draining development.pdf - Khazar University

The Role of Transfer Pricing in Illicit Financial Flows 257based system at the implementation level. Often, the benchmarking ofcomparable transactions and companies provides a range of acceptableprices and the conclusion that any point inside this range is consistentwith arm’s-length pricing. In this context, selecting a lower (or higher)price within the arm’s-length range of prices, whether in response to taxobjectives or otherwise, cannot be construed as anything other than alegal practice or, at most, as tax avoidance. Similarly, shifting incomefrom one country to another in a manner that is commensurate with ashift in assets, functions, and risks cannot be construed as anything otherthan a legal way of business restructuring.Alternative proposals for a transfer pricing system, including grandioseschemes involving a global tax authority and global apportionmentformulas, have been proposed and debated. Overall, these alternativesnot only lack theoretical rigor, but are also less likely to win internationalagreement (which is crucial to ensuring that rules are consistently andfairly applied). Therefore, we argue that the current framework providesa construct that should help corporations avoid double taxation andshould also help tax administrations receive a fair share of the tax baseof multinational enterprises. While any set of rules can be potentiallymanip ulated, the OECD-led initiative to develop and extend the reach oftransfer pricing guidelines based on the ALP represents the best alternativefor a system that is theoretically sound and amenable to being implementedin an internationally coordinated and consistent manner.We also review the empirical evidence on the impact of transfer pricingin illicit flows from developing countries. Essentially, there is nodirect evidence of such an impact. The majority of available studies areconducted at an aggregate level, and even the studies that provide directevidence on the extent of income shifting arising from transfer prices donot distinguish between ALP-consistent price changes (tax avoidance)and non–ALP-consistent changes (tax evasion). There is also a dearthof analytically rigorous evidence on the impact of income shifting ondeveloping countries and their ability to collect taxes.Finally, we discuss the importance of introducing a specific transferpricing regime in developing countries (rather than relying on ad hocmeasures and general antiavoidance provisions). This would ensure thattax structures and policies are more well integrated with internationalbest practice, and, for the private sector, it would make the rules of the