draining development.pdf - Khazar University

270 Draining Development?Importantly and, in the current case, crucially, all such tests must takeinto consideration the broader commercial, regulatory, legal, and riskenvironments in which the transactions or balances being consideredoccur. An auditor is not allowed to consider numerical data in isolation;the use of such data must be contextualized.This chapter seeks, first, to test the hypothesis according to whichtransfer mispricing by major corporations that gives rise to tax lossesamounting to at least US$160 billion a year among developing countriesis plausible in the context of the total likely worldwide corporate profitsin a year during the same period of reference (that is, pre-2008).Second, it tests whether corporate activities in developing countriesand, particularly, in the extractive industries may be especially prone tothis abuse.Third, it considers whether this sum may be hidden from view withinthe accounts and financial statements of the MNCs that might be perpetratingthe mispricing.Fourth, it explores the possibility that MNCs may use secrecy jurisdictionsto assist in hiding these transactions from view.The rest of the chapter is divided into five sections. The next sectionexplores the tax rates that MNCs have and are likely to face; it shows thatmuch of the existing literature on this subject offers misleading indicationsof likely effective tax rates.In the subsequent section, the state of transfer pricing regulation andpractice within the extractive industries is explored on the basis of arange of sources on which the author has worked over a number of years.The following section looks at the way in which MNCs are structuredand how this structure interacts with the corporate and tax law of thelocations that host some of these MNCs; it also contrasts these relationshipswith the requirements of International Financial Reporting Standards(IFRSs), which are the standards that govern the financial reportingof most such entities now that U.S. Generally Accepted AccountingPrinciples are converging with the standards issued by the InternationalAccounting Standards Board.The penultimate section considers the nature of secrecy jurisdictions.Data on the use of such locations by MNCs are presented. The role of theBig Four accounting firms is touched upon.The evidence is drawn together in the concluding section.