draining development.pdf - Khazar University

Accounting for the Missing Billions 267chapter, double tax agreements (DTAs) that would make it so are not inplace, nor are relevant local laws.NGOs and civil society organizations are not the only source of literatureproposing that transfer mispricing might be used to reallocate profitsacross jurisdictions. There is a substantial body of academic literatureasserting that this practice is commonplace, although this literature doesnot focus on developing and transitional economies in coming to itsconclusion. For example, Dischinger and Riedel (2008) state that intangibleassets such as patents and trademarks are increasingly seen as thekey to competitive success and as the drivers of corporate profit, but alsoconstitute a major source of the opportunity for profit shifting in MNCsbecause of the highly nontransparent transfer pricing process. Theyargue that this provides MNCs with an incentive to locate intangibleproperty in jurisdictions with relatively low corporate tax rates. Theyfind evidence to support this activity, showing that the lower a subsidiary’stax rate relative to other members of a multinational group, thehigher the subsidiary’s level of intangible asset investment.Harry Huizinga (2009), in a wide-ranging review, indicates thatMNCs can relocate profits in a number of ways. First, they could changereal activity, that is, where they locate; second, they could manipulatetransfer prices; third, they could choose the location of intangible assetsand associated income such as royalties (as Dischinger and Riedel 2008emphasize); or, fourth, they could choose the location of their headquartersto create possible favorable international double taxation consequences.Having reviewed the current literature within Europe on thisissue, Huizinga concludes that international profit shifting erodes thecorporate tax base in Europe, that the best approach to tackling theproblem is to eliminate incentives for firms to shift profits, and thatinternational policy cooperation is necessary to achieve this.Notably, the academic studies, in contrast to those by NGOs, find thatthe scale of income shifted is relatively small, only a few percentagepoints, at most, of the tax base. For example, in chapter 4 in this volume,Fuest and Riedel posit that Baker (2005), Kar and Cartwright-Smith(2008), Christian Aid (2008), and others all overstate the extent of transfermispricing, although all these authors reject the assertion becauseFuest and Riedel make a fundamental error by assuming that overpricedinflows and underpriced outflows may be netted off for the purposes of