draining development.pdf - Khazar University

138 Draining Development?on the website lists other country-specific firm-level data sets that containinformation on the foreign activities of domestic companies.Data on international trade prices may be exploited to investigateprofit shifting out of developing countries that takes place through trademispricing by multinational firms. Previous studies reviewed above usethe United States Merchandise Trade Databases, which contain pricedata according to import-harmonized commodity codes and exportharmonizedcommodity codes. 3 However, these data hardly allow for aclear identification strategy to ferret out profit shifting behavior. Becausethe data do not discriminate trade between related and unrelated parties,our first identification strategy is not applicable. This shortcoming can,however, be addressed by using a different data source. Thus, Clausing(2003) exploits data from the International Price Program of the U.S.Bureau of Labor Statistics, which publishes information on 700 aggregateexport and import price indexes. The data differentiate tradebetween related and unrelated parties, which makes the control groupapproach feasible. Assuming that profit shifting via trade price distortionsis negligible between third parties, the trade prices of intrafirmtrade between multinational affiliates can be compared with trade pricingbetween third parties (see Clausing 2003). A different strategy for thedevelopment of a valid identification strategy would involve exploitingthe panel dimension of the trade price data; this has not been done inexisting studies. In this way, one might investigate how trade prices areaffected by policy reforms such as tax rate changes or changes in the levelof law enforcement or political stability in partner countries, whichimplies that the countries without tax reforms would serve as a controlgroup.ConclusionTax avoidance and evasion through profit shifting out of developingcountries represent an important and widely debated issue. Yet, relativelylittle is known about the magnitude of and the factors drivingprofit shifting in the developing world. The main reason is that the availabledata are limited in terms of both quality and quantity. The results ofmost existing empirical studies on developing countries are difficult tointerpret because the methods used to measure income shifting raise a