draining development.pdf - Khazar University

The Role of Transfer Pricing in Illicit Financial Flows 245of corporations in pursuing these more aggressive forms of tax avoidancehas sometimes been labeled contradictory to the notion of corporatesocial responsibility. Others argue that the evenhanded administrationof taxation is a matter of statutory interpretation of the tax statutesand should not be open to appeals to the intentions of legislators orvague notions of corporate social responsibility.Business restructuring as a form of tax avoidance: An old conceptIn a world of mobile factors of production, significant differences in taxrates across countries will inevitably lead to tax-based locational advantages,and profit-maximizing global companies will be at the forefront ofsecuring the benefits of structuring their supply chain in a manner consistentwith business objectives and tax minimization. However, the ideaof structuring business operations in a way that minimizes tax liabilitiesis not, by any stretch of the imagination, a new construct. In ancientGreece, sea traders avoided the 2 percent tax imposed by the city-state ofAthens on imported goods by using specific locations at which to deposittheir foreign goods; in the Middle Ages, Hanseatic traders who set upbusiness in London were exempt from tax; and, in the 1700s, the Americancolonies traded from Latin America to avoid British taxes.Securing tax-based advantages will sometimes mean relocating production,development, and even administration centers to minimize thetax burden in a legally consistent manner. The resulting shift in assets,functions, and risks will inevitably also shift profits to those countriesthat offer an environment more consistent with profit maximization.Such a shift in profits, as long as it is accompanied by a commensurateshift in assets, functions, and risks, is a legally acceptable strategy; this isthe essence of tax planning and tax avoidance. The related financial flowscould not be considered illicit.However, shifting profits without a business justification (that is, in amanner not commensurate with the assets employed, the risks borne, orthe functions provided) is clearly illegal and should be considered illicit.For corporations engaging in such manipulative practices (which effectivelymeans that the transfer prices employed are outside of the relevantarm’s-length interval), the penalties can be costly. For example, GlaxoSmithKline announced, in September 2006, that they had settled a longrunningtransfer pricing dispute with the U.S. tax authorities, agreeing