draining development.pdf - Khazar University

The Role of Transfer Pricing in Illicit Financial Flows 247have pressured the MNE into an ALP-consistent treatment if thecountry roles were reversed), a substantially lower marginal corporatetax rate of 35 percent, and a (legal) scheme that allowed a recharacterizationof non–ALP-consistent inbound transactions (through a practiceknown as informal capital rulings).• The local subsidiary was generally worried about the high-risk environment(including the possibility of expropriation) and a bindinglimit on its ability to repatriate profits.In the end, the MNE managed to assign the (bulk of the) windfallprofits to the trading subsidiary, which used an informal capital ruling toachieve a highly favorable tax treatment in the OECD country (likely ata tax rate of 1 percent for what was considered a capital contributioninstead of taxable income).Should this be considered a case of tax avoidance or tax evasion? Inthe absence of a legal requirement for related-party transactions to becarried out at arm’s length, the local subsidiary honored its contract withthe government, assumed the risk of a fixed price compensation scheme,benefited from the subsequent rise in oil prices, and onsold the oil to itsrelated party at the same price it negotiated with the government. In thetax system of the source country, there was nothing that would label thistransaction as illegal. 15Suppose, for instance, that the local subsidiary (which only has expertisein exploration and not in trading) had presold the oil receivableunder the contract to its trading subsidiary at the time that it initiallyentered into the contract in an attempt to hedge its position. The impacton the assignment of profits would have been similar to a later transferat the contract price. Should this transaction be labeled as a cautiousbusiness approach, or should it be characterized, ex post, as incomeshifting and, possibly, tax evasion?Global tax planning and transfer pricing practices indeveloping countriesThe case of the large petroleum company and its allocation of tradingprofits from the country of exploration to a low-tax OECD jurisdictionraises important questions about the tax system in developing countriesand global tax cooperation. This discussion is particularly significant for