draining development.pdf - Khazar University

Introduction and Overview: The Dynamics of Illicit Flows 11some of these markets, there will be flows back to the country of humanorigin, but, in others, the value added will occur and remain in the destinationcountry. Kopp concludes that there are no authoritative estimatesof the scale of these markets and little prospect that such estimateswill be generated either globally or at the national level; prices for servicesvary substantially, and there is no systematic basis for estimatingthe scale of the human trafficking itself.To What Extent Do Corporations Facilitate Illicit Flows?The chapters in part III mostly deal with inherently technical questionsthat cannot be avoided in seeking to understand the flow between thedeveloping and developed worlds. In particular, transfer pricing, themethods by which multinational firms price transactions between affiliatesin different countries with varying tax rates, may permit large transfersof taxable revenue that are properly viewed as illicit, even if not formallyillegal. Trade mispricing, in which export or import documentscarry false prices, also may be important both as a source of tax evasionand as a channel for movement of illicit funds.In “Transfer Price Manipulation” (chapter 7), Lorraine Eden of theMays Business School at Texas A&M University provides an overview ofthe methods by which firms set prices in these internal, but international,transactions. There is a well-established set of theoretical principles and, insome nations, generally in the Organisation for Economic Co-operationand Development (OECD), a detailed set of rules to implement theseprinciples. However, in the real world, there are many potential sources ofdeviation that allow for considerable discretion and potential abuse.Moreover, some countries, mostly in the developing world, have not createdrules specific to the setting of these prices.Eden reviews the thin empirical literature on the extent of incometransfer by transfer price manipulation (TPM). Whether through analysisof individual transactions or more aggregate methods, most studiesfind evidence that TPM occurs in response to changing corporate taxrate differentials. However, the research task is complicated by the largevariety of factors that influence a corporation’s incentives for TPM; advalorem taxes, restrictions on the repatriation of profits, and politicalinstability all play a role. The literature is also dominated by studies