draining development.pdf - Khazar University

The Role of Transfer Pricing in Illicit Financial Flows 253and the growing reliance on service transactions and intangibles as onemoves from the primary to the secondary and tertiary sectors wouldmake it easier to shift profits simply by manipulating transfer prices,without the need for costly reallocations. While this finding, as indicatedby Stöwhase, amounts to (indirect) evidence of income shifting, theresponsiveness of FDI is evidence that profits are moving in a way commensuratewith FDI flows (that is, with shifts in assets, risks, and functions).In other words, this evidence is more consistent with legal taxplanning and tax avoidance strategies rather than with tax evasion.We also know that corporate tax rates are broadly similar in developingcountries and developed countries, notwithstanding differences in taxrates and tax structures across countries (World Bank 2004). 25 For transferpricing, this implies that manipulations that are purely tax motivatedshould involve a tax-evading higher import price into a developing countryand a tax-inducing higher export price from a developed country asmuch as a tax-evading higher import price into a developed country anda tax-inducing higher export price from a developing country. In this context,it is not clear why MNEs would consistently engage in tax-drivenpractices geared strictly to stripping out profits from developing countries.Yet, many studies consider only one direction in mispricing transactions,which results in a significant overestimation of the net tax revenue losses;this includes estimates prepared by tax departments of OECD countries.Finally, some commentators point out that the revenue collectedtends to be lower in developing countries than in developed countries,notwithstanding broadly similar tax rates. Data of the World Bank’sWorld Development Indicators suggest that the average ratio of tax revenueto gross domestic product in the developed world is approximately35 percent compared with 15 percent in developing countries and only12 percent in low-income countries. 26 This gap, it is further argued, is asign of a nexus of phenomena, such as encroaching globalization andcorporate profit shifting, that work against the ability of developingcountries to collect needed tax revenue (generally dubbed the harmfultax competition argument).Developments during the 1990s do not appear to support the argumentof a race to the bottom, however. As the pace of globalizationpicked up in the 1990s, there was a substantial increase in the number ofMNEs and a significant extension of the set of options available for the