draining development.pdf - Khazar University

The Role of Transfer Pricing in Illicit Financial Flows 261and our ability to interpret the results crucially “[depend] on how many of theimportant nontax characteristics have been included in the analysis” (GAO2008, 5). This is because the statistical relationships exploited by most studiesare liable to be considerably affected by the researchers’ ability to control forsignificant industry- and corporate-specific effects. The importance of thesecontrols is highlighted by the U.S. Government Accountability Office (GAO2008), which indicates that, for the United States, foreign-controlled domesticcorporations tended to report lower tax liabilities than United States–controlleddomestic corporations between 1998 and 2005 (by most measures), but alsothat the percentage reporting no tax liability was not statistically different after2001. Most importantly, these two types of corporations differ significantly inage, size, and industry, and companies in different sectors are likely to have differentfinancial characteristics (including levels of assets) and therefore differentlevels of receipts and profitability. The U.S. Government Accountability Officedoes not attempt to explain the extent to which such factors affect differences inreported tax liabilities (GAO 2008).19. There is, for example, empirical support for the notion that price differenceswithin product groups are mostly related to quality differences, where “developingcountries tend to export low-end/low-price products whereas developedcountries export high-end products with higher prices” (Fuest and Riedel2009, 33).20. For more detailed considerations, see Fuest and Riedel (2009) and our discussionelsewhere in the text on the incentives for mispricing on both the importside and the export side.21. The empirical evidence also confirms that FDI is responsive to other locationaladvantages such as country risk, public inputs, and skill availability.22. For a more scholarly summary, see Altshuler and Grubert (2006). For a morepopulist treatment, see recent publications by the Tax Justice Network, ChristianAid, and Oxfam, among others.23. See, for example, Mutti and Grubert (2004) and, for a brief summary, Zodrow(2008).24. The results of this research are summarized in Haufler and Stöwhase (2003), asfollows:• FDI in the primary sector (consisting of agriculture, fishing, mining andquarrying) has a tax elasticity of around zero, implying that FDI is not drivenby tax incentives.• Investment in the secondary sector (manufacturing) is negatively and significantlyaffected by an increase in effective taxation. The tax elasticity is around−2, implying that a 1 percent increase in the tax rate of the host countrydecreases FDI by roughly 2 percent, all else being equal.• Compared with the secondary sector, FDI in the tertiary sector (consisting ofinvestment in service industries such as transport, communication, and