draining development.pdf - Khazar University

Transfer Price Manipulation 227transactions. The authors find that Chinese MNEs with higher-qualitygovernance structures (for example, a higher percent of independentdirectors and financial experts on their audit committees) are less likelyto engage in TPM. Their results suggest that improving corporate governanceof MNEs in emerging markets may lead to less earnings manipulationthrough transfer pricing.Looking across these studies of income shifting and trade mispricing,the evidence supports the presumption of TPM in China. Kar andCartwright-Smith (2008) suggest that China may be the single mostimportant developing country to experience TPM. Perhaps this explainswhy the Chinese government is now paying so much attention to thedevelopment of sophisticated transfer pricing regulations and why Beijingand Shanghai are two of the most rapidly growing transfer pricinglocations for the Big Four accounting firms.ConclusionIn this chapter, we attempt to contribute to the debate on illicit flows anddeveloping countries through the lens of TPM. Based on our literaturereview, we conclude that empirical evidence for TPM exists, but is notoverwhelming. The small number of empirical studies is perhaps notsurprising given the fine-grained—individual transactions identified asrelated-party or arm’s-length transactions—and highly confidentialnature of the data needed to test for TPM. The best empirical estimatescome from transaction-level data collected and processed by statisticalagencies that have paid close attention to intrafirm trade, such as the U.S.data set on the prices of crude petroleum imports and the BLS data setused to compute U.S. export and import price indexes. In terms of developingcountries, the best and largest number of currently available studiesare the Chinese studies. No data set is perfect, and, as a result, all thevarious estimates are flawed. Still, the balance of the evidence suggeststhat income shifting does occur through the manipulation of transferprices.What would be helpful is greater accessibility to transaction-level dataon crossborder export and import transactions and MNE income statementsand balance sheets. This would enable scholars to shine more lightin the dark corners of TPM, providing scholars and policy makers with