Globalization and Taxes Globalization

Competition for Taxes

One of the most difficult issues regarding the state regulation of their tax relations in regard to international business is the presence of various "tax havens" that are present across the globe in today's modern economy. According to some estimates, as much as half of the world's stock of money either resides in tax havens or passes through them (Palan, 2002). The term tax haven has been widely used since the 1950s; yet there is no consensus as to what it means (Palan, Murphy, & Chavagneux, 2010). The influential U.S. Treasury's Gordon Report concluded: there is no single, clear, objective test which permits the identification of a country as a tax haven . Corporations and private businesses now have a plethora of ways to reduce their tax liabilities. Globalization has exacerbated this problem even further. The mere presence of these various tax shelters often gives private institutions significant leverage over any state's power to administer taxes in an international business. This substantially impacts a society's ability to fund public initiatives, for every billion dollars that is in a tax haven, there are scores of teachers and nurses that can't be employed, roads that can't be repaired, schools that can't be built, and hospitals without live saving equipment (Wilson, 2015).

Background

Corporations and wealthy private organizations or individuals have unprecedented opportunities to move their money to certain destinations for the sheer purpose of gaining a better tax position. This situation also gives larger organizations the ability to negotiate with domestic agencies and creates a sense of competition for tax payments. For example, if a company's management team views their international tax requirements as too strict or excessive, they can simply incorporate in a tax haven and avoid much of the domestic body's ability to administer taxes. In a globalized context, companies now have the ability to choose from a large range of different locations in which to hold their money.

Figure 1 - Top Offshore Companies (Kutsh, 2015)

The extent of the problem occurs on a scale larger than most people realize. One study links public disclosures of tax reserves with mandatory private disclosures of tax shelter participation as made to the Internal Revenue Service's Office of Tax Shelter Analysis and finds strong, robust evidence that the tax reserve is positively associated with tax shelters, while other commonly used measures of tax avoidance are not (Lisowsky, Robinson, & Schmidt, 2013). Based on out-of-sample tests, the study also show that the reserve is a suitable summary measure for predicting tax shelters. The tax benefits of tax shelters are economically significant, accounting for up to 48% of the aggregate FIN 48 tax reserves in the study's sample (Lisowsky, Robinson, & Schmidt, 2013).

However, since some corporations generate revenue, mostly through job creation, for the areas in which they operate, there is significant pressure on the local political systems to lower their rates to promote corporate relocation to their home areas. For example in the United States, Delaware has one of the most attractive tax systems that facilitates the ability for corporate tax avoidance when compared to other U.S. states tax systems (Dyreng, Lindsey, & Thornock, 2011). Therefore, within the U.S. domestic area, many states are competing for corporate organizations through their tax policies and many offer special incentives to the corporate rate. There is some risk involved because the incentives for relocating many not be permanent, however there is typically a contractual arrangement that can withstand many of the political changes in the state.

However, the problem is more far more complicated than determining which U.S. state to incorporate in for many international companies. In today's globalized business environment, supply chains may involve countries from all over the world. This gives organizations an increased ability to hold their money in any one of a number of different countries in which they are doing business. Even if the organization is owned by U.S. investors, the company may have a bulk of its assets overseas. This gives them ample opportunities to circumvent domestic tax policies. By escaping the direct control of the state, many organizations can virtually circumvent many of the state's sources of power. Yet at the same time, an offshore entity is intimately connected to the state system (Palan, 1998).

It is argued that oppressive taxation has made such a strategic move by organizations more attractive. Thus their own sovereignty and self-determination may have been internally undermined and the results self-inflicted (Palan, 2002). However, not regulating the legality of the offshore...

For example, in the modern information age, goods, services, and the ability to administer organizational processes can now cross borders with astonishing speed and effectiveness. This puts a private organization at an advantage because they can quickly reorganize their business structure to take advantage of the most attractive tax relationships available. For example, many organization will incorporate or have a "mailbox" organization at the Cayman Islands in which at least some of their international revenues are funneled through or held independent of their domestic business.
As a result of this trend, countries must compete with each other to attract foreign investments. Those who offer the most attractive tax rates will see many modern corporations divert their revenue streams through their financial system. Thus this also illustrates the weakness in the state's ability to negotiate because they are subject to foreign completion to attract investment. Therefore there is not only competition to attract revenue streams internationally, but this competition occurs in nearly every level of consideration. Such as in Delaware's state tax systems that facilitates the ability for corporate tax avoidance when compared to any other U.S. states tax systems (Dyreng, Lindsey, & Thornock, 2011). Thus, domestic firms who actually do bring foreign revenues back to U.S. soil would likely do so in a state such as Delaware.

Globalization

Globalization became a common term during the 1980s and has become even more ubiquitous after the 1990s. The four basic principles of globalization, as identified by the International Monetary Fund, are trade and transactions of goods and services, movements of investments and capital for business from one country to another, migration and movement of people and their labor between countries as well as the dissemination of knowledge worldwide (Moschella & Weaver, N.d.). Today, capital can easily be transferred almost instantaneously to any financial market in the world.

The rapid transfer of assets across boarders has made it easy for companies to start and set up businesses in new regions where condition are the most attractive. This trend has introduced different varieties of consumer products available to more emerging markets. This intrusion of new products and consumer items into new cultures can also foster new behaviors or habits resulting from the use of such products (Friedman, 2005). Having access to new products can definitely improve the quality of life and help reduce the existence of extreme poverty. Furthermore, when any new products that are introduced into a society they can influence the culture; sometimes minimally at first until it eventually gets integrated into the daily life and routine of the users in the society. However, this trend has begun to create a global business climate that shares a common culture. This habit of using and integrating new products into the daily lives of consumers' eventually small changes in the behavior of the consumer consistent with the particular genre of products (Bhagwati, 2004).

The rise and advancement of various technologies has created a platform that has widened the scope and reach of globalization. This translates into the fact that more and more people can communicate with each other all over the globe and benefit from the trend of globalization. For example, people can now share information about their favorite global products and global brands as well as cultural items such as films, music, and literature. The process of globalization has also been greatly enhanced by the rapid and phenomenal growth of the internet and the communicating devices (Scriven, 2015). The trend is resulting in the fact that cultural boundaries between societies and nations are rapidly being broken down and there is a growth of ideas and international cultures.

Competition for Taxes

The corporate tax rate that a corporation is subjected to is one of its biggest expenses and represents a critical consideration in corporate strategy. There are many risks to consider with a corporate tax rate and the taxes come from a variety of sources. For example, there are local taxes that can come in many forms such as sales or property taxes. There are also state level taxes that most states impose on corporations headquartered in their states. Then there is always the federal taxes that must be paid to the federal government. Furthermore, many corporations operate internationally and are subject to foreign taxes as well as a set of taxes to bring their revenues back to the domestic economy.

In the modern economy, despite all of the advantages that globalization has brought, the ability for organizations to circumvent the established tax policies…