draining development.pdf - Khazar University

Accounting for the Missing Billions 283were tax compliant, that is, if they paid the right amount of tax (but nomore) in the right place at the right time, where right means that theeconomic substance of the transactions undertaken coincides with theplace and form in which they are reported for taxation purposes and thatprofits arise where third-party sales (for which GDP is a proxy) occur.Second, the rate, including secrecy jurisdictions and ring-fences, reflectsthe reality of the tax system that, this chapter notes, MNCs can actuallyexploit, that is, the rate is used in recognition of the fact that secrecy doesallow the relocation of profits and that ring-fences for foreign earningsmight be used to apply low tax rates to profits reallocated by transfermispricing techniques behind the veil of secrecy.It is plausible that the differential in taxes paid, based on the varyingassumptions, of some US$700 billion might include transfer mispricingeffects of US$160 billion that have been claimed (Christian Aid 2008).Transfer mispricing abuse would represent 22.8 percent of the tax deferralon this basis, and one may note that, because some of this deferralmay be represented as deferred tax provisions in the accounts of MNCs,the actual impact on the tax charge in the accounts of MNCs may belower than this implies without diminishing the cash loss to developingcountries.A ratio of this proportion allows ample margin for numerous otherfactors that may reduce declared tax rates, including advanced capitalallowances (by far the biggest claimed factor in tax deferral noted inMurphy 2008), nonremittance of profits (perhaps transfer mispricinginduced), tax holidays, and so on. If private company profits were to beincluded in the profit base on which the calculation has been undertaken,the margin for these other factors would obviously be higher still.What is clear is that these data suggest that US$160 billion in transferpricing abuse affecting developing counties is plausible within the frameworkof the world economy given what we know of corporate profits,corporate tax rates, and the opportunities for corporate tax planning.The risk of being caughtIf it is plausible that transfer mispricing of the suggested order may havetaken place, we must then ask if the transfer mispricing could have takenplace without detection or sanction.