Jurisdictional arbitrage
Encyclopedia
Jurisdictional arbitrage is the practice of taking advantage of the discrepancies between competing legal jurisdiction
s. It takes its name from arbitrage
, the practice in finance
of purchasing a good at a lower price in one market and selling it at a higher price in another. Just as in financial arbitrage, the attractiveness of jurisdiction arbitrage depends largely on its transaction cost
s — in this case the costs of switching legal service providers from one government
to another. The lower the exit costs for leaving the jurisdiction — unrestricted emigration, cheap travel, liquidity of assets — the more desirable and feasible it is. Conversely, high entry costs into the more favourable jurisdiction are an inhibitor on jurisdictional arbitrage — certain tax haven
s such as Andorra
only grant permanent residency rights to immigrants who meet certain criteria. Jurisdictional arbitrage is a significant concept in modern free market anarchist schools of thought
.
Tax avoidance
is not the sole benefit of jurisdictional arbitrage. Those who utilize jurisdictional arbitrage to hinder attempts at governmental prosecution include transnational criminals such as terrorists, money launderers
, cyber-attackers. The practice of individuals seeking asylum involves appealing to a jurisdiction with favourable individual rights for residency, where the individual's native jurisdiction is seen to offer insufficient protection. By way of example, women have fled West African nations which have recently adopted Sharia law in favour of Europe
an and North America
n jurisdictions which prohibit female genital mutilation.
Prior to recent international mobilisation against the practice, there existed a long-standing tradition of ousted state leaders such as Erich Honecker
, Idi Amin
and Augusto Pinochet
finding refuge and retirement abroad to avoid prosecution in their native jurisdiction. To counter-act this phenomenon, governments adopted the principle of Universal jurisdiction
, which has enabled individuals to be prosecuted for offences (particularly alleged human rights
violations and war crime
s) committed outside the jurisdiction of prosecution — the legal structure of nations such as Belgium
and Spain
allow for this, as does that of international tribunals operating under the aegis of the United Nations
. A similar attempt at governmental collusion to limit jurisdictional arbitrage is the policy of tax harmonization
. The membership of European governments in the European Union
resulted in a collection of nations with a limited set of common legal structures (Four Freedoms
) which has resulted in tax competition
by the otherwise less-developed nations (such as the Republic of Ireland
in the early 1990s) whereby governments compete for foreign investment by lowering their tax rates significantly below those of their neighbours. This strategy has been adopted in the form of a flat tax
by various Eastern European nations, which has resulted in calls for harmonization of tax rates by the traditionally more developed nations such as France
, Britain
and Germany
.
control and persecution. In the 19th century, many persecuted European anarchists such as Mikhail Bakunin
and Prince Peter Kropotkin sought refuge in London
, which offered greater freedom of political expression
than their native jurisdictions. Anarcho-capitalists hope that by subdividing existing governmental jurisdictions into city-state
s (such as Dubai
or Singapore
), competition among jurisdictions for citizens will lead to a diversity of legal climates including more favourable jurisdictions for liberty
and self-determination
. Cypherpunks and crypto-anarchists also cite low exit costs and fluidity of movement across jurisdictions as a significant means of advancing individual freedom through the free movement of information and capital. The concept of seasteading
is an attempt to increase the possibility of jurisdictional arbitrage by decreasing the cost of switching governments.
A notable proponent and practitioner of jurisdictional arbitrage is Canadian businessman and perpetual traveler
Calvin Ayre
, founder of online gambling
consortium Bodog Entertainment Group. Although online gambling is illegal in the United States
, a market which accounts for 95% of Bodog's sales, the company pays no corporate tax
es there as its activities are distributed across different jurisdictions to minimise tax burden. “We run a business that can’t actually be described as gambling in each country we operate in. But when you add it all together, it’s Internet gambling.”
Jurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...
s. It takes its name from arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
, the practice in finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
of purchasing a good at a lower price in one market and selling it at a higher price in another. Just as in financial arbitrage, the attractiveness of jurisdiction arbitrage depends largely on its transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s — in this case the costs of switching legal service providers from one government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
to another. The lower the exit costs for leaving the jurisdiction — unrestricted emigration, cheap travel, liquidity of assets — the more desirable and feasible it is. Conversely, high entry costs into the more favourable jurisdiction are an inhibitor on jurisdictional arbitrage — certain tax haven
Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
s such as Andorra
Andorra
Andorra , officially the Principality of Andorra , also called the Principality of the Valleys of Andorra, , is a small landlocked country in southwestern Europe, located in the eastern Pyrenees mountains and bordered by Spain and France. It is the sixth smallest nation in Europe having an area of...
only grant permanent residency rights to immigrants who meet certain criteria. Jurisdictional arbitrage is a significant concept in modern free market anarchist schools of thought
Anarchist schools of thought
Anarchism is generally defined as the political philosophy which holds the state to be undesirable, unnecessary, and harmful, or alternatively as opposing authority in the conduct of human relations...
.
Application
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
is not the sole benefit of jurisdictional arbitrage. Those who utilize jurisdictional arbitrage to hinder attempts at governmental prosecution include transnational criminals such as terrorists, money launderers
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
, cyber-attackers. The practice of individuals seeking asylum involves appealing to a jurisdiction with favourable individual rights for residency, where the individual's native jurisdiction is seen to offer insufficient protection. By way of example, women have fled West African nations which have recently adopted Sharia law in favour of Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
an and North America
North America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...
n jurisdictions which prohibit female genital mutilation.
Prior to recent international mobilisation against the practice, there existed a long-standing tradition of ousted state leaders such as Erich Honecker
Erich Honecker
Erich Honecker was a German communist politician who led the German Democratic Republic as General Secretary of the Socialist Unity Party from 1971 until 1989, serving as Head of State as well from Willi Stoph's relinquishment of that post in 1976....
, Idi Amin
Idi Amin
Idi Amin Dada was a military leader and President of Uganda from 1971 to 1979. Amin joined the British colonial regiment, the King's African Rifles in 1946. Eventually he held the rank of Major General in the post-colonial Ugandan Army and became its Commander before seizing power in the military...
and Augusto Pinochet
Augusto Pinochet
Augusto José Ramón Pinochet Ugarte, more commonly known as Augusto Pinochet , was a Chilean army general and dictator who assumed power in a coup d'état on 11 September 1973...
finding refuge and retirement abroad to avoid prosecution in their native jurisdiction. To counter-act this phenomenon, governments adopted the principle of Universal jurisdiction
Universal jurisdiction
Universal jurisdiction or universality principle is a principle in public international law whereby states claim criminal jurisdiction over persons whose alleged crimes were committed outside the boundaries of the prosecuting state, regardless of nationality, country of residence, or any other...
, which has enabled individuals to be prosecuted for offences (particularly alleged human rights
Human rights
Human rights are "commonly understood as inalienable fundamental rights to which a person is inherently entitled simply because she or he is a human being." Human rights are thus conceived as universal and egalitarian . These rights may exist as natural rights or as legal rights, in both national...
violations and war crime
War crime
War crimes are serious violations of the laws applicable in armed conflict giving rise to individual criminal responsibility...
s) committed outside the jurisdiction of prosecution — the legal structure of nations such as Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
and Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
allow for this, as does that of international tribunals operating under the aegis of the United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
. A similar attempt at governmental collusion to limit jurisdictional arbitrage is the policy of tax harmonization
Tax harmonization
Tax harmonisation refers to the process of making taxes identical or at least similar in a region. In practice, it usually means increasing tax in low-tax jurisdictions, rather than reducing tax in high-tax jurisdictions or a combination of both. The best example is the European Union where all...
. The membership of European governments in the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
resulted in a collection of nations with a limited set of common legal structures (Four Freedoms
Four Freedoms (European Union)
The European Union's Internal Market seeks to guarantee the free movement of goods, capital, services, and people – the EU's four freedoms – within the EU's 27 member states.The Internal Market is intended to be conducive to increased competition, increased specialisation, larger...
) which has resulted in tax competition
Tax competition
Tax competition, a form of regulatory competition, exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources...
by the otherwise less-developed nations (such as the Republic of Ireland
Republic of Ireland
Ireland , described as the Republic of Ireland , is a sovereign state in Europe occupying approximately five-sixths of the island of the same name. Its capital is Dublin. Ireland, which had a population of 4.58 million in 2011, is a constitutional republic governed as a parliamentary democracy,...
in the early 1990s) whereby governments compete for foreign investment by lowering their tax rates significantly below those of their neighbours. This strategy has been adopted in the form of a flat tax
Flat tax
A flat tax is a tax system with a constant marginal tax rate. Typically the term flat tax is applied in the context of an individual or corporate income that will be taxed at one marginal rate...
by various Eastern European nations, which has resulted in calls for harmonization of tax rates by the traditionally more developed nations such as France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Britain
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
.
Advocates
Jurisdictional arbitrage is a popular second-best strategy amongst anarchists who believe that it will allow them to avoid stateState (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
control and persecution. In the 19th century, many persecuted European anarchists such as Mikhail Bakunin
Mikhail Bakunin
Mikhail Alexandrovich Bakunin was a well-known Russian revolutionary and theorist of collectivist anarchism. He has also often been called the father of anarchist theory in general. Bakunin grew up near Moscow, where he moved to study philosophy and began to read the French Encyclopedists,...
and Prince Peter Kropotkin sought refuge in London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
, which offered greater freedom of political expression
Freedom of speech
Freedom of speech is the freedom to speak freely without censorship. The term freedom of expression is sometimes used synonymously, but includes any act of seeking, receiving and imparting information or ideas, regardless of the medium used...
than their native jurisdictions. Anarcho-capitalists hope that by subdividing existing governmental jurisdictions into city-state
City-state
A city-state is an independent or autonomous entity whose territory consists of a city which is not administered as a part of another local government.-Historical city-states:...
s (such as Dubai
Dubai
Dubai is a city and emirate in the United Arab Emirates . The emirate is located south of the Persian Gulf on the Arabian Peninsula and has the largest population with the second-largest land territory by area of all the emirates, after Abu Dhabi...
or Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
), competition among jurisdictions for citizens will lead to a diversity of legal climates including more favourable jurisdictions for liberty
Liberty
Liberty is a moral and political principle, or Right, that identifies the condition in which human beings are able to govern themselves, to behave according to their own free will, and take responsibility for their actions...
and self-determination
Self-determination
Self-determination is the principle in international law that nations have the right to freely choose their sovereignty and international political status with no external compulsion or external interference...
. Cypherpunks and crypto-anarchists also cite low exit costs and fluidity of movement across jurisdictions as a significant means of advancing individual freedom through the free movement of information and capital. The concept of seasteading
Seasteading
Seasteading is the concept of creating permanent dwellings at sea, called seasteads, outside the territories claimed by the governments of any standing nation....
is an attempt to increase the possibility of jurisdictional arbitrage by decreasing the cost of switching governments.
A notable proponent and practitioner of jurisdictional arbitrage is Canadian businessman and perpetual traveler
Perpetual traveler
The term perpetual traveller refers to both a lifestyle and a philosophy.- Background :...
Calvin Ayre
Calvin Ayre
Calvin Ayre is the founder of the Bodog online gaming and entertainment brand, which he developed and launched in 1994. Ayre received a Bachelor of Sciences in General Sciences from the University of Waterloo in 1984...
, founder of online gambling
Online gambling
Online gambling, also known as Internet gambling and iGambling, is a general term for gambling using the Internet.-Online poker:Online poker tables commonly offer Texas hold 'em, Omaha, Seven-card stud, razz, HORSE and other game types in both tournament and ring game structures...
consortium Bodog Entertainment Group. Although online gambling is illegal in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a market which accounts for 95% of Bodog's sales, the company pays no corporate tax
Corporate tax
Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Entities treated as partnerships are generally not taxed at the...
es there as its activities are distributed across different jurisdictions to minimise tax burden. “We run a business that can’t actually be described as gambling in each country we operate in. But when you add it all together, it’s Internet gambling.”