draining development.pdf - Khazar University

12 Draining Developmentfocused on where the data are available, particularly the United States.Eden concludes that TPM occurs, but she is not able to estimate howimportant it is anywhere, let alone in individual developing countries.More detail that is specific to the case of developing countries is providedin “The Role of Transfer Pricing in Illicit Financial Flows” (chapter8) by Carlos Leite, a former IMF economist and Deloitte Touche Tohmatsuanalyst in Toronto. Leite illustrates the inherent uncertainties inmany dimensions of transactions. For example, what is a reasonablemethod of allocating risk among different affiliates in a multinationalcorporation? He uses the example of an oil company in a developingcountry. The company entered into a complex contract that generatedunexpectedly high profits in the country, which lacked any specific regulationsfor transfer pricing. The company was thus able to shift the profitsto the country in which its oil trading subsidiary resided and in whichit may have paid only a 1 percent tax. Should this be treated as tax avoidance,particularly given the firm’s legitimate fear of expropriation by thenew regime in the developing country, or tax evasion, given that anyreasonable set of transfer pricing rules would have required declarationof the income in the developing country? Leite’s chapter emphasizes theextent to which many transfer pricing decisions that affect developingcountries lie outside the realm of the OECD principles.Richard Murphy, an accountant and a principal analyst in the TaxJustice Network effort to bring attention to the corporate and tax havenroles in illicit flows, tackles the scale of the corporate flows in “Accountingfor the Missing Billions” (chapter 9). Basing his analysis on theapproach of an auditor, Murphy first tests the hypothesis that substantialtransfer mispricing by major corporations might contribute to a loss ofat least US$160 billion a year to developing countries in the context ofthe total likely corporate profits tax paid or not paid worldwide in a year.Second, he explores the hypothesis that activities in developing countriesand in the extractive industries in particular might be especiallyprone to this abuse. This reflects both the lack of any effective monitoringcapability in many developing countries and the fact that transferprices can greatly affect not only taxes on corporate profits, the usualfocus of transfer mispricing, but royalties and other price-sensitive taxes.Third, Murphy considers whether this sum could be hidden from viewwithin the accounts or financial statements of the multinational corpo-