draining development.pdf - Khazar University

290 Draining Development?entity. The dichotomy is that the assumption accomplishes this in theeffort to reinforce the division inherent in the act of incorporationthrough the presentation of the group as one undertaking distinct fromthe owners, who obtain only the limited information the directors maywish to supply, subject to legal constraints.The inherent conflict in reporting results is exacerbated by a numberof other factors. First, the definition of control used for accounting maybe different from the definition used by some jurisdictions for tax. So,some entities that are within the group for tax purposes in some locationsmay not be within the group in other locations. For example, taxmay require 75 percent control, while accounting requires 50.01 percentin most cases. Therefore, entities that, for accounting purposes, may berelated parties requiring inclusion in a common set of consolidatedaccounts and financial statements may not be so treated for transferpricing purposes.Second, note that some entities are deliberately structured to exploitthe rules on consolidated financial reporting. In particular, the financialservices industry has become expert at creating orphan entities. Theseare companies that are created by a parent organization and that aredeliberately structured by the parent entity so that they are off the balancesheet; thus, the assets or liabilities that the orphans own are excludedfrom consolidation in the parent entity’s accounts and financial statements,as are the results of the trading of the orphans.A common way to engineer this outcome is to create a company towhich are transferred the off–balance sheet assets and liabilities the parententity wishes to hide from view. The new entity is owned by a charitabletrust, for example. As such, it is not considered to be under theownership or control of the parent entity. This is why it is described asan orphan; it has become parentless, although it is utterly dependent onthe parent entity.These entities are hard to spot, but commonplace. While the entitiesare used to exclude liabilities from accounts, the rules that permit thiswill, in most cases, also allow them to be used for transfer mispricing,which may pass undetected, subject to the caveat that the proceeds mustthen be used for purposes that the group may wish to keep at quasiarm’slength. This purpose may be fraudulent.