draining development.pdf - Khazar University

Accounting for the Missing Billions 269consequence, many consider deferred tax charges as accounting fictionand as unreliable, and they are, curiously, the only liability included inthe set of accounts whether or not there is any prospect of their settlement.In this case, to include them in the tax charge in considering thereal taxation paid by corporations is seriously misleading and underminesmany existing studies of effective taxation rates among MNCs.Thus, the methodology used in these studies is inappropriate for appraisingthe transfer mispricing that these studies survey.Using accounting data from the companies, Murphy (2008) showsthat the largest 50 companies in the FTSE 100 increased their net deferredtax provisions (that is, the cumulative provisions that are made by acompany for deferred taxation arising over the period of trading to dateand that are shown as a long-term liability on balance sheets) from £8billion to £46 billion between 2000 and 2006. This hints at the existenceof significant tax avoidance that database information on the taxationcharges in company accounts is unlikely to reveal.The room for disagreement is thus substantial on whether there is, ornot, a major transfer mispricing issue that might have particular relevanceto developing nations and in which secrecy jurisdictions may playa significant part in a way that policy change may need to address. 4It is not the purpose of this chapter to resolve whether the mispricingtakes place or not. The chapter has another purpose, which is approachedfrom an accounting and auditing perspective. An audit tests the credibilityof reported data. This is not a test of whether the variable is right orwrong: financial audits do not offer an opinion on this to their users.Instead, the audit seeks to test whether the variable may be true and fair.In seeking to prove or disprove the credibility of data, auditors have, forsome time, realized that a microapproach, that is, verification based ontransactional data alone, is unlikely to provide all (and, in some cases,any) of the data needed to determine the likely credibility of the overallstated position. The alternative approach involves verifying data by testingthe credibility of sums in total.This testing can take a number of forms. For example, do the data fallwithin the known range of plausible outcomes based on the third-partydata that are available? Alternatively, are the data within the likely patternof outcomes that may be observed within the entity that is beingtested? And are the total data plausible in that they are consistent withother known totals?