All transfer mispricing causes tax losses in developing countries

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Earlier this week a team from Oxford University challenged the work I and others have done in seeking to estimate the tax loss to developing countries as a result of transfer mis-pricing and related issues. One issue in particular stood out:

A key shortcoming of many existing studies based on mispricing is that they only take into account overpriced imports into developing countries and underpriced exports of these countries. But the mispricing approach also identifies underpriced imports into developing countries and overpriced exports. Both shift income into developing countries. Estimates of tax revenue calculations have to take into account income shifting in both directions. If only one direction is taken into account, the results are highly misleading. In this case, tax revenue losses due to mispricing are overestimated drastically.

I have said they have got their analysis wrong, but had the chance to explore this yesterday when i was at a conference with a major figure in finance from a poor developing country (Chatham House rules prevent me from saying which). I asked if he had witnessed under pricing into his country and over pricing out and he confirmed he had. But then said that the over pricing out was to claim export subsidies in excess of any additional tax paid and the import under-pricing was to avoid import duties in excess of any additional tax paid. In other words, in both cases there was tax cost and not benefit to the developing country — quite contrary to the assumption made by the Oxford team.

I am afraid their wholly unsupported assumptions used to criticise our work are not just unsupported, they are wrong. All mis-pricing into and out of developing countries is designed to harm their tax receipts.

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