In the last few decades the activities of transnational corporations aided by tax havens on one side and terrorists on the other side have destroyed the concept of nation state and its sovereignty evolved after the 30 years’ war in 1648 in Westphalia.
What is Westphalian sovereignty?
Westphalian sovereignty is the principle of international law that each nation state has sovereignty over its territory and domestic affairs, to the exclusion of all external powers. The principle of non-interference in another country’s domestic affairs, and that each state (no matter how large or small) is equal in international law is recognized. This doctrine named after the Peace of Westphalia, signed in 1648, which ended the Thirty Years’ War.
After that war major continental European states – the Holy Roman Empire, Spain, France, Sweden and the Dutch Republic – agreed to respect one another’s territorial integrity. As European influence spread across the globe, the Westphalian principles, especially the concept of sovereign states, became central to international law and to the prevailing world order.
What are the three core principles of Westphalian sovereignty?
The three core principles on which the consensus rested are:
1. The principle of the sovereignty of states and the fundamental right of political self -determination.
2. The principle of legal equality between states.
3. The principle of non-intervention of one state in the internal affairs of another state
Interestingly all three are questioned by contemporary leaders of West and radical Islam.
Role of transnational corporations and tax havens-
Interestingly we find global corporations transcending sovereignty in search of global profits. For this they use tax havens as a tool.
Tax havens–numbering more than 70 jurisdictions–facilitate bank facilities with zero taxes and no-disclosure of the names and in many cases anonymous trusts holding accounts on behalf of beneficiary. Basically lawyers and Chartered accountants will deal with such investment institutions. Sometimes a post box alone will be operative system. For instance, In the case of Bahamas one building seems to have had tens of thousands of companies registered there.
Impact on world economy –
• A simple method of trade mis-invoicing by global companies using tax-havens have impacted developing countries nearly 730 billion USD in 2012 says Global Financial integrity. Another interesting finding by GFI is about terror financing using Tax haven route.
• Because of the increasing wariness of MNCs using Tax havens for avoidance of taxes and the opaque ways of functioning of these off-shore structures, demands are growing about their activities and even closing down of these tax havens by European parliament etc.
Alternatives available –
• Due to relentless pressure from OECD as well as G20 many of these secretive jurisdictions are becoming more transparent. OECD-led project on Base Erosion and Profit Shifting (BEPS) lays out 15 action points to curb abusive tax avoidance by MNEs. The BEPS project takes note of the erosion of a nation’s tax base due to the accounting tricks of Multinational Enterprises (MNEs) and the legal but abusive shifting out of profits to low-tax jurisdictions respectively.
• There is another domestic solution for a country like India to check the menace of loss of revenue by the nexus of transnational corporations and tax havens – Offshore Financial Centres.
Emergence of Offshore Financial Centres-
The economist Ronen Palan defines OFCs as “markets in which financial operators are permitted to raise funds from non-residents and invest or lend the money to other non-residents free from most regulations and taxes”.
• It is estimated that OFCs are recipients of 30% of the world’s FDI, and are, in turn, the source of a similar quantum of FDI.
Learning from the international experience –
• United States set up International Banking Facilities (IBFs), “to offer deposit and loan services to foreign residents and institutions free of reserve requirements”.
• Japan set up the Japanese Offshore Market (JOM).
• Singapore has the Asian Currency Market (ACU).
• Thailand has the Bangkok International Banking Facility (BIBF).
• Malaysia has an OFC in Labuan island, and other countries have similar facilities.
Offshore Financial Centres are designed specifically to attract foreign investment by amending domestic financial laws.
• Such being the case, all India needs to do to attract FDI is to become an OFC, or create an OFC on its territory. OFCs are less tax havens than regulatory havens, which means that financial capital can do here what it cannot do ‘onshore’.
But the fact of the matter is these Trans National Companies and Tax Havens together have significantly undermined the concept of sovereignty and territorial jurisdictions. It is ironical that Terror organisations on one side and Tax havens on the other have completely undermined Westphalia consensus. In that context countries like India have every right to exercise its freedom to pursue terrorists who are undermining its existence whether sponsored by foreign countries or home grown. The concept of territorial jurisdictions and sovereignty are no more valid in the context of terror organisations since they damage both India and its own host countries over period of time. India must protect its national interests and institutions by challenging inimical forces wherever they are located without worrying about Westphalia consensus.
For more information keep visiting Raj Malhotra’s IAS Academy