draining development.pdf - Khazar University

288 Draining Development?ever brought to court in Africa has shown (Unilever Kenya Ltd v. Commissionersof Income Tax, Kenya Income Tax Appeal 753, 2003), theabsence of the accounts of the related party with whom trade was beingundertaken in the destination jurisdiction is a significant cause of thefailure to prove that profit was being shifted through the transfer mispricingof goods; this is what the Kenyan authorities were seeking toprove had occurred using the OECD arm’s-length principle. Althoughthe accounts in question were necessarily available to the group of companiesthe Kenyan subsidiary of which made the appeal in this case, theywere not made available to the court. It is likely that the withholding ofthis accounting data, albeit entirely legal, had a material impact on theresulting decision of the court in Kenya.Secrecy prevented the proper determination of a transfer pricingissue in this case, whether rightly or wrongly. This is a recurring themeof work in this area, as is the persistence of the assertion that developingcountries are particularly vulnerable to the effects of secrecy. If this is thecase, it is important that the mechanisms for creating this secrecy thatpermits transfer mispricing to take place undetected, unchallenged, oruncorrected be considered. Unless it can be shown that corporations canmake use of secrecy to achieve this outcome, then it remains implausiblethat transfer mispricing of the alleged scale takes place. If, in contrast,significant secrecy is available to corporations, then corporations havethe opportunity to transfer misprice, as some believe is taking place.How Multinational Corporations Exploit SecrecyThe modern MNC is a complex entity. This is not the place to explore allaspects of the nature of the MNC or the motivations for creating someof the structures MNCs use, but, without consideration of the interactionof the corporation, jurisdictions, corporate law, and tax law, testingthe proposition that transfer mispricing can take place within MNCsand be hidden from view within the accounts and financial statements ofMNCs is not possible.The MNC is almost invariably headed by a single company, the parententity, which is almost always a limited liability corporation. The parententity comprises a number of other, usually similar limited liability corporationsspread over one or more other jurisdictions. For example, in