draining development.pdf - Khazar University

Accounting for the Missing Billions 301The existence of the Big Four firms of accountants—PricewaterhouseCoopers,Deloitte Touche Tohmatsu, Ernst & Young, and KPMG—in many secrecy jurisdictions in which their location cannot possibly bejustified solely by the needs of the local populations reinforces this view.As Murphy (2010b) shows, the Big Four firms are significantly overrepresentedin small secrecy jurisdictions (those with less than 1 millionpopulation) compared with other locations of this size (see table 9A.6). 30As he also shows, these locations of the Big Four have an average GDPper head that is approximately four times greater than the average GDPin similar locations in which the Big Four are not present. Of course,cause and effect cannot be proven based on this circumstantial evidence,but the possibility exists, especially in the smallest of such locations, thatthe income in question is not earned in these places, but is transferred inthrough transfer mispricing, and, in that case, the Big Four firms, asMurphy suggests, facilitate the structures that allow the transfer mispricingto occur.ConclusionThis chapter has sought, first, to test the credibility of the claim that atleast US$160 billion a year may be lost by developing countries as a resultof transfer mispricing by MNCs.Second, it has sought to demonstrate that developing countries and,particularly, the extractive industries may be especially prone to thisabuse.Third, it has considered whether this sum may be hidden from viewwithin the accounts or financial statements of the MNCs that may beperpetrating the mispricing.Fourth, it has explored the possibility that these MNCs may usesecrecy jurisdictions to assist in hiding these transactions from view.As the chapter indicates, the incentive to transfer misprice is great.This is because, first, the differential in effective tax rates between thejurisdictions in potential supply chains is higher than the existing literatureon tax rates suggests would normally be the case. Second, it isbecause the structure of international tax regulation at present suggeststhat the chance of detection of transfer mispricing is low.