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.
|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.
Galaz et al. 2018. Tax havens and global environmental degradation. Nature Ecology and Evolution: https://doi.org/10.1038/s41559-018-0497-3