draining development.pdf - Khazar University

110 Draining Development?IntroductionIn the debate on the impact of illicit capital flows on developing countries,the view is widespread that illicit flows undermine the ability ofdeveloping countries to raise tax revenue. The reason stated is that illicitcapital flows may channel resources to the informal economy or to otherjurisdictions, in particular to tax havens, so that the resources escapetaxation. A large part of this activity takes place in the shadow economyand largely escapes public attention. Yet, parts of the official economy,particularly multinational firms, are accused of engaging in tax avoidanceand tax evasion as well. They are criticized for shifting income outof developing countries and into tax havens to avoid paying corporateincome taxes. Since developing countries frequently lack appropriatelegislative and administrative resources, they are generally seen to bemore vulnerable to income shifting relative to developed countries.While the shifting of income out of developed countries is a widelydebated issue, empirical evidence on the magnitude of the problem andon the factors driving income shifting is scarce. This chapter contributesto the debate as follows. First, we review the literature on tax avoidanceand evasion through border crossing income shifting out of developingcountries. Second, we discuss methods and available data sets that canbe used to gain new insights into the problem of corporate incomeshifting.There is a growing number of empirical studies on corporate profitshifting in the countries of the Organisation for Economic Co-operationand Development (OECD). Many of these studies use appropriate dataand sophisticated econometric methods, and the results offer valuableinsights into corporate profit shifting. Unfortunately, almost none ofthese studies include developing countries. The main reason is that, fordeveloping countries, significantly fewer data are available. A number ofstudies, mostly published by nongovernmental organizations (NGOs),try to estimate income shifting and the tax revenue losses suffered bydeveloping countries. These studies have the merit of attracting theattention of a wider public to the issue of income shifting out of developingcountries. However, the results of these studies are somewhat difficultto interpret, mainly because the measurement concepts used havea number of drawbacks (Fuest and Riedel 2009).