draining development.pdf - Khazar University

280 Draining Development?The differential is even more significant if comparison is made withthe simple weighted average tax rates in Africa. The incentive to tax avoidthrough transfer mispricing from that continent would appear to bestrong, a theme to which we return below.What does need to be assessed is whether the incentive based on taxrate differentials is sufficient to justify the claimed US$160 billion ormore of transfer mispricing that is said to take place each year. Analyticalreview techniques such as are found in auditing are used here with theobjective of testing whether the claimed audit outcome (in this case, thattransfer mispricing results in losses to developing countries of US$160billion a year) is within the plausible range of data outcomes that populationinformation implies may be likely.It is proposed that, in analytical review terms, the estimates of transfermispricing would be considered plausible if the total estimatedamount of tax lost to transfer mispricing were materially less than theamount of tax lost as measured by the differential between weightedaverage headline tax rates (which would indicate tax due if corporationswere tax compliant) and the tax likely actually to be paid calculated usinglikely cash paid tax rates, as noted above. In this context, tax complianceis defined as an effort to pay the right amount of tax (but no more) in theright place at the right time, where right means that the economic substanceof the transactions undertaken coincides with the place and formin which they are reported for taxation purposes.Data on tax rates have already been developed above. The other dataneeded are as follows:• A measure of world GDP, because the trade that is transfer mispricedis a proportion of world GDP, and that proportion must be credible• An indication of corporate profits as a proportion of world GDP,because, ultimately, it is profits that are shifted as a result of transfermispricingThese data, if combined, will generate the following:• A measure of worldwide corporate taxable profits• If weighted by the tax rate data noted above, the measure of worldwidecorporate taxable profits will give measures of both the likely taxpaid and the tax lost because tax rates weighted by GDP are not paidby major corporations, as noted above