Cayman Islands, Panama, Belize, Turks and Caicos and other Central
American small countries may remind some of us of little pieces of paradise,
but may also remind others of tax havens and corruption. However, perhaps a
question that nobody had (dared to?) asked before was about a possible link
between tax havens and environmental degradation. A study recently published in
Nature Ecology and
Evolution gives us a good sense of how these two things may be much
more related than you would have ever guessed so.
Tax havens are
known for providing politically neutral and reliable arenas for institutional
innovation compared with settings dominated by political turbulence and
institutional legal vacuum. At the same time, however, some negative effects of
these jurisdictions are evident, such as their
role in ‘money laundering’ and funding of illegal activities, and the risk of
amplified global systemic financial risks created by the lack of financial
transparency and oversight.
But how about the potential environmental impacts of tax havens? To
address this issue, Victor Galaz and collaborators have examined resource
extraction from two key global environmental commons - the ocean and the Amazon
rainforest. Their data shows that while only 4% of all
registered fishing vessels are currently flagged in a tax haven jurisdiction, 70%
of the vessels that have been found to carry out or support illegal, unreported
and unregulated fishing are, or have been, flagged under a tax haven
jurisdiction. Fisheries sector is particularly susceptible to the use of tax havens in three important
ways. First, the use of tax havens has been
proved to support aggressive tax planning and tax evasion. Second, these
jurisdictions also facilitate the evasion of regulation designed to address
overfishing and fisheries crime because many well-known tax havens also qualify
as secrecy jurisdictions in other regards, such as flags of convenience (FOC)
states. FOCs are countries to which vessel owners flag vessels and from which
they can expect limited or no sanctioning mechanisms if they are identified as
operating in violation to international law. Third, the secrecy afforded by
combined use of tax havens and FOCs also allows companies to secure the dual
identity of a fishing vessel, one of which is used for legal and the other for
illegal fishing activities. Therefore, the authors claim that the use of tax
havens makes tracing of fisheries resource use and allocation of accountability
extremely difficult and costly, representing a major threat to the sustainability
of global ocean resources.
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| Source: Caribbean News Service (Illegal, unreported and unregulated fishing in the Caribbean) |
The environmental
impacts of tax havens are not that different in the Amazonian reality. Galaz
and co-authors’ study shows that between October 2000 and
August 2011, tax havens accounted for 68% of the total foreign capital
transferred to the nine largest companies operating in the soy and beef sectors
of the Brazilian Amazon. Even though it is not illegal to transfer money to
Brazil using tax havens, it is worth mentioning that soy and cattle production
are the two sectors representing key drivers of deforestation. For some of the companies investigated, tax
havens represented as much as 90–100% of the foreign capital.
Channeling capital through tax havens provides three benefits to investors:
legal efficiency, tax-minimization and secrecy.
Both examples explored
by Galaz and collaborators show that the use of tax havens leads to
environmental concerns, and poses major challenges to transparency and tracking.
Furthermore, the authors claim that the loss of tax
revenue through the use of tax haven jurisdictions by companies modifying the
biosphere could be conceptualized as indirect subsidies to economic activities
with possibly detrimental global environmental consequences. The authors
conclude by highlighting that the international community should
intensify its attempts to stimulate corporate transparency and collaborate to
uncover and fight tax evasion, viewing such actions as important not only from
a socio-political perspective, but also for environmental reasons.
Source:
Galaz et al. 2018. Tax havens and global environmental degradation. Nature Ecology and Evolution: https://doi.org/10.1038/s41559-018-0497-3
