draining development.pdf - Khazar University

Transfer Price Manipulation 209The second key actor in the global economy—MNEs—have long seentransfer pricing as an important international tax issue (Ernst & Young2010). From an international tax perspective, tax avoidance (tax planningthat complies with the law) is viewed by MNE executives and thetax planning industry as both legal and morally acceptable (Friedman1970). 2 Because the goal of the firm is to maximize shareholder wealthand because transfer pricing can raise the MNE’s after-tax profits on aworldwide basis, transfer pricing is a valued activity for the MNE. Transferpricing has also become an increasingly important issue for MNEexecutives because government regulations have become more complexand the number of governments that regulate transfer pricing, requiredocumentation, and levy penalties continues to grow (Eden 2009; Ernst& Young 2010). In addition, recent U.S. legislative changes such asSarbanes-Oxley and FIN 48 have made transfer pricing important forMNE executives from a corporate financial and reporting perspective(Ernst & Young 2008).Lastly, with the collapse of Enron, WorldCom, and others in the early2000s and bankruptcies or near bankruptcies among many huge multinationals(for example, General Motors) during the current internationalfinancial crisis, NGOs are now paying more attention to corporatefraud, in particular to abusive financial behaviors that may be related tothe global financial crisis (for example, see TJN 2007; Christian Aid2009; Sikka and Willmott 2010). Transfer pricing has been specificallyattacked by NGOs. For example, Christian Aid has published reportsarguing that transfer pricing is tax dodging, cooking the books, secretdeals, or scams that rob the poor to keep the rich tax-free, thereby strippingincome from developing countries (Christian Aid 2009). Thus, thethird key actor in the global economy—NGOs—is now also payingmuch more attention to transfer pricing.The purpose of this chapter is to review the literature on empiricalestimates of TPM, focusing, where possible, on developing countries. Wealso situate this chapter within the context of the work on illicit flows offunds out of developing countries, the theme of this volume. In the nextsection, we explore the reasons why MNEs engage in TPM. The followingsection examines expected manipulation patterns in response to particularforms of government regulation. The penultimate section reviewsthe empirical evidence on TPM. The last section concludes.