ALTA Law Research Series
|
|
Home
| Databases
| WorldLII
| Search
| Feedback
ALTA Law Research Series |
|
Last Updated: 16 August 2010
Tax and Regulatory Avoidance Through Non-traditional Alternatives to Tax Havens
NOEL COX
Lecturer in Law, Auckland University of Technology
To combat corporate regulation, and the burden of taxation, corporations and individuals attempted to avoid or minimise the effects of both. This was particularly so with respect to taxation. There has, however, been increased interest in avoiding the regulatory requirements of States. One approach to the avoidance of taxation or regulation is to use traditional tax havens. Another, but more problematic option, is through the creation and use of micro-nations, or ephemeral political entities. Another option is a virtual State in cyberspace, but this perhaps faces even less chance of success. Difficulties beset all of these endeavours. This article assesses some of the possible alternatives to traditional tax and regulatory havens.
1 INTRODUCTION
In the face of growth in the scope of governmental regulation, and an increasing burden of taxation, corporations and individuals not surprisingly have sought to avoid, or at least to minimise, the effects of State intervention.[1] This was particularly important with respect to taxation,[2] both from the perspective of governments — which would lose revenue — and of corporations or individuals who sought to avoid payment of taxes.
One option that became available in this respect was the tax haven — a country that attracted overseas companies and individuals to register or otherwise obtain legal residence, in return for paying minimal tax. As States alone levied taxation, so States alone could offer taxation incentives to investors. There was a significant rise in the number of tax havens in the course of the 20th century. This has continued into the 21st century,[3] even though tax burdens have in many cases eased. Possibly half of all money in circulation throughout the world either resides in or passes through tax havens.[4] In very few of these cases do the investors actually physically reside in the tax havens. It is generally sufficient if their legal residence is within the haven. If companies or individuals were required to relocate completely from one jurisdiction to another to take advantage of a tax haven, interest in tax havens would perhaps have remained relatively insignificant. Use of a tax haven usually requires only a legal move, the management of most companies — and private investors — remaining physically located elsewhere.[5]
However, traditional tax havens have come under increased pressure from established economic powers.[6] Although this pressure is unlikely to have significant short-term effect, in the longer term such tax havens may find themselves compelled to enact more stringent regulations on investors. This would obviously have an adverse effect on their utility as havens.
Another option for minimising taxation and regulatory burdens, more imaginative though more problematic than the tax haven, is the creation or use of micro-nations or ephemeral political entities. One example of such a “State” is the Duchy of Sealand, but there have been many others appear since the late 19th century. The term “ephemeral political entities” is here preferred to micro-nations, since the great majority of such “nations” have no real existence beyond the imagination of their creators, and because most such entities have been short-lived.[7] The purpose of this article is to assess the viability of such ventures.
One of the earliest examples of the deliberate creation of a new State by a private individual occurred in the South China Sea in the early years of the 20th century.[8] Morton Meads established two companies chartered in Manila for the purposes of exploiting the mineral resources and pearl beds of the Spratly Islands.[9] These islands were disputed territory, thus offering an opportunity for an enterprising individual or company to attempt to obtain title where none was already clear.[10] For various reasons, this venture to create a new private State suffered a similar fate as that of other self-proclaimed States before and since,[11] and was short-lived. Traditional tax havens offer many advantages to the investor, principally those of low or nil taxation. However, the added advantages of establishing and controlling one’s own micro-nation — including the ability to control the legal and fiscal policies of that State — mean that the notion of such “nations” continues to attract interest.
The third option for avoiding or minimising taxation or regulatory burdens of traditional States is to utilise a “virtual” State, whose legal residence is only in cyberspace. To be effective, however, this option will likely have to wait until the time, which may never come, when the internet itself is recognised as sovereign.[12]
The fourth option is not to avoid the imposition of State-imposed taxation by creating one’s own State — real or virtual — but to utilise existing sub-national entities such as special development regions or tribal reservations. If the principal opposition to tax havens is from governments unwilling to see their taxation revenues decline, it is perhaps incumbent upon these governments to offer incentives for investors to remain domiciled in their homeland and not seek tax havens abroad. This could be achieved through the establishment of special economic regions.
This article begins with an examination of some of the criteria for a successful tax haven. It then reviews the requirements for traditional statehood, and some exceptions to these. The various types of ephemeral States are then examined and assessed in light of the criteria for successful tax havens and for statehood.
2 TRADITIONAL TAX HAVENS
Palan has argued persuasively that tax havens were not simply a legitimate response to a surge in taxation and governmental regulation. They also developed as a consequence of the complex interrelationship of State sovereignty and economic globalisation.[13] Though they come in many forms,[14] traditional tax havens distinguish themselves by enacting legislation that provides corporations and individuals with anonymity and shelter from their own domestic governments.[15]
Palan also outlined the attributes of a successful tax haven.[16] According to him, most successful tax havens have political and economic stability, are supported by a large international market, or are equipped with sophisticated information-exchange facilities and are within easy reach of a major financial centre.[17] They also have agreements with larger countries to avoid double taxation and regulation.[18] They are also untainted by scandals, and money laundering of the proceeds of criminal or drug activity.[19] Any alternative to a tax haven would have to offer these or commensurate advantages to achieve a measure of success in attracting investors.
The Cook Islands has long been a tax haven for New Zealand investors,[20] though some companies have transferred their legal domicile to more distant tax havens, such as Bermuda, which enjoy better access to the major financial centres of the world. Although there is a considerable degree of “shopping around” in locating a suitable tax haven,[21] none is likely to offer a perfect solution either for a company, or for a private investor. Tax havens must, as States operating within an increasingly interdependent global economy, adhere to certain norms of behaviour, and cannot disregard the legitimate concerns of other States.
3 STATEHOOD AND EPHEMERAL POLITICAL ENTITIES
A more problematic alternative for avoiding or minimising tax liability and regulation is the deliberate creation of micro-nations, or ephemeral political entities. One example of such a creation is the Duchy of Sealand, but there have been many since the late 19th century. These are “States” that have been created by small groups of people, usually motivated by economic or utopian ideals.[22] The question whether these are viable as nations, quite apart from their efficacy as tax havens, must be doubted. Yet it is important to recall that the notion of the State as the sole source of legal authority is comparatively modern, and many States have been created, amalgamated, and have disappeared over the course of time.
The notions of sovereignty and statehood were once among the most important aspects of public international law. The heyday of the notion of statehood was perhaps during the late 19th century, when States enjoyed almost unfettered independence of action. They were subject only to the regulation of their diplomatic and military actions, principally by the law of armed conflict (or the law of war).[23]
The traditional juristic theory of territorial sovereignty, with the king being supreme ruler within the confines of his kingdom, originated as two distinct concepts in western Christendom. The king acknowledged no superior in temporal matters, and within his kingdom he was emperor.[24] If the Holy Roman Emperor had legal supremacy within the terrae imperii, the confines of the empire, theories of the sovereignty of kings were not needed, for the latter had merely de facto power.[25] Sovereignty remained essentially de jure authority.[26] This was not merely power without legitimacy.[27] Medieval jurists cared not whether the emperor had jurisdiction and authority over kings and princes, but focused on his power to usurp the rights of his subjects. Whether this power was de facto or de jure was unimportant.[28] From this concept of pluralist authority, modern international law developed.
But not every political entity was necessarily sovereign, or even a State as that term is now understood. The Montevideo Convention of 1933 is generally regarded as articulating the modern requirements for statehood. A State must have a permanent population; it must have a defined territory; it must have a government; and it must have the capacity to enter into diplomatic relations.[29] No other entity could be regarded as a State, whatever its de facto power, and leaderless populations or ethnic groups within States generally lacked sovereign status and, accordingly, the recognition and protection of public international law.
Even if a territory meets the Montevideo criteria, it will not necessarily be recognised by the international community. An old debate, between declaratory and constitutive theorists, centred on the role of recognition in transforming communities into States. Declaratory theorists asserted that recognition by existing States merely acknowledged that a community possessed the empirical attributes of a State — territory, population, a government, and the capacity to engage in international relations. Under this view, the function of recognition was merely to acknowledge that the State has come into existence and to signal a willingness to enter into diplomatic relations with the new State. Constitutive theorists, by contrast, considered recognition necessary to the creation of a new State. They further believed that recognition was a matter within the discretion of the recognising State to extend or withhold. The effect of the constitutive view is to hold a community’s right to statehood hostage to the discretion of existing States.[30]
Grant considers the declaratory theory to be the better view, but he argues that neither view accurately describes the emergence of new States. Recent State practice renders the debate between declaratory and constitutive theory all the more inadequate. Some scholars have amended existing constitutive and declaratory theories by proposing additional requirements that communities must fulfil before becoming States, such as democratic governance or respect for minority rights. These additional rules, which have yet to gain widespread acceptance, pose additional difficulties in that they threaten to enlarge the scope of State discretion with respect to recognition. Grant contends that the alternative is to focus on the process that governs recognition rather than the substance of statehood.[31]
It may be that there is scope for the creation of novel forms of new States, but such scope appears to be restricted. Statehood has hitherto been the necessary precondition of tax haven status. For only a State is able to impose — and repeal — taxation and regulatory laws.
Traditionally only a State was regarded as an international person, capable of having rights and duties under international law.[32] That entities other than States might be the subjects of international law is even today not a universally accepted idea,[33] and exactly which entities do have this status is an even more controversial topic. Early in the 20th century, Hall noted that international law primarily governs the relations of independent States, but “to a limited extent . . . it may also govern the relations of certain communities of analogous character”.[34] At about the same time, Lawrence wrote that the subjects of international law were sovereign States, “and those other political bodies which, though lacking many of the attributes of sovereign States, possess some to such an extent as to make them real, but imperfect, international persons”.[35] Whereas these scholars tended to define subjects of international law as States and certain unusual exceptions, there are others who went further in opening up the realm of reasonable subjects of the law of nations. Notable among them was Sir Hersch Lauterpacht. In his view:[36]
“International practice shows that persons and bodies other than states are often made subjects of international rights and duties, that such developments are not inconsistent with the structure of international law and that in each particular case the question whether a person or a body is a subject of international law must be answered in a pragmatic manner by reference to actual experience and to the reason of the law as distinguished from the preconceived notion as to who can be the subjects of international law.”
Indeed, it has since been observed that “a look at history, however, tells us that conceptions of world order have by no means always been shaped by the model of sovereign co-equal actors with a territorial basis”.[37] The recognition of non-State entities has indeed become more pronounced since the 1960s.[38]
The status of organisations in international law is less controversial than the assumption of rights and duties by individuals or groups of individuals. In 1949 the International Court of Justice recognised the United Nations Organisation as an international person,[39] marking an important stage in the process whereby an ever-increasing number of modern international organisations are recognised as having personality in international law. That is not, however, the same thing as saying that such an organisation is a State, or that its legal personality and rights and duties are the same as those of a State.[40]
While it is possible for organisations and individuals to be subjects of international law, States remain the dominant agents in world politics and the dominant actors in international law. This dominance has led some theorists to distinguish “subjects” of the law from “objects” of the law, suggesting that although entities other than States may have rights and duties in international law, these rights are conferred upon them by States and, presumably, may be taken away by States.[41] It is possibly more correct now to regard international law as a body of rules that binds States and other agents in world politics in their relations with one another and that is considered to have the status of law.[42]
There are now many organisations operating on an international plane. Whilst many such organisations, such as the European Union and the United Nations Organisation, receive ambassadors from member countries, the Sovereign Military Order of Malta almost alone among international organisations claims the right to send representatives to other States for the purpose of carrying on diplomatic negotiations,[43] as well as to receive representatives from other States for the same purpose.[44] Most importantly, the Sovereign Military Order of Malta claims, and is sometimes acknowledged by States, to be a sovereign State in its own right.[45] This status has been claimed since at least the 14th century, well before international law began to accord legal personality to international organisations.[46] But the Order is not unique in such claims. Its own parent body, the Holy See, has for long been regarded as sovereign, apparently even when the papacy was without territorial possessions.[47] Territorial possessions gave both the Holy See and the Sovereign Military Order of Malta their status as sovereign States, but the loss of territory did not necessarily extinguish that status.[48]
The 20th century, and particularly the second half of that century, saw the growth of international organisations and other bodies now accorded recognition as subjects in international law. With the growth in both the extent and the reach of international agreements, treaties, conventions and codes, the extent to which individual sovereign States retain the final control over their national policies may have diminished.[49] This tendency is becoming more noticeable in the modern commercial environment, and especially in respect of the internet. This development of the internet has presented new opportunities for those keen to escape the shackles of government. As yet, however, only States and international organisations that have been recognised as analogous are exempt from taxation by other States.
The principal actor in international law is the State. If one cannot find a State whose fiscal and regulatory policies accord exactly with one’s requirements, the option remains of creating one’s own “ideal” State. Most of the attempts to create new States have been oceanic or marine. The freedom and isolation of the open seas inhibit the control exercised by established powers and encourage the formation of alternative political societies.[50] Menefee has identified four principal categories of territory that have been so used: the appropriation of apparently unclaimed islets (for example, Mead’s State in the Spratly Islands); the promulgation of sovereignty over reefs or low-tide elevations (for example, Grand and Triumph reefs); the creation of States in shallow waters by dumping or other means (for example, Abalonia); and the creation of States on totally artificial structures (for example, Sealand).[51] Each of these categories presents particular difficulties for the would-be State-builder, whether that person be motivated by notions of unbridled free enterprise or libertarianism, or by pure eccentricity.
4 PROBLEMS FOR APPARENTLY UNCLAIMED ISLETS
Even if the whole of the land mass of the planet is claimed by existing States,[52] it may still be possible to find islands that have escaped the jurisdiction of States. One such possibility is the Spratly Islands — sometimes known as the “Kingdom of Humanity” and the “Republic of Morac-Songhrati-Meads”. Morton Meads never got as far as declaring independence. But had he done so it is likely that his country’s independence would have been short-lived. The principal requirement for the acquisition of sovereignty over an uninhabited island territory is effective occupation.[53] This requires possession and administration,[54] though this will be commensurate with the extent and nature of the territory. It does not necessarily mean actual settlement.[55] The emphasis has changed from taking physical possession and the exclusion of others,[56] to the manifestation and exercise of the functions of government over the territory.[57] “The continuous and peaceful display of territorial sovereignty (peaceful in relation to other States)” is as good as a title otherwise obtained.[58] “In many cases the tribunal has been satisfied with very little in the way of the actual exercise of sovereign rights, provided that no other State could make out a superior claim.”[59] The means by which possession by an individual could establish statehood is analogous to that by which an existing State obtains title.
Settlement of the Spratly Islands might have been sufficient to give Meads some title to the islands. But though it might be possible to claim sovereignty over a disputed island, it is unlikely that any established State would fail to use force, if necessary, to remove occupiers before they could obtain a perfect title.[60]
These entities (unclaimed islets) cannot be said to meet Palan’s requirements for success as tax havens.[61] They generally do not have political and economic stability. It is unlikely that they would be adjacent to and supported by large international markets, or be equipped with sophisticated information-exchange facilities and be within easy reach of a major financial centre. It is unlikely that any will have agreements with major countries to avoid double taxation and regulation. While such entities are not necessarily tainted by scandals, or by the laundering of proceeds of criminal or drugs activities, they lack international credibility. Indeed, since their status is disputed by existing classic sovereign States, they would present grave risks and disadvantages to investors.
5 PROBLEMS FOR REEFS OR LOW-TIDE ELEVATIONS
Even if one could not locate an existing island upon which to base one’s financial empire, it might be possible to use a reef or other low-tide elevation, such as what was known as the Grand Capri Republic (or alternatively Atlantis, Isle of Gold) – the Grand and Triumph reefs, east of the Florida Keys. This was chosen by Louis Ray, of Acme General Contractors Inc, apparently for the development of a resort, although his ambitions also extended to eventual independence. The reef was also chosen by the rival Atlantis Development Corporation. The plans to develop Grand and Triumph reefs ended in considerable litigation.[62] It was unnecessary for the courts to consider in detail the international law precedents for establishing States, because the reefs were found to be seabed rather than islands. Both domestic[63] and international law[64] confirmed that the United States had a right to control the natural resources of the continental shelf.[65] Federal authorities could prevent Ray from developing his reef into an island. The development of a State could scarcely succeed in these circumstances.
It seems unlikely that a State would allow part of its seabed to be used in this way, but it may be possible to find an elevation that is unclaimed, such as the Republic of Minerva. This was based on the Minerva reef, between Tonga and Fiji, some 1,000 nautical miles north-east of New Zealand.[66] Most of North Minerva reef is less than 2 metres high at low tide, and the rest is never more than 1 metre uncovered. The entire reef is submerged at high tide. South Minerva reef is completely submerged at high tide, and uncovered at low tide.[67] Unlike the Grand Capri plans, the reefs were not within the territorial waters of another State — or on its continental shelf — being some hundreds of nautical miles from Tonga, the nearest State. The proposed development of the Minerva reef was led by the USA-based Ocean Life Research Foundation, and began in 1971.[68] The plan was for the formation of a 160 hectare island on the reef.[69] The developers claimed that their “Republic” was recognised by the Sultanate of Ocussi-Ambeno, East Timor — though the legal status that this recognition would confer was slight, given that the Sultanate was itself not a recognised State.[70] Whilst the constitutive theory of statehood might recognise this as a means of achieving de jure statehood,[71] de facto statehood did not endure (if it ever existed). The brief existence of the “Republic of Minerva” — whether it was ever a
State or not — ended with its occupation by Tongan forces.[72] It is likely that further such States would founder due to invasion by the nearest established State claimant, or simply because of the high cost of development and the uncertainty of a return on investors’ funds.
These reef-based entities also cannot be said to meet Palan’s requirements for success as tax havens.[73] They generally do not have political and economic stability, and while they are not necessarily tainted by scandals and by the laundering of proceeds of criminal or drugs activities, they lack international credibility because of their artificiality.
6 PROBLEMS FOR STATES IN SHALLOW WATERS CREATED BY DUMPING OR OTHER MEANS
Greater difficulties face States in shallow waters, created by sinking derelict ships or by dumping. One example is Abalonia in Cortes Bank, west of San Diego in California. Like the neighbouring Taluga, development ceased temporarily during the Ray litigation, and ended soon after the Grand Capri Republic failed to obtain court recognition.[74] Such projects are likely to be unsuccessful for economic reasons alone, and environmental considerations — which were also present in the Minerva case — would deny them support from many of the freer spirits of the environmentalist movement, who formed their own (virtual) Waveland.[75] They are also likely to be in territorial waters, and thus subject to the authority of existing States. This alone would prevent their development.
In respect of Palan’s requirements,[76] these entities also would be unlikely to rank as successful alternatives to existing tax havens, for the same reasons as the other forms of “States” reviewed.
7 PROBLEMS FOR STATES ON TOTALLY ARTIFICIAL STRUCTURES
Perhaps ironically, in some respects the most successful option — or least unsuccessful — for an alternative to a traditional tax haven has been the creation of totally artificial States. For practical reasons these have usually been in coastal waters. They may be part of the seabed. In some cases they have been floating, moored or anchored, or free-floating — though the floating republics have generally been especially unsuccessful.[77] One of the first of these was New Atlantis, which was created by Ernest Hemingway’s younger brother, Leicester, in the 1960s. It consisted of a bamboo platform moored six nautical miles off the coast of Jamaica,[78] and was fated to sink in a storm.[79]
A non-American example is Iola Delle Rose, off the Port of Rimini, on the Adriatic coast of Italy, 300 metres outside Italian territorial waters.[80] The Italian Council of State, to which Rosa and Chierici (the co-founders of the “State”) appealed a demolition order from the Rimini Harbour Office, said that the Geneva Convention on the High Seas,[81] like that of Territorial Sea and Contiguous Zone,[82] “only creates rights and obligations of an international character for the Italian State with respect to other nations of the international community. The appellants cannot deduce from it any rights worthy of protection either according to international law or under Italian municipal law.”[83] The venture failed because, like Grand Capri, it fell within the territorial influence of an existing State, which simply ignored its claims to statehood.
The Principality, or Duchy, of Sealand[84] is perhaps the best-known example of a totally artificial structure that has pretensions to statehood — and the longest surviving. It is based on Roughs Fort, built in the winter of 1941-1942, 7 nautical miles off the coast of England, as an anti-aircraft post. It comprises two 20-metre high and 8-metre wide legs, which are joined at the top by a platform that originally housed the guns. The State began in the 1960s, at a time when numerous “pirate” radio stations were being established across the United Kingdom and continental Europe in contravention of national broadcasting laws.[85] Many of these were built in wartime sea forts.[86] Most were found to be subject to national broadcasting laws,[87] but the legal status of Roughs Fort at least was more problematic.[88] Indeed, a British court held in 1968 that Sealand was outside British territorial waters — as then defined[89] — and therefore beyond the jurisdiction of British courts.[90] But though it may be beyond the territorial jurisdiction of the country to which it apparently belongs, a territory, however large, is not necessarily a State.
On 25 September 1975, “Roy of Sealand” proclaimed the Constitution of the Principality. In the mid-1970s the Administrative Court of Cologne, asked to determine the status of Sealand citizenship conferred upon a German national, the “Foreign Secretary and Chairman of the Council of State” of Sealand, held that the platform was not a State within international law, because it had neither territory, nor people, nor government.[91] The criteria of the Montevideo Convention[92] proved too resilient for the new “State”. As the Court observed: [93]
“A man-made artificial platform, such as the so-called Duchy of Sealand, cannot be called either ‘a part of the earth’s surface’ or ‘land territory’ and only structures which make use of a specific piece of the earth’s surface can be recognised as State territory within the meaning of international law.”
The Court however went beyond the guidelines of the Convention, and observed that:
“The State, as an amalgamation of many individuals . . . has the duty to promote community life. This duty does not merely consist of the promotion of a loose association aimed at the furtherance of common hobbies and interests. Rather it must be aimed at the maintenance of an essentially permanent form of communal life in the sense of sharing a common destiny . . .”[94]
“The so-called ‘nationals’ of the ‘Duchy of Sealand’ do not satisfy these criteria for community life. Apart from the 30 to 40 persons permanently living on the platform, who are responsible for its defence and the maintenance of its installations, the presence of the other so-called ‘nationals’ is limited to occasional visits. The territorial extent of the ‘Duchy’ of merely 1300 square metres does not satisfy the requirements for the permanent residence of all its ‘nationals’. The life of the State is not limited to the provision of casinos and places of entertainment. Rather a State community must play a more decisive role in serving the other vital human needs of people from their birth to their death. These needs include education and professional training, assistance in all the eventualities of life and the provision of subsistence allowances where necessary. The so-called ‘Duchy of Sealand’ fails to satisfy any of these requirements. Regardless of the material prerequisites which an entity must have in order to constitute a ‘people’ under international law, the ‘nationals’ of the ‘Duchy’ themselves fail to satisfy an essential condition for their classification as a people. These ‘nationals’ have not acquired their ‘nationality’ in order to live with one another and handle all aspects of their lives on a collective basis, but on the contrary they continue to pursue their individual interests outside the ‘Duchy’. The common purpose of their association is limited to a small part of their lives, namely their commercial and tax affairs. This degree of common interest cannot be regarded as sufficient for the recognition of a ‘people’ within the meaning of international law.”[95]
However, despite this judgment, the United Kingdom authorities did little to assert their authority over the platform, though (perhaps unsurprisingly) they still do not recognise it as a State.[96] But the “State” continues to exist, albeit precariously.
On 30 September 1987, Prince Roy declared the extension of Sealand’s territorial waters to 12 nautical miles, pre-empting the declaration on 1 October 1987 that British territorial waters had been extended from 3 to 12 nautical miles.[97]
In 1999 Sealand began a resurgence, due to an alliance with HavenCo, providers of internet servers. Prince Regent Michael, who has acted for his father as ruler of the principality since 1999, although he lives at Leigh-on-Sea in Essex, on the mainland of Britain, leased Sealand to HavenCo, an Antigua-registered firm run by husband and wife team Sean and Jo Hastings.[98] The aim is to avoid United Kingdom laws, and taxes on e-commerce activities.[99] According to the company’s own publicity material, “HavenCo has been providing services since May 2000 and is fully operational, offering the world’s most secure managed servers in the world’s only true free market environment, the Principality of Sealand”.[100] The claims continue thus:
“The Sealand Government is ideal for web business, as there are no direct reporting or registration requirements.”[101]
“HavenCo Limited is exploiting a unique opportunity to set up the world’s first real data haven. The initial showcase datacenter is the Principality of Sealand, the world’s smallest sovereign territory. It was founded over thirty years ago and has obtained a unique legal status as the only sovereign man-made island. Its claim to sovereignty has been tested and supported in several legal challenges.”[102]
“Sealand has no laws governing data traffic, and the terms of HavenCo’s agreement with Sealand provide that none shall ever be enacted.”[103]
HavenCo’s plan is to allow any type of internet services to be hosted at Sealand, with the exception of child pornography and the unsolicited mass broadcast of messages (“spam”). HavenCo has already agreed to host the internet presence of the Tibetan government in exile (Tibet Online[104]) from Sealand.[105] HavenCo claims that the combination of Sealand’s declared independence from the United Kingdom, sophisticated encryption techniques, and the laissez-faire attitude of Sealand ruler Roy Bates will give customers unprecedented freedom and security.[106] The Home Office, the United Kingdom agency responsible for enforcement of internet laws, says that it expects Sealand and any business operating on it to follow British laws.[107] While the United Kingdom might have done little to assert jurisdiction over the offshore enclave in the past, any prospect of its use for digital money laundering, gambling or tax evasion might quickly result in a re-assertion of British sovereignty.[108]
The government of the United Kingdom can assert that it owns the platform, which is on the continental shelf (on the Ray analogy). Sealand also lies within the United Kingdom’s 12 nautical mile territorial water limit, though — perhaps crucially — it did not do so when the independence of the platform was first proclaimed. Ultimately, the existence of Sealand can be ended as easily as that of the Grand Capri Republic, or of the Republic of Minerva. The establishment of internet servers on the platform are no more a sign of statehood than the operation of pirate radio stations. As soon as significant regulatory issues arise the United Kingdom authorities are likely to act to end Sealand’s de facto statehood. However, the longer this is delayed the stronger are claims that Sealand has de jure statehood, despite its artificiality and minimal population. It may be that, despite the finding of the Administrative Court of Cologne,[109] and in light of the passage of years,[110] Sealand has a sufficiently permanent population, government, and capacity to enter into diplomatic relations, and would meet the criteria of the Montevideo Convention.[111] However, difficulties remain with respect to the existence of a defined territory, for Sealand is nothing more than an artificial platform.
In terms of the attributes of a successful tax haven, Sealand is apparently equipped with sophisticated information-exchange facilities, and it is within easy reach of a major financial centre. But whether it has political and economic stability is another matter.[112] A platform or boat in international waters — if it were able successfully to establish statehood — could be both tax and regulation free. But these advantages are obtained also in the Bahamas, or any one of the existing land-based tax havens. As well as tax and legal-haven advantages, companies in the Bahamas would benefit from an established legal system and infrastructure, which would not be the case on a platform or ship.[113]
As in the case of the previous structures examined, these artificial entities cannot be said to meet Palan’s requirements for success as tax havens.[114] They generally do not have political and economic stability. Sealand may be equipped with sophisticated information-exchange facilities and within easy reach of a major financial centre. It is unlikely, however, that it will have agreements with major countries to avoid double taxation and regulation. Yet, so long as it operates on a relatively small scale it seems that the United Kingdom authorities have been unwilling actively to enforce domestic laws over Sealand. In such a situation could lie the seeds of future political recognition and eventual tax haven status. But success is at best uncertain.
8 REAL SMALL STATES OF DUBIOUS STATUS
If artificial platforms and islands are generally untenable, there remains the option of the Principality of Seborga. This is located in Liguria, on the Italian Riviera, close to the French border. The Principality’s territory amounts to 14 square kilometres, and it has a population of 2000 inhabitants — of whom only 362 living in the 5 square kilometre capital are citizens.[115] This is not merely a would-be independent State declared by a lone eccentric. It is one that may have some historical claim to legitimacy.
In 954 Count Guido of Ventimiglia bestowed the castle, the Saint Michael’s Church in Ventimiglia, and a large portion of land on the monks of Lerins. In 1079 Seborga became a Principality of the Holy Roman Empire. Seborga remained a Cistercian State until 1729, when the principality was sold to Vittorio Amedeo II of Savoy, Prince of Piedmont and King of Sardinia. But this change was never, according to advocates for an independent Seborga, registered with the Kingdom of Sardinia, nor with the House of Savoy.[116]
At subsequent stages in the unification of Italy, Seborga was never mentioned by name. According to its advocates, the Principality of Seborga has never been considered part of the Italian Republic formed in 1946.[117] In view of this alleged status, in 1963 the people of Seborga elected a new Prince, Giorgio I. On 23 April 1995 Seborgans voted for the principality’s Constitution.[118] It declared its independence in 1996. Seborga is successful as a tourist resort. But whether its independence will ever be more than just an attraction to tourists is doubtful. As a State situated between Italy and France — and a near neighbour of Monaco — Seborga has potential for development as a tax haven, provided its legal status as a State can be established, which is doubtful.[119] Currently the citizens of the putative State continue to pay taxes to Italy.
Seborga, and similar potential States, enjoy several important advantages over artificial sea platforms. Seborga has a permanent population, and a defined territory. It may also possess a government, and possibly the capacity to enter into diplomatic relations. This would meet the criteria for statehood of the Montevideo Convention.[120] However, it may not meet the criteria laid down by the European Union for recognising new States in Eastern Europe and the former Soviet Union in 1991-1992, based on the guidelines adopted by the European Commission Member States on 16 December 1991.[121] This recognition may be denied it.
Compared with the artificial constructs examined previously, genuine States of dubious status do meet some of the requirements for a successful tax haven. They may well have economic if not political stability — they do at least have a settled population. Being physically based on land it is easier for them to achieve access to large international markets. While it is unlikely that any will have agreements with major countries to avoid double taxation and regulation, they have a better chance of achieving international credibility and recognition. The main difficulty would be that their status is doubtful, and they cannot simply be created as investors might wish, since they depend upon the vagaries of history. Indeed, they offer no advantage over existing tax havens, and present some additional disadvantages.
9 VIRTUAL STATES
The next example of a non-traditional alternative to tax havens is the newest and least orthodox. It is not a territorial State at all. The internet, or “cyberspace”, is an interconnected electronic communications network. It has no physical existence as a whole, though comprised of a large number of individual networks.[122] In essence the internet exists in a virtual world, rather than in the real, geographical, world.[123] The internet has no controlling body,[124] although it does have a common language, allowing different operating systems to speak to one another.[125] A State created on the internet would have no corporeal existence, yet it may be no less real for that. Such internet States could conceivably be used to avoid taxation liability, particularly in an age of electronic money.
There has been a tendency to claim that the changes we observe in notions of sovereignty, the State, jurisdiction, and law in general are caused by the internet.[126] But, as has been observed by various writers, globalisation of commerce is not a new phenomenon.[127] Our existing international law is predicated on the existence of the sovereign State. The notions of sovereignty and statehood were once among the most important aspects of public international law.
But to be a State, a territory must have a permanent population,[128] it must have a defined territory,[129] it must have a government, and it must have the capacity to enter into diplomatic relations.[130] No other entity could be regarded as a State, whatever its de facto power. This definition remains politically important, though additional factors have increased in relevance and importance.
The notions of sovereignty and statehood are not easily defined or explained. To a large degree this is because they are principally political concepts, rather than merely legal principles. With the growth in both the (horizontal) extent and (vertical) reach of international agreements, treaties, conventions and codes, statehood is becoming a less dominant feature. This tendency is becoming more noticeable in the modern commercial environment, and especially in the context of the internet as the level at which economic decisions are increasingly taken, though States remain the level at which taxation is levied.
The jurisdiction of national courts is based upon the domestic laws of individual countries.[131] Similarly, the legislative jurisdiction of a State is limited to its territory.[132] The advent of cyberspace has not meant the decline of domestic law. But it has “pushed the boundaries”.[133] Border controls on the internet are not impossible to develop and implement.[134] Many governments already regulate cyberspace.[135] It may be that the most effective means to achieve this is to regulate the architecture of cyberspace.[136] But for the most part the internet is international; nor are its users adequately served by existing laws with respect to conflict of laws.[137] And global computer-based communications cut across territorial borders,[138] creating a new realm of human activity and undermining the feasibility[139] — and legitimacy[140] — of applying laws based on geographic boundaries.[141] Furthermore, the internet threatens traditional political institutions and perhaps even the very concept of sovereignty itself.[142] As Zekos has written, the real jurisdictional novelty of cyberspace is that it will give rise to more frequent circumstances in which effects are felt in multiple territories at once.[143] Traditional international legal rules on jurisdiction do not fit the internet context, nor do they facilitate cooperation on international regulation. The limits of national control of the internet are perhaps exaggerated. Principally that is because nations are increasingly acting in concert to deal with the borderless nature of cyberspace by creating both relatively uniform laws across jurisdictions, and agreements for international cooperation in surveillance and investigation.[144]
As well as being a threat to sovereign authority, the internet may allow new opportunities for an increase in surveillance[145] and authority[146] — or for an increase in public participation in government. Increasingly, private, non-State parties are regulating cyberspace.[147] But this does not yet equate to “sovereignty”, nor can one avoid tax liability by utilising a virtual residence, since money requires a physical abode — even if only for juridical purposes.
Internet-based entities could not be said to meet Palan’s requirements for success as tax havens.[148] They would not have political and economic stability, since they could be created and abolished by the actions of an individual computer operator. Since they would be virtual rather than real they would be within easy reach of any major financial centre. But they would lack international credibility, and they may never emerge from the virtual world of cyberspace.
10 SPECIAL DEVELOPMENT REGIONS AND TRIBAL AUTHORITIES
One of the principal reasons for the upsurge in criticism of tax havens has been the perception that they illegitimately deprive governments of the taxation revenue which they are due.[149] The desire to protect and enhance revenue is as much a social policy objective as it is economic. The alternatives to the traditional tax haven outlined above are no less a threat to this revenue, and are therefore just as likely to face the opposition of governments.
There is, however, one way around this apparently unavoidable difficulty. There have been a number of tribal authorities and special development regions that have been permitted to become, if not tax havens, at least areas where special tax benefits may be obtained — with the blessing, or at least acquiescence, of government — for the furtherance of social and political objectives. These have developed as a consequence of a resurgence of the interests and rights of tribal and indigenous peoples in western countries in particular.[150] For example, in some States of the US, native American tribal authorities own and operate casinos and other commercial ventures, largely unfettered by ordinary State taxes.[151] While such authorities do not present a complete answer — and they will likely be subject to regulation — they at least usually have the support of governments. Unlike in many tax havens, such privileges are seen as serving worthwhile social objectives, rather than allowing rich people and companies to avoid paying taxes on their already ample assets.
These entities do meet Palan’s requirements for success as tax havens.[152] They generally have political and economic stability. They may be supported by a large international market, or equipped with sophisticated information-exchange facilities, and within easy reach of a major financial centre, depending upon the nature of the region. They will often have agreements with their national government to minimise taxation and regulation. They are not necessarily tainted by scandals and by the laundering of proceeds of criminal or drugs activities. Finally, their international credibility stems from their official or quasi-official nature. They offer the best alternative available to the traditional tax haven.
11 CONCLUSION
Tax havens cannot simply be abolished, as they are a manifestation of State sovereignty.[153] A State may obtain benefits from offering taxation advantages to certain non-residents. But they do not suit every investor. However, non-traditional tax havens, based on non-State entities or quasi-States, offer no real alternative.
There are serious difficulties facing ephemeral States such as Sealand, which are unlikely to be given the opportunity to develop fully as alternatives to tax havens. States with some claim to sovereignty, such as Seborga, may have better prospects of success. But even here they will offer few if any advantages over traditional tax havens. Even special development regions and tribal authorities offer only partial answers — though they are more viable. Political and economic stability are essential, as is international credibility. These have generally been denied the newly-created States, which rarely satisfy even one of the requirements for statehood,[154] let alone those of a successful tax haven.[155]
The future may lie in space. Article II of the 1967 Treaty on Principles Governing the Activities of States in the Exploitation and Use of Outer Space provides that:[156]
“Outer space, including the Moon and other celestial bodies, is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means.”
Perhaps some latter-day Morton Meads may claim the Moon as his private kingdom, and thereby bewilder the taxation and governmental authorities on the earth?
This article was accepted for publication on 27 September 2002
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/journals/ALRS/2003/4.html