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Measurement of base erosion and profit shifting phenomena through the analysis of FDI stocks


  • Paolo Acciari
  • Francesca Tomarelli
  • Laura Limosani
  • Laura Benedetti


This work is intended to provide a useful contribution to the OECD-G20 project to address the issue of international tax avoidance by multinational corporations, known as Base Erosion and Profit Shifting (BEPS), focused on the issue of “how big a problem is BEPS†. The main difficulties encountered in the assessment of the scale and impact of Base Erosion and Profit Shifting stem from: i) the variety and complexity of the tax planning strategies exploited by multinational corporations to reduce their corporate tax burden; ii) the lack of complete and reliable worldwide corporate micro-data sources; iii) the absence of an exhaustive tax variable to identify a low-tax system, since neither the statutory tax rate nor the different specifications of the effective tax rates are sufficiently accurate for this purpose. The assessment strategy described in this work tries to overcome the aforementioned difficulties by basing the analysis on inward FDI stocks for a wide set of countries, leading to an indirect identification of foreign direct investments that are driven by BEPS phenomena as those FDI stocks that are not justified by economic reasons. With particular attention to the consistency and quality of the recorded information, the econometric analysis performed makes use of a database constructed with information provided by different data sources (UNCTAD, The World Bank, International Telecommunications Union International Labour Organization, Transparency International, WTO, UNESCO, IMF, WGI) for the years 2005-2012, and available for a set of 172 countries. The data used for each country refer to structural and context variables identified in the economic literature as FDI determinants, such as: gross domestic product (GDP), infrastructures, labour market, degree of openness to foreign markets, inflation, etc. Through the application of a mixed model on repeated observations, it was possible to identify an econometric function to obtain a point estimate of the inward FDI stock for each country. This point estimate displays two components: a fixed effect (for all countries), regarding the structural and context variables identified in the model, and a variable intercept with a random effect, which captures the individuality of each country in that it explains the differences linked to the exploitation of favourable tax systems, to incentive policies targeted at foreign investors, or to other aspects that are not directly captured by the explanatory variables in the fixed part of the model. Therefore, positive intercepts identify those countries attracting a greater amount of foreign direct investments, and are a proxy of the share of inward FDI stocks at risk of BEPS.

Suggested Citation

  • Paolo Acciari & Francesca Tomarelli & Laura Limosani & Laura Benedetti, 2015. "Measurement of base erosion and profit shifting phenomena through the analysis of FDI stocks," Working Papers 3, Department of the Treasury, Ministry of the Economy and of Finance.
  • Handle: RePEc:itt:wpaper:2015-3

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    References listed on IDEAS

    1. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(2), pages 107-126, March.
    2. Drabek, Zdenek & Payne, Warren, 2002. "The Impact of Transparency on Foreign Direct Investment," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 777-810.
    3. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
    4. Clausing, Kimberly A., 2009. "Multinational Firm Tax Avoidance and Tax Policy," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(4), pages 703-725, December.
    5. Ana Agundez-Garcia, 2006. "The Delineation and Apportionment of an EU Consolidated Tax Base for Multi-jurisdictional Corporate Income Taxation: a Review of Issues and Options," Taxation Papers 9, Directorate General Taxation and Customs Union, European Commission, revised Oct 2006.
    6. Asiedu, Elizabeth, 2002. "On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?," World Development, Elsevier, vol. 30(1), pages 107-119, January.
    7. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
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    More about this item


    BEPS; MNEs; corporate income tax; inward FDI; mixed models; OECD;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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