Debate on international taxes FES Briefing Paper June 2006 Page 4 parliamentary democracy. Now, the fact that that globalization has at least relativized the principle of territoriality by transnationalizing economy and communication has substantial implications for the functioning of parliamentary democracy in general and for taxation in particular. It is for this reason recommendable to start out by taking a look at the impacts of globalization on national taxes. Globalization and taxation The systems of taxation that developed in the course of the 19th and 20th centuries were conceived for the comparatively closed economy of the nation-state. Capital and labor were territorially bound to roughly the same degree. It was relatively easy for national tax legislation to establish the national tax base. Globalization has given rise to a new situation. The latter’s economic core may be seen in the fact that national boundaries are increasingly vanishing for movements of capital, goods, and services. And in this connection no other factor of production has proven to be as mobile as capital. To cite an example, thanks to digitalization and satellite communication, today some US$ 1.9 per day are transacted in the international foreign-exchange markets trade(BIS 2005). What we see emerging here is something similar to the cyberspace of the Internet, a transnational space. These processes are becoming less and less accessible to control and regulation. New possibilities to dodge and evade taxes Globalization has thus opened up new approaches for global players to dodge national tax obligations. And this in turn is serving to erode the nation-state’s tax base. Various mechanisms are used in this connection: • Financial market liberalization has subverted most of the controls on capital movements in place at the national level. And more and more possibilities have also emerged to transfer funds in ways that circumvent national taxes. • At the same time, most nation-states are actively engaged in cutting taxes on corporate profits, capital gains, and large assets. As a means of attracting capital into their own economies, many governments have seen fit to boost their“locational attractiveness” by cutting taxes for investors. Globalization-related locational competition is fueling a race to cut taxes that is taking on increasingly perverse forms of tax dumping. • Transnational corporations(TNCs) have ways to distribute their profits and losses across locations most favorable to them in terms of taxes. • Using procedures like transfer pricing, these corporations are also able to generate artificial profits or losses. One approach used here is for a parent corporation to charge a subsidiary excessively high or low prices for intermediate products, services, patents, and the like. • Offshore banking centers and/or tax havens provide additional incentives to dodge or evade taxes(Giegold 2003). The outcome is that revenues from corporate and asset taxes have started to crumble. This is one of the main reasons for the structural crisis of national finances. New ways to earn profits In parallel to the new tax problems besetting the nation-state, globalization has also opened up new sources of corporate profits(Wahl 2005). Some of these new profits can of course still easily be taxed in the national framework. But the character of a good part of these new high­yield activities is by nature well suited to dodging national tax obligations. To cite some important examples: • Speculative and arbitrage transactions focusing on global financial flows. The possibility of cashing in on currency fluctuations, interest-rate differentials, and fluctuations in the prices of stocks and other securities has given rise to an entirely new type of yield potential. Even slight price differentials of no more than a hundredth of a percent may yield huge gains if the volume of the transaction is sufficiently large. • The electronic Internet trade in virtual goods and services. The internet has set the stage for deliveries of sounds, pictures, and texts on a commercial basis. Services that were earlier tied to a material medium(e.g. CD, video cassette), and could thus easily be tracked by customs or tax authorities, are being provided more and more via the Internet. Television, film, and video on demand, music, news, software, and countless advisory services, including e.g. medical telediagnosis, are opening up some wholly new possibilities to make money using transnational channels.(WTO 1998); • Externalization of environmental costs that accrue internationally or globally and emissions that pollute the earth’s atmosphere. Here we are talking primarily of international carriers(aircraft, ships) that