draining development.pdf - Khazar University

The Role of Transfer Pricing in Illicit Financial Flows 237Meanwhile, the tax authority of the entity on the selling side of the transactionattempts to raise the price to maximize its own tax collection (onwhich its performance is judged), and, finally, the tax authority of theentity on the purchasing side of the transaction attempts to lower theprice so that its own tax collections can be higher (on which its effectivenessis evaluated). The complexity of the resulting to-and-fro necessitatesa specific set of concepts and rules (including transfer pricing regulationsand tax treaties) and even a specific interjurisdictional disputeresolution mechanism (the Mutual Agreement Procedure and CompetentAuthority process).Following a summary introduction to the building blocks of transferpricing and a brief discussion of some of the complexities of implementingthe ALP, the stage is set for a discussion on the significant differencesbetween tax avoidance and tax evasion and how these concepts intersectwith the practice of transfer pricing. Next, we consider the existing literatureon the impact of transfer pricing abuses on the tax revenues collectedby developing countries; unfortunately, this literature tends toprovide, at best, indirect evidence on the extent of income shifting andthe role of transfer pricing, but few insights into the motivation or thepossible illicit nature of the underlying transactions. We then discuss theimportance of developing countries adopting a specific transfer pricingregime; we note, in particular, that a globally consistent tax regime andhigher degree of information sharing among tax authorities on theapplication of transfer pricing policies will help to ensure consistency ofapplication, make the rules clearer for taxpayers, and increase the abilityof tax authorities to act in a fair and coordinated manner. We concludeby noting that the ALP and ongoing efforts of the Organisation for EconomicCo-operation and Development (OECD) to expand the use ofthe ALP are the best option for a theoretically sound and globally consistentapproach to transfer pricing.Throughout the chapter, we illustrate some of the implementationand administration complexities faced by multinationals and tax authoritiesby discussing three cases taken from actual exchanges between taxpayersand tax authorities. In addition to tax-minimizing choices bymanagement, these cases also illustrate the lack of coordination amongtax authorities that sometimes risks compromising solid business strategiesand valuable commercial relationships.