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Obstacles to progress

Realities

“ There is solid empirical evidence that multinational firms reduce their tax bills considerably by

shifting profits from countries with high corporate taxes to countries with low corporate taxes
and the various profit-shifting techniques are fairly well understood.1 The global loss of
government revenue caused by profit shifting is most likely counted in hundreds of billions of

dollars and has been increasing over time.
While almost all of the empirical evidence on profit shifting concerns developed countries, the

problem may be even more acute in developing countries.
First, given the limitations on tax design imposed by a large informal sector (Gordon and Li

2009), many developing countries depend heavily on tax payments from large corporations in
the formal sector (UNCTAD 2015).

Second, a recent line of research shows that sophisticated anti-avoidance rules targeted on
multinational firms successfully limit profit shifting;3 however, such rules rarely exist in
developing countries (OECD 2014), where the regulatory and bureaucratic capacity is limited.

Third, there is a broader concern that weak governance in developing countries, reflected in
high levels of corruption, weak law enforcement, and a lack of political accountability, may

foster an environment with low tax compliance
The negative relation between a country's development level and its exposure to multinational
tax avoidance is very robust “

"Are less developed countries more exposed to multinational tax avoidance?" 205
UNU-WIDER (2016)

***** ***** *****
Profit Shifting / Tax Evasion & Avoidance

Transfer Mispricing
“ Trade misinvoicing is a method for moving money illicitly across borders which involves the

deliberate falsification of the value, volume, and/or type of commodity in an international
commercial transaction of goods or services by at least one party to the transaction. Trade

misinvoicing is the largest component of illicit financial outflows measured by Global Financial
Integrity
***
Broadly, there are four primary reasons to misinvoice trade:

• Money laundering – Criminals or public officials may seek to launder the proceeds from
crime or corruption.
• Directly Evading Taxes and Customs Duties – By under-reporting the value of goods,

importers are able to immediately evade substantial customs duties or other taxes.