draining development.pdf - Khazar University

250 Draining Development?on their ability to maximize after-tax profits, and economic efficiency isgenerally raised by the search for lower costs. What is less clear is howmuch of this profit shifting is associated with tax evasion, and, withinthat category, how much is due to transfer pricing. In other words, giventhat transfer pricing analyses typically provide a range of prices or profitlevels consistent with the ALP, is it the case that MNEs simply select apoint within the range that legally minimizes their tax liability, or is it,instead, the case that MNEs effectively choose a point outside the ALPrange?The role of transfer pricingTo date, there is no direct evidence on the role that transfer pricing playsin tax evasion (box 8.3). It is likely true, however, that MNEs routinelychoose prices within the ALP range in a tax efficient manner, but thiswould be classified, at most, as tax avoidance. Two recent studies, Bartelsmanand Beetsma (2003) and Clausing (2003), provide direct evidenceon the related issue of profit shifting associated with transfer pricing.Their findings are broadly consistent with tax minimization strategies,but neither of these studies distinguishes between tax avoidance and taxevasion. Both studies find that a 1 percentage point increase in a country’stax rate leads to a decline in reported taxable income of roughly2.0–2.5 percent. These findings are consistent with the interpretationthat a lower corporate tax rate tends to encourage firms to anchor theirBox 8.3. A Measure of Tax Evasion in the United StatesIn what is likely the most rigorous exercise of its kind, the U.S. tax authority estimated that thegross tax gap for the U.S. taxation year 2001 was close to US$350 billion, of which US$30 billionwas due to the corporate sector (on account of nonfiling, underreporting, and underpayment). a Itis not clear how much of this was associated with transfer pricing issues. In any case, this estimateis also likely to be an overestimate given that the U.S. tax authority would not have taken accountof the reverse situation in which a United States–resident corporation overreports income in theUnited States (because the other jurisdiction is the high-tax country).a. The gross tax gap is defined as “the difference between what taxpayers should have paid andwhat they actually paid on a timely basis”; it excludes the impact of penalties and late interestcollected by the tax authority. In the U.S. study, the bulk of the tax gap arose from underreportingon individual tax returns (close to US$200 billion) and on employment returns (close to US$55billion).