Forbes Highlights Transfer Mispricing, GFI Data

August 28th, 2009

Forbes Magazine has published an excellent article today which highlights the massive problem of transfer mispricing and the risk it poses to shareholders.  The article cites GFI Director Raymond Baker as well as GFI’s Illicit Financial Flows report several times.  From Forbes:

Shareholders in many of the world’s leading multinational corporations face significant financial peril from a source few have probably ever thought about: transfer pricing.

So says Raymond Baker, director of Global Financial Integrity, a non-profit in Washington, D.C., that promotes policies aimed at curtailing the cross-border flow of illegal money.

Transfer pricing is often employed by globe-spanning companies with the intent of minimizing their taxes by reporting profits in jurisdictions with relatively low corporate tax rates. Such transfer pricing has been a political hot potato for years and a subject of interest to the U.S. Government Accountability Office since the early 1990s. Now it is increasingly coming to the attention of legal authorities around the globe.

The article goes on to site GFI’s January report as well as our upcoming research on where illicit flows end up:

Last December, for example, Global Financial Integrity released a study, financed by the Ford Foundation and based on World Bank and IMF data, which tracked illicit financial flows out of developing countries between 2002 and 2006. The GFI calculated, and Baker testified before Congress this summer, that between $850 billion and $1 trillion annually in illicit transfer payments flow from developing countries into developed ones.

“Commercially tax-evading money is 60% to 65% of the illicit flow globally, and that is done primarily through mispricing of trade by corporations,” says Baker. In contrast, bribery and theft by foreign government officials accounted for under 5% of the total. Criminal activity, such as drug smuggling, accounted for 30% to 35%.

At the end of 2009, Baker says GFI will release a second study, following how mispriced trade is laundered through tax havens and the funds reintroduced into developed economies. Baker says that the work so far reveals that service firms–and multinationals dealing with the service component of their business–are particularly aggressive in using mispricing and tax havens to evade local taxes.

It’s great to see an influential publication like Forbes address this issue.

Written by Clark Gascoigne

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