Identifying Base Erosion Through the Expenses Localness Indicators Model: A Methodology for Supporting Social Investment

Georgia Parastatidou () and Vassilios Chatzis
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Georgia Parastatidou: Department of Management Science and Technology, Democritus University of Thrace, 65404 Kavala, Greece
Vassilios Chatzis: Department of Management Science and Technology, Democritus University of Thrace, 65404 Kavala, Greece

JRFM, 2025, vol. 18, issue 6, 1-17

Abstract: A company’s base, or physical location, is often a criterion or condition for inclusion in regional development programmes that offer investment incentives such as reduced taxes, subsidised loan rates, or funding for research and development projects. However, these programmes, aimed at strengthening communities lagging behind in economic development, are often the target of malicious exploitation by companies that have a virtual headquarters in the region without actually contributing to local economies. This study proposes the use of the Expenses Localness Indicators (ELI) model as a reliable indicator of a company’s real contribution to a local economy. The ELI model can measure and highlight attempts to erode a company’s headquarters, and also assess a company’s integration into the local economy. By simulating a virtual economic environment and generating synthetic transaction data, the effectiveness of the ELI model in detecting false location claims and quantifying regional participation is evaluated. The results show that companies that prioritise local partnerships maintain higher locality scores, while those that partner with low locality entities weaken their local economic footprint, regardless of physical location. The ELI model provides a transparent and reliable tool that can be used both to grant regional incentives and to monitor their performance. Its integration into policy design can support more equitable, evidence-based approaches to regional economic development and social investment.

Keywords: base erosion; Expenses Localness Indicators model; profit shifting; fraud; incentives; financing (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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