draining development.pdf - Khazar University

Accounting for the Missing Billions 303combination of the secrecy inherent in accounting rules and secrecyjurisdiction legislation provides a deep opacity that limits the possibilityof discovering transfer mispricing activity. As a result, the chapter findsthat transfer mispricing may be taking place undetected.In this case, is it also plausible that the quantum of the loss to developingcountries may be as much as US$160 billion per annum? As notedin the chapter, this seems to be quite plausible on the basis of data verifiedfrom a variety of sources and therefore considered a credible basisfor the analytical review techniques common in auditing methodology.Thus, on the basis of the methodologies noted, the chapter concludesthat substantial transfer mispricing by major corporations contributingto a loss of at least US$160 billion a year to developing countries is plausiblein the context of the total likely corporate profits earned worldwidein a year.Notes1. Transfer mispricing occurs if two or more entities under common control thatare trading across international borders price transactions between them atrates designed to secure a tax advantage that would not be available to third partiestrading in the same goods or services across the same borders.2. The arm’s-length principle is the international standard that OECD membercountries have agreed should be used to determine transfer prices for tax purposes.It is set forth in article 9 of the OECD Model Tax Convention, as follows:where “conditions are made or imposed between the two enterprises in theircommercial or financial relations which differ from those which would be madebetween independent enterprises, then any profits which would, but for thoseconditions, have accrued to one of the enterprises, but, by reason of those conditions,have not so accrued, may be included in the profits of that enterprise andtaxed accordingly” (Centre for Tax Policy and Administration, “Annex 3: Glossary,”OECD, Paris, http://www.oecd.org/document/41/0,3343,en_2649_33753_37685737_1_1_1_1,00.html, accessed October 13, 2011). See also chapter 7 inthis volume.3. IFFs are defined by Kar and Cartwright-Smith (2008) as “the proceeds fromboth illicit activities such as corruption (the bribery and embezzlement ofnational wealth), criminal activity, and the proceeds of licit business that becomeillicit when transported across borders in contravention of applicable laws andregulatory frameworks (most commonly in order to evade payment of taxes).”4. Secrecy jurisdictions intentionally create regulation for the primary benefit anduse of nonresidents in the geographical domain. The jurisdiction regulation is