Over the past thirty plus years, the business environment throughout the world has changed dramatically through the course of globalization. Globalization is defined as the process in which individual economies become integrated with each other and eventually operate together as one.
Due to vast improvements in technology, such as transportation and communication, along with an increase in international trade, international business has grown at a rapid pace. This growth has led to the formation of Multinational Corporations, or MNC's. Some well-known MNC's include Toyota and Samsung. While operating in a global economy, there are bound to be dissimilarities and incompatibilities between the laws or regulations between the individual economies. One in particular is taxation. Two important issues surrounding taxation in a global economy are tax havens and double taxation treaties, or DDTs.
Globalization allows a corporation to operate in a country other than their own, known as a host country. By doing this, it allows the MNC to produce its' goods or services for a lower price, and more often than not, at a significantly lower tax rate. When searching for a country to outsource its' operations to, MNCs will look to see which country offers the most attractive tax haven. A tax haven is a state, country, or territory where certain taxes are levied at a low rate or, in some cases, not at all. Tax havens are appealing for MNCs and help the decision of which country to operate within. Tax havens also work to create competition globally and help keep tax rates low.
(1)Tax havens typically work in favor of the MNC and can have negative effects on the host country. For example, the Netherlands offer a tax haven in the form of "mailbox companies". A mailbox company, or a shell corporation, is a business that is set up to engage in transactions without having an actual physical presence, meaning significant assets or operations, in the host country. According "The Global Problem of Tax Havens: The Case of the Netherlands," the Netherlands is host to more than twenty thousand mailbox companies.
(2) The MNCs move their money through the mailbox companies in the Netherlands, with the intent of having the money end up in a "pure" tax haven. A pure tax haven means that there are no taxes levied at all. While tax havens are attractive to the MNC and its' home country, they can end up having a detrimental impact on the economies of the host countries. As MNCs are operating in a tax haven paying a low tax rate, the host country is losing out on revenues which could lead to an increase in poverty levels.
Double taxation is another important issue surrounding taxation and globalization. Double taxation occurs when an MNC is operating in a host country. The MNC is responsible for paying the taxes levied by both their home and host countries. Many countries will avoid the issue of double taxation by signing double taxation treaties, or DDTs. (4)For example, in 1946 at the International Tax Convention, the United States and the United Kingdom signed an agreement in which exemptions from taxes, credits for taxes paid, and a reduction of overall tax rates were implemented to reduce or eliminate double taxation. By signing DDTS, countries are promoting the growth of international business and the development of more MNCs. DDTs are advantageous because they lower corporate tax rates and allow MNCs to operate globally, but they can also prove to have a negative impact on taxation, as well as being quite costly. Setting up DDTs can carry high administrative costs, such as negotiations and the translation of languages. Most importantly though is the loss of tax revenue. As opposed to tax havens where the host country usually loses out on tax revenue, DDTs favor which ever country has a lower tax rate.
(3)For example, Hong Kong is a tax haven and also does not tax foreign sourced income. A double taxation treaty would have no effect on Hong Kong's tax system because they don't tax income earned in another country. A country that does tax foreign sourced income, such as the United States, would end up giving up substantial tax revenues if they were to enter into a DDT with Hong Kong.
Globalization is continuously evolving, leading to more and more opportunities for large corporations to grow and flourish throughout the world. As this continues to be the case, the countries that choose to participate within the global economy will eventually have to agree on the proper way to deal with the differences between their individual tax systems. Until then, the issues of tax havens and double taxation treaties will continue to interfere with global business.
References
The Global Problem of Tax Havens: The Case of the Netherlands SOMO Paper | May 2008 By Michiel van Dijk & Francis Weyzig
Rainsford K. Tax Treaties with Tax Havens: The Hidden Tax Break. Auckland University Law Review [serial online]. January 2011;17:60-87. Available from: Academic Search Complete, Ipswich, MA. Accessed October 9, 2013.
Edwards C. Tax Competition Spurs GLOBALIZATION. USA Today Magazine [serial online]. March 2003;131(2694):26. Available from: Academic Search Complete, Ipswich, MA. Accessed October 9, 2013.
Taylor, J. C. (2010). TWILIGHT OF THE NEANDERTHALS, OR ARE BILATERAL DOUBLE TAXATION TREATY NETWORKS SUSTAINABLE?. Melbourne University Law Review, 34(1), 268-311.
