draining development.pdf - Khazar University

236 Draining Development?few insights into the possible illicit nature of the underlying transactions.We conclude by noting that (1) expanding the use of the ALP is thebest option for a theoretically sound and globally consistent approach totransfer pricing, and (2) it is crucial for developing countries to adopt aspecific transfer pricing regime and to engage in a higher degree ofinformation sharing among tax authorities.IntroductionMultinationals are the most successful form of business organizationlargely because of inherent advantages in the access to crucial knowledgeand processes and in the ability to secure economies of scale. Over thepast three decades, the number of multinationals has risen 10-fold, froma modest 7,258 in 1970 to nearly 79,000 by 2006 (UNCTAD 2008).Against the background of falling barriers to international commerce,these corporations have played a key role in boosting trade and foreigndirect investment (FDI) flows, and, as their far-flung operations haveexpanded, so has the importance of intrafirm trade. 1 It is estimated that,globally, multinationals account for approximately two-thirds of tradeflows, and fully half of these are intrafirm transactions. 2 These developmentsand trends have distinct consequences for international taxation,and some observers have linked weaknesses in tax collection indeveloping countries with the propensity of multinationals to use financialartifices, including favorable transfer pricing practices on intrafirmtrade, to shift income (illegally) around the world.As a result, transfer pricing has been raised from the status of anarcane subject solely in the purview of tax administrators and practitionersto a ranking as the most important issue in international taxation insurveys of business people. It has also become a key point of discussionamong politicians, economists, and nongovernmental organizations.Technically, transfer pricing refers to the pricing or valuation of intrafirmtransactions (a complex task in practice) and the consequent allocationof profits for tax and other internal purposes (a complicated balancingact of competing national interests and public policy choices). On oneside of these transactions, multinationals aim, first, at avoiding doubletaxation (a strong deterrent to international trade) and, second, at minimizingthe tax burden (potentially a source of competitive advantage).