Introduction
The access to affordable and quality food has overtime proved to be a complex issue hence making the agribusiness industry vital as it facilitates the production, processing, and distribution of food in world economies. The operations of the agribusiness sector are affected by a number of factors in regard to the business environment. An organization has to consider the issues that will determine its success or contribute to its failure while conducting trade and transactions.
The agribusiness industry has been operating internationally, especially due to globalization, and thus, both the domestic and the foreign investment factors have to be taken into consideration before resources are allocated to the sector. Certain factors like the economic conditions of given countries contribute to the success or failure of this industry because of the opportunities or limitations that they present, which in turn determines the competitiveness of the agribusiness industry.
The international financial market is a major determinant of the way agribusiness is conducted, and it is currently at risk due to the vast use of foreign tax havens. The heavy flow of money into tax havens contributes to inflation, tax competition, and unemployment, and labor productivity in different states of the world.
Statement of the Problem
The study will be focusing on examining the impact of international tax havens on Arizona and the world, specifically the international financial market, which in turn has the capacity to affect the agribusiness environment, its level, and the quality of service. The study will be addressing the following factors:
- How the use of international tax havens affects the economy.
- Tax has ns’ impact on the policies and structure of the international business environment.
- How the state of the economy of a country affects agribusiness.
The aim of this study is to explore the relationship between international tax havens, the state of the economy, and its influence on the conduct of business. By the end of the research, I expect that ideas will be generated on whether the use of tax havens has a negative impact on international agribusiness and hopefully lead us towards possible solutions to the problems.
Purpose of the Study
The purpose of this study is to institute the impact of international tax havens on Arizona and the world by establishing its effect on the economic performance of countries and determine whether the elimination of tax havens can be beneficial to agribusiness.
Literature review
This research approach will involve the current, past, and future reviews of business practices involving tax havens because the study of what has been done allows one to make possible conclusions about the impact of international tax havens as they form the basis of the research. Studies on these impacts suggest that tax havens negatively affect the economic position of countries through the alteration of financial markets, which consequently leads to the failure of the business.
Research also shows that investors are attracted to countries with quality public service in addition to a comprehensive and transparent tax regime. This research shows that tax authorities encounter difficulties in carrying out their jobs because of the information limitation in tax havens brought about by its secrecy legislations. Studies report that the lack of information has led to the rise of tax-related crimes, including tax evasion and avoidance.
International tax havens
Taxation forms the basis of an efficient government in addition to its being an important aspect of the prosperity of a nation. Tax compliance reflects a country’s willingness to adhere to corporate social responsibility. A tax haven is an impediment to the economic success of a country because it offers an “escape route” to individuals or corporate entities intending to evade taxes. Tax havens, which are also referred to as secrecy jurisdictions, are found in the countries where taxes are paid either at very low rates or are not paid at all. They are characterized by a great deal of secrecy and complexity.
Tax havens provide ways for individuals or companies to break the law by using high levels of secrecy. The United States began experiencing economic difficulties after the Cold War, and it started to draw illegal foreign money in order to handle the debts as it needed a place to “launder” the money, thereby leading to the beginning of secrecy jurisdictions. Tax havens are designed on structures that allow foreign companies to avoid tax payment in their domiciliary or source countries by taxing them at reduced rates. Statistics show that by 2009, corporations in the United States had acquired approximately US$ 1trillion from untaxed profits.
Economists report that the US loses about US$ 65billion in tax revenue when corporate bodies use tax havens because their secrecy allows one to hide the true value of their assets from tax authorities. It is legal for one to have a business in a tax haven provided that all the information regarding the company, its owners, assets, and activities are presented to the authorities of the owner’s country of residence for the purpose of taxation.
Those in support of tax havens say that the structures aim at providing individuals and corporations with means of diversifying their investments and are therefore legal. It is true that certain states or countries depend on finances from these tax havens, but the damage these practices cause to other countries is more compared to the benefits that they offer. Tax havens earn money from payments accrued from providing tax, regulations, and accountability “escape routes” to foreign companies.
The global economy continues to deteriorate while these tax havens flourish. Contrary to popular beliefs that the jurisdictions’ popular clients are only criminals like drug barons and terrorists, the tax has ns’ biggest clients are banks that help their customers to evade taxes. Research shows that assets in tax havens total to about a third of universal assets and are so concealed that they are almost not easily detected by tax authorities. Experts estimate that more than half of the international trade passes through secrecy jurisdictions and that the amount of lost tax revenue from the trade continues to rise every year.
Tax evasion and avoidance are destroying the international market, yet tax havens spend millions on professionals who design schemes that assist the rich to escape tax obligations.Tax havens’ structures which are complicated to deter the efforts of economists, tax authorities, and other experts to pursue justice. Tax authorities are often faced with a shortage of staff that makes it difficult for them to prosecute the wealthy and professionally staffed tax heavens.
Experts on the tax avoidance industry name London and New York as the main secrecy jurisdictions in the world. This observation discredits “the myth” that tax havens are only found in small states and islands. New York and London are among the largest financial centers in the world and major players in the tax fraud sector. Fraudulent investment scams often use tax havens to launder money, which analysts say comes mostly from poor countries and not rich ones.
Other known tax havens include Luxembourg, Switzerland, Netherlands, Singapore, and Ireland among others. The Organization for Economic Co-operation and Development (OECD) which makes international tax laws and regulations makes people to believe that tax havens are only based in small states and islands, an issue which analysts deny. The analysts say that this fact is because they try to draw attention from themselves because certain OECD member countries are among the key participants in the industry.
The table above shows the names and activities of some of the popular tax havens. (Adapted from the Tax Justice Network website www.taxjusticenetwork.com) Secrecy jurisdictions’ supporters claim that tax havens protect companies from double- taxation but economists say that this move ends up creating an even bigger problem of double non-taxation whereby one avoids getting taxed both in their home country and in the tax haven.
Researchers claim that tax havens handle about half of international trade profits. Multi-billion dollar fraudsters like those of Liechtenstein put their profits into tax havens in order to avoid being taxed in their domiciliary. International tax law states that both the country from which an individual operates and his country of residence can tax the profits and this is referred to as the domiciliary principle. This principle states that the owner’s home country retains the right to tax so as to avoid double taxation which might be brought about as a result of the two countries charging the same tax base. The owner’s domiciliary has the taxing mandate regardless of the country from which the proceeds are made.
The disadvantage of this rule is that one’s country of residence relies on data from the country that the income came from. Secrecy regulations in tax havens make accessing the information difficult hence the owners end up avoiding paying taxes. Initially, setting up a company in a tax haven does not facilitate taxes’ evasion if one follows the global income rule which requires an owner to report all his offshore proceeds to his domiciliary for taxation purposes. It is the manipulation of the tax havens that enable owners to evade tax. The tax haven secrecy is the main impediment to the fight against tax evasion.
A few decades ago, tax havens were used by a small percentage of wealthy individuals. However, in the present day, they have gained popularity with many wealthy people and corporations. The elimination of trade barriers has further facilitated tax evasion by encouraging the shifting of mobile taxable bases. Tax haven lobbyists and technological developments have also contributed to the menace. The characteristics of tax havens which include high levels of secrecy, very low or no taxes for foreign companies and individuals and absence of asset ownership transparency place about 30 to 70 states in the tax haven category.
This fact is a dilemma for countries worldwide especially developing ones because they need the money to achieve their developmental goals.
The structure of tax havens
Tax havens are based on the principal of discretion with the aim of concealing the identity of the company’s owners and their transactions and use confidentiality to justify the secrecy. This factor makes it hard for tax authorities to unearth illegal activities related to tax fraud because of the limited access to information which makes tracking money flow almost impossible. The tax havens employ different strategies to keep their client’s identity a secret. The most common one is having their clients register their companies and assets under the name of a third party which is legal according to tax havens.
These third parties or local agents, commonly referred to as “straw men” lease their names to the corporations and act as the companies’ directors. Tax havens do not have comprehensive company public registers and to prove that the companies exist, the registers only show the company name, that of its director and its establishment date. To ensure that the clients’ finances are handled according to their wishes, the director and the client draft a deed of trust. This deed binds the director to the clients’ wishes. In the event that a company has a register, the owner’s identity and details are normally classified.
The structure is further complicated by the fact that even the agent might not know the real owner of the company. Ideally, the agents should have the name of the owner but then this company ownership might have a long chain of command meaning that there can be other owners in the chain. The secrecy rules may prevent the agent from knowing the identity of the owner at the top of this chain. In other situations, a corporation in one tax haven may be in the ownership of another entity in a different tax haven with different jurisdictions. To make the situation worse, in certain tax havens, owners may be allowed to use attorneys to act like “straw men” and when a third party enquires about the identity of the owner, the lawyer may use the attorney-client professional confidentiality rule so as not to disclose the information.
Tax havens are normally established with the help of professional accountants and other legal and financial experts. The main aim of a tax haven is to ensure that the connection between its client and their company’s activities cannot be revealed to the authorities. This attribute makes tax havens attractive to several kinds of criminals including tax evaders, terrorists and drug lords who use it to launder their money undetected and in exchange for the privacy, tax havens collect rent from the companies. The use of tax havens by companies results in the loss of taxable bases by the home country of the owners.
The secrecy legislations not only allow the manipulation of data but also ensure that the foreign companies are not mandated to publicize their information or preserve it. Information can be provided by the owners voluntarily but it should also be defined and follow all the owners’ home country’s legal requirements. The alternations made on data to cover up irregularities are not easy to prove because of the limited access to information with the help of secrecy regulations of the tax havens. In this kind of a situation, a legal request is the only tool that the public can use to access the information.
However, legal requests are lengthy and expensive and demand that the reason for the request should be stated and include basics like the company’s owners or individuals’ names, account details and the activities which are difficult because the third party files the legal request to gain access to this same information. These obstacles are more damaging to developing countries which are mostly the victims because they can neither afford to finance the costly and intense legal battles nor can they have the necessary competence to challenge that of the wealthy nations.
The challenges of the legal requests are further aggravated by the fact that the companies’ owners can hinder the process by the use of legal means in the “guise” of defending their right to privacy. The secrecy rules also provide clauses that enable fast and untraceable relocation of the company to a new tax haven. This fact is made possible because certain tax havens state that the owner should be the person physically handling the shares. This aspect is known as bearer shares’ ownership. It means that all one needs to do to change the ownership is to move the shares physically to another individual and he instantly becomes the new owner and this process does not need official procedures.
The relocation of the company further complicates the legal proceedings because in order to gain access to the new information in the new tax haven, the legal request has to start afresh. Limited liability companies are mandated by the law to uphold their company’s accounts. These accounts summarize the company’s activities and economic position especially for the sake of those who do not have the company’s records like the employees and creditors.
The reason for this development is that the company is entitled to confidentiality and hence there is information that the third party does not need to know. An external auditor counterchecks the accounts to ensure they are not altered. Tax havens do not necessitate the keeping of accounts by their clients meaning that the companies can manipulate their accounts and face no penalties. This fact is because the foreign companies do not pay taxes to the tax havens and hence no liabilities are attached. Accounting records are very important especially in facilitating transactions as creditors or investors may need to know the economic position of a company before committing their capital to the business.
Companies sometimes use a virtual address which means that they use financial centers’ official addresses to conceal the fact that they are registered in tax havens. They ensure that they choose a financial center that is not regarded as a tax haven. The address of the financial centre is fully staffed and equipped to make it seem genuine but it is only “a front” meaning that it only acts as an intermediary that passes information to the owners in the tax havens.
The economic impact of international tax havens
Tax havens’ operations cause harm to both national and international economies thus putting the welfare of the financial system at risk. Economists estimate that illegal money flowing into jurisdictions sums up to approximately $2 trillion annually. Tax havens facilitate financial crimes committed by tax evaders, drug dealers and other criminals laundering their “illegal” money in the jurisdictions. This aspect is necessitated by the fact that the secrecy jurisdictions reduce the price of committing crime by obstructing criminal investigations by tax authorities.
They alter financial markets because the limited access to information makes it difficult for trading partners to assess the economic position of companies and their performance hence raising transaction risks. These potential risks and lack of transparency and accountability “scare away” the potential business partners. The jurisdictions permit public and private corporations and individuals to avoid their responsibility of paying taxes but still enjoy the revenue benefits from their domiciliary which amounts to “corrosion” of democracy. Tax is a vital element for the development of a country as it offers a continuous supply of revenue.
Developing countries depend on it to “free” themselves from foreign aid debts but tax related crimes continue to undermine this effort because the more tax revenues are avoided; the more affected countries become dependent on foreign aid. Tax havens create tax competition between countries as they struggle to lower their tax rates to avoid losing taxable bases to the jurisdictions. The loss of these taxable bases forces the authorities to reduce capital tax rates and simultaneously increase labor tax rates to compensate for the loss of the taxable bases due to the fact that capital is mobile while people are not. This fact means that wage earners who are mostly middle income families are left to pay the wealthy people’s taxes.
The increase of employment taxes has now resulted to an increase in the inequality between the rich and the poor.The tax base composition change and the subsequent increase in employment taxes have a social cost as the employees experience motivation loss leading to a decline in their work efficiency. Certain economists like Charles Tiebout previously argued that tax competition is healthy since companies and individuals are attracted to countries with low tax rates for the reason that the competition forces companies to learn how to administer public service provision in a better way with as little tax as they can manage.
It is for this reason that companies lower their taxes as each tries to outdo its rival but what tax competition really does is undermine development as it deprives the nation of tax revenue that is meant to improve the citizens’ welfare. Developing countries are affected more because taxes make up a huge source of their total revenue. Tax competition forces these countries to cut back on investments in their public sector. A given country can be forced to do this because it needs to replace the resources as this would help in improving infrastructure as well as fund other social service sectors. Tax competition also raises a country’s debt as the government results to borrowing to compensate for lost taxes.
Austria and Finland have different tax rates yet their growth for real GDP is almost at the same level. Tax competition also creates an unequal tax standard by favoring established international companies and undermining local companies that are starting. These foreign companies prosper as a result of the low or no tax rates enabling them to gain a competitive advantage over the national companies with secrecy legislations and little or no liabilities favoring their growth. Analysts say that this unfair advantage has nothing to do with the quality of goods and service provision or their pricing. This fact is an injustice to the small companies as they are most likely to be the main beneficiaries apart from being major job creators.
Tax havens facilitate the theft of income from poor countries because they do not have the necessary resources to meet the cost of protracted legal processes in the event that they discover irregular financial activity being conducted by the wealthy multinational companies. Secrecy jurisdictions undermine the government and the legal system as the secrecy favors criminal activities allowing fraud and corrupt individuals to ruin public resources. It also leads to companies wasting huge sums of money in hiring legal and tax experts to help in setting up of companies and trusts in the tax havens. Experts suggest that these skilled individuals should instead be put to good use like giving advice on how to improve the performance of financial markets.
International tax havens’ impact on Arizona The personal and corporate, private and public total income tax that the state of Arizona loses to international tax havens annually amounts to approximately US$ 500 million. Researchers argue that the income per person in Arizona has gone from being 5% less than the national average thirty years ago to approximately 20% less presently. These lost resources could have been used to fund important public service sectors including healthcare and education. As a result of the massive loss, the government has been forced to reduce these sectors’ funding thereby compromising the welfare of the citizens and its economy.
Tax authorities have also been forced to increase the labor tax rate to compensate for the lost capital tax by having the middle income families pay higher employment taxes. The average tax payer and businesses have been forced to pay an additional $800 and $2000 in taxes respectively to cover for the lost tax revenue. The federal spending cuts known as sequester cuts have direct negative impacts on working families in several ways. First, the federal funding for education programs can be reduced compelling education institutions to pay their teachers’ salaries. Vital public services like the fire and police department can suffer greatly as a cut in the public safety grants can leave them understaffed and ill-equipped.
These cuts lower the capacity of the state of Arizona to compete with others in the current economy. The quality of the public service of a place attracts business which is good for development but sequester cuts in Arizona’s federal funding have lowered its quality of public service “driving away” investors. Expenditures in terms of insurance have risen with the compromised quality of fire protection, property and loss of life which has also increased because of the low quality police services provided. Health costs have risen as result of the inferior healthcare for children brought about by the cut in healthcare federal funding.
The education sector has not been spared either as the cuts in the sector have compromised the quality of education. This fact in turn has increased the rate of crime and decreased future productivity due to the lack of a well educated workforce which is the basis of development.
Table 2.
The table above shows Arizona’s federal funding reductions in various sectors and their subsequent effects.
Conclusions
The research concludes that international tax havens have a negative impact on not only Arizona but also on the entire world as it drains the economies of countries belonging to the corporations or individuals who use them. Developing countries are particularly affected because they need the funds more than multinational corporations but due to the lack of comprehensive tax and legal regimes, multinational companies take advantage of them. The secrecy legislations “erode” trust between trading partners which prevents investments. In relation to international agribusiness, the tax havens hinder the growth of this industry by distorting the financial market creating an unfavorable operational environment.
Low productivity caused by increased employment wages affects not only the amount of food produced, processed and distributed but also its quality which subsequently compromises its safety. Tax competition on the other hand influences the stability of the product’s pricing. The banks’ participation in tax havens compromises crediting services as they transfer funds to jurisdictions instead of financing the agribusiness industry and other industries.
The inadequacy of funds also affects the distribution process because cost-effective transportation cannot be achieved by a fluctuating market. Small and medium sized enterprises (SME’s) suffer when tax competition limits fair competition as this leads to reduction of their chances of controlling the food market by deterring their growth. They may have new products or ideas to bring to the market but the multinationals’ unfair advantage may prevent them from accessing the markets. Resources that are exploited tax havens can negatively affect the rural economy by reducing its development which in turn deters agribusiness’ efforts in rural development.
The embezzlement of funds especially in developing countries which is encouraged by tax havens can bring disharmony among neighboring nations. This instability discourages investments because of the insecurity because the investors would want stability as it would assure them that their assets would be safe.
Recommendations
Policy changes in the tax industry have the ability to reduce the negative impacts of international tax havens by eliminating the channels that deny economies of their revenue and distort global financial markets. These policy changes should be able to increase the states’ chances of detecting tax and financial related crime especially tax evasion and avoidance. Apart from increasing the accountability of international companies and individuals who use tax havens, states can adjust the taxpaying rates by ensuring that tax regulations do not undermine small or national businesses. This fact would ensure that competition is based on a company’s ability to be innovative and the quality of its goods and services and the commodities’ prices.
Many countries should apply a mechanism that involves the use of progressive taxation whereby the tax payment is founded on ones capacity to pay meaning that the richer ones would pay more taxes. The mechanism would not only serve to increase justice and democracy but also ensure that the wealthy do not enjoy the benefits of taxes in terms of good infrastructure and an educated workforce at the expense of low wage earners. The move would increase the equality and reduce the poverty gap between the rich and the poor. The unitary tax system which is already being implemented in a majority of states in the US is an important aspect in the effort to eliminate international tax havens.
The system operates in a way that nations work out an international tax mechanism that allows them to determine the global income of every company and all its source countries after which all of them can subsequently tax their portion as per their domestic tax rate. The international mechanism serves to avoid double taxation whereby the same company is taxed by both the home country and its country of operation. The core principle of a unitary tax system is combined reporting. Worldwide combined reporting by international companies would close the channels that companies use to avoid paying taxes as they would bring together all the income of their mother companies and “shell companies “and then tax the total income.
This fact would require that the countries treat the corporations and their subsidiaries in foreign countries as a single entity. Taxing the companies would then be based on their activities in every one of their source countries. This strategy would only be effective if the companies practiced transparency in their reporting. To ensure that transparency is maintained, the companies can present their subsidiaries’ information country by country stating what activities every subsidiary is undertaking in each country together with the ones in jurisdictions. This fact would serve to prevent the companies from merging information from all the countries as this would increase the chances of concealing alterations made to the data.
TABLE 3.
The table above demonstrates the difference between a merged report and a country by country report. Tax authorities ought to demand the disclosure of information, particularly financial information because with the auditing of each accounting record, the chances of the tax authorities being able to detect any irregularities taking place would increase and as a result, they would be able to detect tax related offences. The accounting records and auditing would enforce the international companies’ accountability and both the tax authorities and trading partners would know what activities take place in different localities and how much profit each subsidiary makes.
The countries would then be able to tax the corporations and use the revenue for the improvement of their citizens’ welfare and their development. Worldwide combined reports would disband tax havens as profit shifting would no longer be of any benefit as the profits in these jurisdictions would be calculated and taxed by the home country as per its domestic tax rates. Countries should reinforce automatic exchange of information that can reduce secrecy and instill confidence in trading partners and investors thus encouraging them to carry out transactions. Tax authorities can then be able to detect and penalize tax evaders. Jurisdictions should also provide all the necessary information to the owners’ domiciliary for taxation purposes.
All the nations that prove to be uncooperative should be sanctioned. States should also enforce the registrations of all companies after which these records should be made available to the public for the benefit of third parties. The companies’ registers should include the name of the owner and the company’s activities, its assets as well as location. It has been a relief to many countries especially developing ones as the European Union has began putting into practice the automatic information exchange.
Tax authorities should officially make tax avoidance a crime. As at the moment, it is considered lawful because one utilizes weaknesses in the tax system to avoid paying taxes which they should otherwise pay and not directly break the law. Tax competition can also be eliminated through the application of the domiciliary principle which states that the home country retains the right to tax company capital no matter where the income is derived from.
This would also eliminate the need of tax havens because all the profits here would be taxed by the owner’s domiciliary. Nations can apply the Foreign Accounts Tax Compliance Act (FATCA) which permits states to a 30% withholding tax income made in the US by companies then shift to international financial institutions that are noncompliant to the United States rule of disclosing information on the identity of their investors or clients who are residents of the US.
This clause also applies to the residents of the US who directly or indirectly own assets that do not belong to the United States in these institutions. This fact may force the foreign financial institutions to either comply with the disclosure regulation or discontinue their dealings with United States’ residents and their assets unless they are ready and willing to face the 30% withholding rule. This rule is important in promoting the sharing of information between corporations and tax authorities. Experts suggest that tax authorities should get rid of the territorial tax system whereby only domestic profits are taxed. This aspect can be necessitated by the fact that multinational companies enjoy an unfair advantage of having their income made and taxed in low tax rated countries and then transfer their money back to their domiciliary.