Measuring Profit Shifting Using “Resident” Information: The PSM-ROC Method

This paper presents a novel method to estimate Base Erosion and Profit Shifting (BEPS) at the micro level employing solely the information on resident business units (MNEs and domestics). The method contributes to the existing literature in two ways. Firstly, focusing on microdata referring to resident business units it overcomes the challenge associated to the availability and reliability of worldwide firm-level databases, which is currently a critical issue in BEPS measurement. Secondly, BEPS estimates at the MNE level enable the results to be applied in several research areas, such as informing specific policies, adjusting National Accounts and measuring Illicit Financial Flows. The application of the method to the Italian economy suggests significant findings: approximately 6 out of 10 MNEs shift their profits abroad; estimated BEPS amounts to slightly less than 25.9 billion euros, accounting for 1.4% of the Italian GDP at current prices in 2019.