draining development.pdf - Khazar University

260 Draining Development?payable by means that are within the law. By contrast tax evasion is a felony andthe general term for efforts to not pay taxes by illegal means.” Consistent withthese definitions, the OECD has been focusing on combating tax evasion(OECD 2009).13. Concerns with egregious cases of tax evasion have recently come to the fore withthe widespread publicity accorded to the 2008 case involving LGT Bank of Liechtenstein.After the initial case became public in Germany, a U.S. Senate investigationscommittee extended the inquiry to possible abuses by American taxpayers;other countries followed suit; and the issue of tax evasion and tax havens has sincebecome a key agenda item at various international policy forums. The report bythe U.S. committee estimated that offshore tax havens supported tax evasionschemes that reduced tax collections in the United States by about US$100 billionper year (compared with annual gross domestic product of around US$14.2 trillion,annual federal tax revenue of close to US$2.5 trillion, and annual federalspending on Medicare and Medicaid of some US$675.0 billion) (see PermanentSubcommittee on Investigations, 2008, “Tax Haven Banks and U.S. Tax Compliance:Staff Report,” Report, U.S. Senate, Washington, DC, July 17).14. In this region of the world, government routinely collects royalty and tax paymentsin kind. At the time the contract was signed, the price of the commoditywas near historical lows.15. In the absence of a specific transfer pricing regulation, there was no specificauthority to enforce compliance with the ALP even though the tax laws includedgeneral antiavoidance provisions (which are typically vaguely worded, difficultto interpret without legal precedents, and cumbersome to implement).16. Tax authorities in some OECD countries are combating the lack of disclosurethat is part of these tax evasion schemes by accessing a wider set of information.In the United States, for example, the Internal Revenue Service has started relyingon records from American Express, MasterCard, and Visa to track the spendingof U.S. citizens using credit cards issued in Antigua and Barbuda, The Bahamas,and Cayman Islands. As a direct result of such information, the accountingfirm KPMG admitted that its employees had criminally generated at least US$11billion in phony tax losses, often routed through Cayman Islands, which cost theUnited States US$2.5 billion in tax revenue, and, in 2007, the drug maker Merckagreed to pay US$2.3 billion to the government to settle a claim that it had hiddenprofits in a Bermudan partnership.17. For example, Maffini and Mokkas (2008, 1) find that “a 10 percentage points cutin the statutory corporate tax rate would increase multinationals’ measured[total factor productivity] by about 10 percent relative to domestic firms, consistentwith profit-shifting by multinationals.”18. For a review, see Fuest and Riedel (2009). Even for the United States, where moredisaggregated and higher-quality data are available, the U.S. GovernmentAccountability Office recognizes that the usefulness of the available estimates