ strategic behaviours. How do different institutional settings affect countries’ co-operative versus competitive behaviours? How multilateral do agreements need to be to achieve effective co-operative outcomes?

The analysis of BEPS and countermeasures has advanced since 2013, providing more evidence of BEPS and insights into specific BEPS channels and potential effects of BEPS countermeasures. As analysts can only observe the current world with BEPS, any analysis of BEPS and countermeasures must estimate a comparison point, whether it be a world without BEPS, a future world without co-ordinated multilateral action, or a future world with proposed countermeasures. Future analysis of BEPS, MNEs’ BEPS behaviours, and tax competition with improved estimation methodologies are needed to complement improvements in the available data relevant for analysing BEPS and BEPS countermeasures."

Tom Neubig and Bob Cline