draining development.pdf - Khazar University

302 Draining Development?The chapter then shows that the risk that transfer mispricing may goundetected within the extractive industries that supply much of the externalearning capacity of many developing countries is great. As the chapteralso notes, transfer mispricing in this sector is unlikely to be motivated bya desire to avoid taxes on corporate profits alone. The abuse is likely toextend to royalties, sales and purchase taxes, dividends, abuse of profitsharingagreements, and more. The incentives to abuse for all these reasonsare substantial, and the consequence of not tackling the issue considerable,but, as the chapter shows, the prospects of tackling the issue arelimited given the current legislative and contractual constraints.The chapter also reviews a number of IFRSs, in particular the standardsaddressing consolidated accounts and financial statements, related-partytransactions, and segment reporting: the three standards most likely torelate to disclosure of intragroup trade within the accounts of MNCs. Theanalysis shows that these standards are not designed to, and are not capableof, leading to the disclosure of these transactions and the associatedtransfer pricing. It proposes that this failure may be intentional.The chapter defines secrecy jurisdiction and argues that secrecy jurisdictionsare deliberate constructs. Secrecy jurisdictions are used disproportionatelyby MNCs as measured relative to local populations andGDP. In the secrecy jurisdictions most popular with the MNCs, there islittle prospect of any real added value arising because, as the chaptershows, the economies of these secrecy jurisdictions are largely dedicatedto the supply of financial services, part of which activity is administeredby the MNC subsidiaries. This pattern of use does, however, accord withthe proposed definition of a secrecy jurisdiction, suggesting that the purposeof these jurisdictions is to disguise the true nature of activity undertakenelsewhere so that compliance with the regulations of other statescan be avoided or evaded. Transfer mispricing may be only one abusiveactivity that may be occurring.What overall conclusions may one draw from this evidence? The followingconclusions are proposed.First, it is apparent that there is a stronger incentive to transfer mispricethan the existing literature has suggested. Second, developingcountries are particularly susceptible to this activity. Third, this activitycan be hidden from view in accounts. Fourth, secrecy jurisdictions providean additional layer of opacity to disguise this activity. Fifth, the