draining development.pdf - Khazar University

8The Role of Transfer Pricing inIllicit Financial FlowsCarlos A. LeiteAbstractAs multinationals have become a larger fixture in international trade andthe weight of intracompany transactions has increased, the practice oftransfer pricing has come under greater and often strident scrutiny. Inthis chapter, we review the current practice of transfer pricing and itsimpact on the ability of developing countries to collect tax revenue.After an overview of the arm’s-length principle (ALP), the key conceptin modern-day transfer pricing regulations, we discuss the complexitiesinvolved in determining prices for transactions between relatedparties in a context of competing interests and unique transactions. Bymeans of examples drawn from specific real-world cases, we (1) illustratethe difficulties in simultaneously assuring that companies are notdouble taxed and that competing tax authorities collect their fair shareof tax revenue and (2) distinguish between tax avoidance and tax evasionand examine the relationship of each to the illegality of financialflows.Unfortunately, the existing literature on the impact of transfer pricingabuses on developing countries provides insufficient evidence on theextent of income shifting and the role of transfer price manipulation and235