Jurisdictional arbitrage

Jurisdictional arbitrage is the practice of taking advantage of the discrepancies between competing legal jurisdictions. 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 costs, here 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 havens such as Andorra grant permanent residency rights to immigrants only if they meet certain criteria. Jurisdictional arbitrage is a significant concept in modern free market anarcho-capitalism, not to be confused with anarchism per se.

Applications

The practice of individuals seeking asylum involves appealing to a jurisdiction with favorable 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 practice tribal female genital mutilation and/or extremist Islam in favour of European and North American jurisdictions.

To avoid arbitrary restrictions on skilled immigration, high-tech companies may set up offices in countries neighboring those with the restrictive policies, preferably in locations close to the border, as was the case with Microsoft's plans to open a satellite office in Vancouver, Canada, situated only 140 miles (225 km) from its headquarters in the Seattle suburb of Redmond, Washington in the United States. In Silicon Valley, a project is underway to launch a ship 12 nautical miles from the shore, in international waters, with the goal of allowing entrepreneurs without US work visas to legally create and work for companies close to the area (see Blueseed).

On the other hand, jurisdictional arbitrage has also been utilized to hinder attempts at governmental prosecution, by transnational criminals such as terrorists, money launderers, and cyber-attackers.

Prior to recent international mobilization 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. Pinochet, one-time military leader of Chile sought to evade retributive prosecution in his native jurisdiction by seeking refuge in the United Kingdom. He was later prosecuted by a Spanish court according to the principle of universal jurisdiction.

To counter-act this phenomenon, most countries have signed bilateral extradition treaties with most other countries, and some governments adopted the principle of universal jurisdiction, which has enabled individuals to be prosecuted for offences (particularly alleged human rights violations and war crimes) 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 the use of jurisdictional arbitrage for tax avoidance 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.

Advocates

Anarcho-capitalists hope that by subdividing existing governmental jurisdictions into city-states (such as 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. It is worth noting that there is nothing anarchist about jurisdictional arbitrage, since it is a strategy based on profiting from the differences between regulatory regimes, and therefore incompatible with the abolition of the state.

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 taxes 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.”

See also

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