draining development.pdf - Khazar University

266 Draining Development?In each case, it is suggested that the behavior described is plausibleand that, as a consequence, losses of the estimated amount are also plausible,although not proven to exist as a result of this work.IntroductionSince 2000, a body of literature, mainly emanating from nongovernmentalorganizations (NGOs), has developed suggesting that systematictransfer mispricing is taking place within the world’s MNCs. This literatureasserts, in the first instance, that the flows in question abuseinternational standards on transfer pricing implicit in the arm’s-lengthpricing rules of the Organisation for Economic Co-operation and Development(OECD) and that the abuse results in significant loss in revenuesto developing countries. 2Estimates of the loss vary. Christian Aid’s estimate (2008) finds thattransfer mispricing and related abuses result in the loss of corporate taxrevenues to the developing world of at least US$160 billion a year, a figurethat, it notes, is more than 1.5 times the combined aid budgets of therich world, which totaled US$103.7 billion in 2007.Raymond Baker (2005) proposes that total annual illicit financial flows(IFFs) might amount to US$1 trillion, asserting, in the process, that theseflows pass illegally across borders aided by an elaborate dirty money structurecomprising tax havens, financial secrecy jurisdictions, dummy corporations,anonymous trusts and foundations, money laundering techniques,and loopholes intentionally left in the laws of western countries. 3 Of thisamount, Baker estimates that some US$500 billion a year flows from developingand transitional economies. He suggests that at least 65 percent ofthese flows may be accounted for by transfer mispricing.Baker’s findings have been endorsed by Kar and Cartwright-Smith(2008), who estimate that, in 2006, developing countries lost US$858.6billion to US$1.1 trillion in illicit financial outflows. Note that the termillicit is appropriately used in this chapter. The Oxford English Dictionarydefines illegal as contrary to or forbidden by law, but illicit as forbiddenby law, rules, or custom. The distinction is important. Transfer mispricingis illicit; it is contrary to known rules or customs, but, in many of thetransactions of concern, it is not illegal because, as noted later in this