draining development.pdf - Khazar University

The Role of Transfer Pricing in Illicit Financial Flows 255• Contemporaneous documentation requirements (to facilitateenforcement)• The use of advance pricing agreements, which hold the promise ofsimplifying the negotiation and monitoring of transfer pricing practices,including by generating relatively quickly a much-needed bodyof locally relevant precedents 32The call to strengthen enforcement is a common refrain, but it isnonetheless of primary importance. Low tax collection rates occur moreoften in countries where fundamental issues of tax administration andinstitutional weaknesses tend to complicate (severely) the enforcementof the existing tax regime, regardless of choices on tax policy. The operationalchallenges include not only questions of organizational design(encompassing accountability mechanisms, the relationship betweenpolicy and administration, and risk management practices), but alsocapability in basic tools such as auditing and a sound knowledge of legalprinciples.The fact that these economies tend to be economically less diversifiedactually enhances the ability to make quick progress toward effectiveimplementation of the ALP. MNEs operate in relatively few sectors inthese economies, and tax auditors require a clear understanding of onlya few types of business models, that is, by strengthening their degree offamiliarity with the assets, functions, and risks deployed in only a fewsectors, tax auditors can typically cover a significant proportion of thetax clientele that uses transfer prices in determining tax liabilities (forexample, see the case of Zambia in box 8.4).The other recommendations (exchange of information and a globallyconsistent transfer pricing regime) are crucial because taxpayers tend toview transfer pricing (primarily) from a risk-management point of view.As a result, there is a natural tendency for companies to undertake moreefforts to comply with the requirements of those countries that havemore effective regulations (including documentation requirements) andenforcement capacities (so as to minimize the possibility of compliancepenalties and negative publicity). By the adoption of clear and globallyconsistent transfer pricing regulations, developing countries should beable to nudge MNEs into a more balanced risk assessment, which wouldpermit the revenue authorities to direct their limited resources to