On 13 May 2015 the OECD published on its website comments received on the discussion draft on base erosion and profit shifting (BEPS) action plan Action 11 (Improving the analysis of BEPS). Comments were received from 20 organizations and individuals.

As pointed out by the UK’s Confederation of British Industry (CBI) Action 11 of BEPS is critical for legitimizing the work of the BEPS action plan. By accurately analyzing the incidence of BEPS on a national and international level and for each BEPS action a legitimate measure can be obtained as to whether the solutions put forward to deal with BEPS actions are proportionate.

The commentators were in general agreement that existing data sources are not sufficient to provide an analysis of the incidence of base erosion and profit shifting. BEPS behavior involves the artificial shifting of profits without changes in the location where the activities creating those profits take place. Corporate behavior is however influenced by a number of factors of which tax is just one. Also, there is legitimate tax planning and so not all behavior motivated by tax considerations amounts to base erosion and profit shifting.

The commentators were generally in agreement that the analysis of BEPS must disentangle BEPS behavior from real economic effects. They also generally considered that this was not possible on the basis of existing data. As pointed out by the German Confederation of Industry (BDF) the data must show what the outcome would have been without BEPS, and must therefore exclude the effect of real economic activity.

The discussion draft for Action 11 had suggested there were two possible overall methods for analyzing BEPS –the aggregate tax rate differential approach, estimating the hypothetical situation without any BEPS; or the BEPS channels approach, assessing the amount of base erosion and profit shifting caused by each channel of BEPS. Commentators were of the opinion that the second approach would not be possible because of the number of variables involved – including the problem of finding reliable data on the level of the enterprise.

However the overall approaches suggested in the draft consultation document were also generally regarded as unreliable by the commentators. For example, looking at high profit rates in lower taxed affiliates of global multinationals would not be reliable because profits vary in any cases between markets. There are variables affecting real economic activity and the results of this analysis would also be affected by national tax rules unrelated to BEPS.

Looking for high profit rates of multinational affiliates in lower tax locations would have to take account of the fact that the more developed economies tend to have higher corporate tax rates combined with high capital intensity. Higher profits earned in developing countries might reflect the higher levels of risk in those locations. The Business and Industry Advisory Council to the OECD (BIAC) pointed out that this indicator would need to compensate for the fact that activities can be higher value adding or lower value adding activities. The indicator would need to indicate where there were lower levels of profit for high value adding activities or vice versa. The danger otherwise is that the indicator would be flagging up the effects of normal tax planning activity rather than base erosion and profit shifting.

An indicator comparing profit rates compared to effective tax rates for multinationals and foreign operations would also be misleading. A business may lower prices and accept lower profits for purposes of market penetration or other business strategies. Much of the variation in results of the indicator would not be due to base erosion and profit shifting.

Likewise a comparison of tax rates of multinationals in a country compared to domestic firms would not be reliable. Comparable profits of domestic companies would be difficult to find for this indicator. Results would be distorted by the domestic tax treatment of inbound or outbound investment, tax treaties and other aspects of the domestic tax system. These aspects would lead to different tax rates for domestic and multinational companies that were not caused by BEPS.

The BEPS Monitoring Group indicated in its submission that there are currently no sources of data that could be effectively used for assessing data on BEPS. All the micro data sources currently present an incomplete picture and would not suffice for identifying the impact of BEPS. The only conceivable dataset that will meet all the criteria for effectively assessing the impact of base erosion and profit shifting would be created by drawing together all the country by country reporting of the multinationals.

In the opinion of the BEPS Monitoring Group the country by country reporting data submitted by multinationals should be available to researchers outside a country’s tax administration. Ideally the data would be filed on a single global format and should be publicly available.

As a second best solution the BEPS Monitoring Group considers that the data should be stored in a centralized data system for access by researchers from the OECD, UN, IMF and other international organizations and by regional tax forums and external researchers, who would all be bound by confidentiality agreements. They would also prefer a lower turnover threshold for country by country reporting to apply to each group and a shorter reporting period of six months after the financial year end.