Palm Oil: Africa’s Red Gold

The demand for Palm Oil, valued at around $50 billion per year, is soaring; but Africans are fast learning that it is a controversial investment.

In their article “Africa – RSPO Facts and Figures” the Sustainable Palm Oil Platform, a think tank, draw on a broad spectrum of verifiable evidence to support several of their claims: The oil palm plant originated in West Africa and grows extensively in this region, but largely as village low-yield multi-crop stands; yield is much lower in Africa than in Southeast Asia for various reasons, including climate and infrastructural limitations and a predominantly smallholder approach to production; smallholders account for 70 to 90 percent (depending on the country) of African oil palm grower; Africa is a net importer of palm oil(Sustainable Oil Palm Platform, n.d.). In other words, investors should be looking at Africa (particularly West Africa) as a new frontier region for large-scale palm oil production.

While oil palm is native to West Africa, most of today’s production is small scale and, except during the colonial era (1900s), export barely exists. This, however, is about to change. Due to restrictions on logging and the acquisition of land in Malaysia and Indonesia – the two countries that have accounted for the vast majority of the world’s export of palm oil – investors are now moving into Africa, where concessions for new plantations are more freely available. There is documentary evidence that the politicians in West Africa has, in the past decade, leased out as much as 1.8 hectares of land for palm oil plantations.  Given the high demand for palm oil, it will not be a surprise that companies like Wilmar, Olam, Sime Darby, Golden Veroleum and Equatorial Palm Oil are demanding for more land. As a matter of fact, another 1.4m hectares of West African  land is currently being sought by investors overall to be used for palm oil production(Economist, 2014)

Demand fever rising!

Worldwide, the demand for palm oil, whose annual global production is valued around $50 billion is rising(see table 1): In the first half of year 2014, palm oil imports by the European Union rose to record  3.37 million metric tons, while China’s import of palm oil during the same period totaled 3.38 million tons(McFerron, 2014; Economist, 2014). Given this current scenario, the demand and consumption of palm oil is expected to triple by the year 2050. The main reason for this soaring demand is evident: Palm oil is a very useful product. The oil, which is taken from the oil palm’s red fruit, is used in roughly half of all packaged supermarket products: margarine, shampoo, and ice cream, chocolate candy bars, cosmetics, and so on. In addition to that, palm oil is increasingly used as a biodiesel, particularly in Asia (Tan, 2014). Given that palm oil is highly lucrative (due largely to the fact that the plant yields more oil per hectare than any major oil seed crop) and that once planted the tropical tree can produce fruit for more than 30 years, providing jobs for poor rural communities, the benefit of oil palm are difficult to ignore in countries where they are grown.

Table 1 – Top 12 Palm Oil Producing Countries, 1970-2010

Country	Palm   Oil   Production	(Million Tonnes)
	1970	2010
Indonesia	0.1	20.0
Malaysia	0.1	35.3
Colombia	0.1	19.0
Costa Rica	0.1	40.1
Ecuador	0.1	19.0
Honduras	0.2	37.0
Thailand	0.1	36.1
Nigeria	0.2	36.0
Brazil	0.1	37.0
China Cote d’Ivoire Papua New Guinea	0.1      0.1      0.1	39.0    37.0    40.0

Source: Net Balance Foundation, 2013

 

In as much as Africa is coveted by oil palm growers, Africans are fast learning that growing oil palm at a commercial level can be a controversial business. Take Malaysia and Indonesian experience as a good example: The two countries have been castigated for the environmental damage caused by palm oil. The critics of these countries blames their oil palm industry  for deforestation  which, they argues, has increased carbon emissions and destroyed the habitats of rare breed animals, especially the orangutans. The bottom line here is that if Africa welcomes commercial-level oil palm production into their domains they will definitely face similar problems. Already there are ongoing complaints in various published reports that more that 50 percent of oil palm concessions in Africa infringe on the living places of great apes.

Africa’s case is unique due to their peculiar land ownership systems and land rights. On many occasions, signing a new concession can trigger complaints by civil society organizations that the land has been grabbed from the owners, who may be individuals or communities. The reason for this is clear: Weak land titles and hazy lines between customary and state ownership of land is a common feature in most African countries, with the result that such concessions may boot the local peasants off their land. And since a significant percentage of these peasants are farmers and hunters, they can become impoverished if they lose their lands in that fashion. The awareness of these facts by the peasants is one of the factors that hampered the palm oil industry in most African countries, particularly in Liberia where, though concessions were granted as early as 2006, still has very limited planted area and hence produces very limited quantities of palm oil.

But is it really a proven fact that the would-be investors in African palm oil have shoddy track record? Wilmar, a Singaporean group which owns plantations in Nigeria and Ghana, was ranked the least environmentally sound company in the 2012 Newsweek’s green ranking of the world’s 500 biggest publicly-traded companies(as cited in Economist, 2014). This does explain why potential investors are leery about putting their money in palm oil firms in West Africa. It should be pointed out here that West Africa is not the only region where potential investors are nervous: Deeming deforestation as a threat to the future growth of their investments, Norwegian Government Pension Fund Global (GPFG) – the world’s largest sovereign fund backed by Norway’s oil and gas industry – pulled out of 23 Southeast Asian palm oil firms who they claimed were sourcing palm oil unsustainably (Scott-Thomas, 2013).

Finding new friends

The bottom line here is that, for palm oil firms to survive in West Africa, they must be more sensitive to the villagers’ worries and should clear forests only if it has already been degraded. A lot of them appeared to have understood the “hand-writing on the wall”. For example, Olam has returned much of the land allocated to it by the government of Gabon on the ground that they were not suitable for agriculture. It also went further than that: It will not develop any plantations in areas that are already permanently inhabited by Gabonese nationals. In addition, it plans to develop less than half of the terrain it retained from Gabon’s government land grant so that it can set aside the remainder for community use or conservation purposes (Economist, 2014).

Other firms should learn from this approach to their advantage. It is true: West Africa wants the palm oil firms to help grow their economies and create jobs for their people. However, they will cooperate more when these firms do it sustainably.

 

 

 

References

Economist (2014): Palm Oil in West Africa. Retrieved September 9, 2014 from http://www.economist.com/news/middle-east-and-africa/21612241-companies-wanting-make-palm-oil-face-angry-environmentalists-grow-cherish

McFerron W. (2014): Palm Oil Prices Seen Near Bottom by Oil World on Demand. Bloomberg. Retrieved September 9, 2014 from http://www.bloomberg.com/news/2014-09-02/palm-oil-prices-seen-near-bottom-by-oil-world-on-demand.html

Net Balance Foundation (2013): Palm Oil in Australia – Facts, Issues and Challenges. Retrieved September 9, 2014 from http://www.rspo.org/file/PalmOilinAustralia.pdf

Sott-Thomas C. (2013): Norwegian Fund Pulls Out of “Unsustainable” Palm Oil Companies. Food Navigator. Retrieved September 15, 2014 from http://www.foodnavigator.com/Market-Trends/Norwegian-fund-pulls-out-of-unsustainable-palm-oil-companies

 

Sustainable Oil Palm Platform (n.d.): Africa – RSPO Facts and Figures. Retrieved August 27, 2014 from http://www.sustainablepalmoil.org/palm-oil-by-region/africa/

Tan H. (2014): Asian Biofuel Motorists Drives Palm-Oil Prices Higher. Wall Street Journal. Retrieved September 9, 2014 from http://online.wsj.com/articles/asian-biofuel-motorists-drive-palm-oil-prices-higher-1401354565

 

 

 

Boko Haram: A Clueless Gang

Ask any parent their worst nightmare, and you find abduction of their children is high on the list. Many parents in Nigeria are currently living that horrific reality: On April 14,  under the cover of darkness, 230 schoolgirls were abducted by Boko Haram – a clueless, Islamist terror group operating in Nigeria and Cameroon (Abubaker et al, 2014). As the parents of these girls wait and pray for their release, Nigeria’s government seems to be having great difficulty grappling with a terrorist group that has gotten more brazen and radical. The country’s army has, so far, proved that they lack the clout to implement a coordinated, calibrated and effective response to Boko Haram’s activities in Northern Nigeria. 

What’s in the Name?

In the local language, the name “Boko Haram” translates to “Western education is sin”(Giovanni, 2014). Founded by the Muslim cleric Mohammed Yusuf, Boko Haram was influenced by a telling phrase from the Koran, which stated thus: “Anyone who is not governed by what Allah has revealed is among the transgressors”(Chotia, 2014). This means that taking part in any social and political activities associated with the West is forbidden. Simply put, Boko Haram is promoting a version of Islam which makes it “haram”, or forbidden for every Muslim to participate in any political or social activity associated with Western society, including secular  education, election, and wearing shirts and trousers, among others. Thus it is not surprising that this terrorist group regards Nigerian state as being run by non-believers, who should be removed from power at all costs.

It should be acknowledged here that the group’s official name  is “Jama’atu Ahlis Sunna Lidda’awati wal-Jihad” which, in Arabic means “People Committed  to the Propagation of the Prophet’s Teachings and Jihad” (Chotia, 2014). It is the residents of the north-eastern city of Maiduguri(a city in Northern Nigeria), which is where the group’s headquarters is located, who called them  Boko Haram. 

The big question, of course, is why Boko Haram chose northern Nigeria as their stronghold. Historical evidence documents that there has always been resistance among the area’s Muslim to Western education since the Sokoto  Caliphate - which ruled part of what is now northern Nigeria, Niger and Cameroon – fell under  British control in 1903(Chotia, 2014). To this day, the residents of that part of Nigeria still refuse to send their children to what they believe to be government-run “Western Schools.” Unfortunately, the politicians from the northern Nigeria compounded the problems by not  seeing education as a priority for the region.  While there are some Muslim families from across Nigeria who enrolled their children in public schools, Boko Haram abhors education.

Yet by rejecting Western education, Boko Haram is merely exposing their ignorance, for two reasons. First, Islam was once the north star of Western science and education: Between the eight and the 13^th centuries, science thrived in Muslim lands while Europe stumbled through the Dark Ages. During that time, the Abbasid caliphs showered money on education and learning.  The 11^th century “Canon of Medicine” by Avicenna, a Persian doctor(who is also a Muslim), was a standard medical textbook used in European universities and by European doctors for hundreds of years. In addition, Muhammad al-Khwarizmi, a ninth century Muslim scholar, laid down the principles of Algebra, which is actually a word derived from the name of his book “Kitab al-Jabr”. Another Muslim scholar, by name Al-Hasan Ibn al-Haytham, transformed the study of light and optics, while Abu Raihan al-Biruni(a Persian Muslim scholar) calculated the earth’s circumference within 1%. Furthermore, Muslim scholars did much to preserve not only the intellectual heritage of ancient Greece but also helped spark Europe’s scientific revolution(Saliba, 2007; Economist, 2013). Besides, the weapons of mass destruction being used by Boko Haram are the products of Western education. 

The second reason, which Boko Haram members are too ignorant to ignore, is that some of the tenets  and practices of Islamic religion actually  encourage scientific learning. Many astronomers of the Renaissance era were motivated by the Muslims’ skills in accurately calculating the beginning of Ramadan(determined by the sighting of the new moon). Even the Islamic popular Hadith(the sayings of Prophet Muhammad) exhort all Muslims to seek knowledge everywhere, even as far as China(Saliba, 2007; Economist, 2013). And in this modern era, the King Abdullah of Saudi Arabia, Islamic Holiest country, is one of the crusaders of modern education. In 2009, he opened King Abdullah’s University of Science and Technology, which has an endowment that even rich American universities would envy - $20 billion endowment. 

Given these simple facts, it becomes very difficult to understand or explain Boko Haram’s seemingly innate hostility to Western education and science. The group is obviously suffering from an inherent conflict between belief and reason – which is actually the hallmark of Islamic fundamentalism worldwide. 

Nigerian’s Lessons:   The Short Arm of the Law

If Nigeria’s experience of the past few years teaches us anything, it is that its President, Mr  Goodluck Jonathan, has publicly shrugged off deaths of thousands of people, mainly in the north-east of the country. Across the country, the general belief seems to be that he portrays “death-by-Boko Haram” as the unfortunate but unavoidable result of a fanatical insurgency for which his government cannot be blamed. But the plight of the 230 school girls abducted from a school by Boko Haram has served as a wake-up call for President Jonathan and his government since it has put them under an international spotlight, exposing how their incompetence and callousness is hurting Nigeria’s reputation at home and abroad(Economist, 2014b).

This surge of national  horror due to Boko Haram’s activities was particularly embarrassing for Nigeria, which recently celebrated  the  international re-evaluation of  its economy as being by far the biggest in Africa, well ahead of South Africa,  during the the World Economic Forum held in Abuja(Nigeria’s capital)  on May 7, 2014(Copley & Sy, 2014). And in response to the outrage, which spread beyond Nigeria’s borders, President Obama and other Western leaders who had, until April 14, been  watching more or less silently from afar, felt obliged to offer help to the country, which they believe to be in political distress. The U.S. government, for instance, flew in experts in intelligence, hostage negotiations and victims assistance  in its effort to help find and return the kidnapped girls(IBN Live, 2014) while the British offered to send surveillance aircraft along with soldiers from its special forces.  Leaders from other West African countries, led by Ghana’s president, also pledged their support and solidarity for Nigeria. 

On the positive side, it is really a welcome relief that there is no slightest sympathy for Boko Haram and its  current maniacal leader, Abubaker Shekau. While the ongoing speculation is that some of the girls may  already have been forced to marry their abductors  for a bride-price equivalent to $12, as Abubaker threatened in a video released on May 5^th, the United Nations made it clear to the group they would be committing war crimes if they carried out their leader’s threats(Economist, 2014b). 

Whisky for My Men, and Beer for My Horses

In the past, Nigeria’s government often refuse such help, perhaps  because they are wary of perceived encroachments on their sovereignty.  As a matter of fact, it is on record that the United States has operated drones from a base in neighboring Niger since 2012(Economist, 2014b). So it is really very unclear why, until this incident,  Nigeria’s government continued to decline  American requests to be allowed to do the same from Nigerian territory. One plausible explanation  may be that while Nigerian’s government is proud of its  army – which is not only the biggest in Africa,  but also has a long history of contributions to peace-keeping missions, with the most recent one being in Mali – they are notably secretive as well as prickly about its operations and the low standards of soldiery which  foreign experts would see. For instance,  the Nigerian army has dismally failed to defeat Boko Haram in the north-eastern Nigeria despite the fact that President Jonathan declared a state of emergency in that region a year ago.

Given that the Nigerian army has perpetrated numerous atrocities against civilians suspected of harboring or lending sympathy to Boko Haram members, most of whom  thrive among the embittered young Muslims in the north – the poorest part of Nigeria – it makes sense that they are being criticized nationwide. For instance, the Nigerian army was widely castigated after a Military counter-attack  on March 14 following a failed attempt  to escape from the jail by the suspected members  of Boko Haram who were detained at a barracks in Maiduguri. During this counter attack, as much as 500 people lost their lives, mainly at the hands of the Nigerian soldiers. This explains why Western governments were leery about offering to join the fray: They are concerned that such human right abuses by the Nigerian Army will make them to be deemed complicit if they offer to join the fray as they did in other countries with similar issues in the past (Tundo, 2014).

Another reason why foreign military advisers chose to keep their distance is corruption, which is considered to be Nigeria’s greatest scourge. According to an unconfirmed statements and testimonies from some Nigerian soldiers, their commanders tend to pocket the bulk of their salaries, which they sometimes keep in their private accounts in banks where they yield interests. This acts of the commanders of the Nigerian army naturally do not provide any incentive for the soldiers to fight a well-equipped guerrilla movement(such as Boko Haram) that knows the rugged terrain and forests in northern Nigeria. Thus for the Nigerian soldiers, it is not worth it to risk death at the hands of Boko Haram for no reward. And given this prevailing attitude and conditions, it can be an uphill task for outsiders to raise Nigeria’ troops’ morale(or even improve their military skill) to a level that can effectively flush out Boko Haram from Nigeria’s territory.

The Nigerian government’s seeming indifference to the plight of the kidnapped girls’ families is perhaps the 

 worst aspect of its handling of the abduction. Here is a cruel part: President Jonathan refused to address the matter in the public until two weeks after the abduction. So Nigerians should be applauded for staging protests in several cities across the country as a response to President Jonathan administration’s sluggish response and its failure even to clarify how many girls had been abducted.

How Nigeria Can – and Should – Destroy Boko Haram

The latest crises caused by Nigeria’s Boko Haram simply highlights the failure and weakness of the government of President Goodluck Jonathan. Now more than ever, the Nigerian people should not make the mistake that all it takes to eradicate Boko Haram insurgency is a strong president or a strong government, for the simple fact that just because one have a hammer does not mean that every problem is a nail. As a matter of fact, the weaknesses of President Jonathan’s government are mere reflections of Nigeria’s corruption-infested capitalist system – a system that lacks the necessary clout needed to spark a period of urgently needed change in the country.

It should be noted here that for more than half of its history since independence from Britain, elites from the north dominated Nigeria’s politics and government. Unfortunately, very little has been done to develop formal education, healthcare and employment opportunities in the whole of Nigeria, especially in the northern part of the country. So why should it surprise anyone that Boko Haram emerged in the north with the goal of questioning the legitimacy of Western education, especially given that the corrupt elite is largely western-educated?

Faced with death, most people will do almost anything, including committing murder. Boko Haram are evidently aware of this kind of weakness in people of northern region. Thus they offer more than religious vitriol: The group also condemned social and economic injustice and corruption, and offered Sharia Law as the solution. This kind of religious fundamentalist teachings tinged with some kind of radicalism can draw support among the huge swathe of poor and mostly uneducated youth in northern Nigeria since there is no alternative mass working class active organizations or socialist ideas on offer. Besides, to the poor and dispossessed youths who flocked to it,  Boko Haram also offered shelter, food and other means of sustenance.

Corruption and economic sabotage by the Nigerian politicians had ensured that over 80 percent of Nigeria’s oil wealth is cornered by a few. Meanwhile, as much as 100 million Nigerians are jobless(Okechukwu, 2014). The bottom line here is that insurgencies like Boko Haram will end if, and only if, the root cause – corruption and massive impoverishment of the populace – is tackled.

Examined against this background, it can be inferred with considerable confidence that neither increased militarization of the northern part of the country nor the intervention of the security experts and troops from the United States and Europe will solve the problem of Boko Haram. We all are living witnesses  to the fact that all militarization strategies adopted by Nigeria’s government – including the declaration of a state of emergency in north-east Nigeria – has only achieved one outcome: a large scale destruction of lives and properties as well as a clampdown on the democratic rights of both the working masses and the lower class citizens. As we are all aware, Nigeria government now routinely bans protests and break up any “unauthorized gatherings,” under the guise of fighting terrorism. 

This is thus the chance and the time for the people of Nigeria to make their politicians realize that the days of such lordly arrogance described above  must come to an end. In other words, the only effective strategy for tackling both Boko Haram and corruption in Nigeria is for the country’s labor unions and trade unions to mobilize workers and the oppressed masses to take their destinies in their hands. They can send a clear message that they need a country that is governed by laws, not by people. The country’s labor movements can send the right signal to both the corrupt ruling elite and Boko Haram that the people are prepared to defend themselves against the onslaughts from both  by organizing days of general strikes across the states of the country. They can also take the lead in those areas threatened by Boko Haram raids by sensitizing and mobilizing working class to begin to take of the responsibility of securing their communities and neighborhoods. Given that Nigeria is a multi-ethnic country, setting up democratic multi-tribal as well as multi-religious self-defense committees can be an effective way of doing this. There is no way a small gang that calls itself Boko Haram can be stronger than 168 million people – which is Nigeria’s population. Power, actually belong to the people, and Nigerians need to realize that. This strategy has been proven to work - both the U.S.  and France did this with great success in the 18^th century – and Nigerians have reason to get on board. It is only this way can Nigerians can ensure that the huge wealth of the country is used to better the lives of its citizens, regardless of ethnicity or religion.

References

Abubaker A., Karimi F & Pearson M.(2014): Scared But Alive – Video Purports to Show Abducted Nigerian Girls. CNN World. Retrieved May 21, 2014 from http://www.cnn.com/2014/05/12/world/africa/nigeria-abducted-girls/

 

Chotia F.(2014): Who Are Nigeria’s Boko Haram Islamists? BBC Africa. Retrieved May 21, 2014 from http://www.bbc.com/news/world-africa-13809501

Copley A., Sy   A.(2014): World Economic Forum on Africa – Stark Contrasts of Economic Growth and Security. Brookings. Retrieved June 3, 2014 from http://www.brookings.edu/blogs/africa-in-focus/posts/2014/05/08-world-economic-forum-africa-growth-insecurity-sy

Economist(2014b): Kidnappings in Nigeria. Retrieved June 2, 2014 from http://www.economist.com/news/middle-east-and-africa/21601839-incompetence-nigerias-president-and-government-hurting-countrys

Economist(2013): Islam and Science – The Road to Renewal. Retrieved May 29, 2014 from         

http://www.economist.com/news/international/21570677-after-centuries-stagnation-science-making-comeback-islamic-world-road

Giovanni J.(2014): The Deadly Mission of Boko Haram. Newsweek. Retrieved May 21, 2014 from http://www.newsweek.com/2014/05/30/deadly-mission-boko-haram-251505.html

INB Live(2014): US Deploys Nearly 80 Military Personnel to Help Find Nigeria Girls. Retrieved June 3, 2014 from http://ibnlive.in.com/news/us-deploys-nearly-80-military-personnel-to-help-find-nigerian-girls/473454-2.html

Okechukwu N.(2014): 80 % Nigerian Youths Are Unemployed – CBN. Punch. Retrieved Junes 8, 2014 from http://www.punchng.com/news/80-nigerian-youths-are-unemployed-cbn/

Saliba G.(2007): Islamic Science and the Making of the European Renaissance. Cambridge, MA: MIT Press.

Tundo A.(2014): Nigeria’s Forgotten War. GB Times. Retrieved June 5, 2014 from http://gbtimes.com/world/nigerias-forgotten-war

No longer at ease: The Rich Countries’ high corporate tax

The US  and OECD countries should realize that high corporate taxes are not a painless way to raise money: they creates an arms race in which companies either lobby politicians for exemptions, or find a way of not paying it.

 

During the reign of King Louis XIV of France(1638-1715), his then finance minister once said  that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”(Rothbard, 2010). When it comes to taxing U.S. corporations, this should mean getting the largest possible amount of tax revenue without discouraging  business investment and entrepreneurship. Unfortunately, available published evidence has revealed that among the countries that made up the Organization for Economic Corporation and Development(OECD), the United States has the highest income tax rate. At 39.1percent, the U.S. corporate income tax rate, which is a combination of the 35 per cent federal rate and the average rate levied by the individual states, put its corporations at a competitive dis advantage(Pomerleau & Lundeen, 2014).

 

Broadly speaking, those countries that try to squeeze their firms too hard with high corporate tax often have larger black  market(or informal market), which, in turn cause significant amount of economic and political damage to their economies. Simply put, given that different governments offer a choice of rates and ways of taxing businesses, high taxes may lead companies to move to places that  offer more tax breaks, especially  for activities such as prospecting for natural resources, research and development. At a time when America is struggling to generate economic growth, the politicians at Washington and state legislatures too often behave as though the business sector is the enemy. Instead of competing with other OECD  members to attract good companies and stimulate them to create jobs, innovative products and revenues, they have tended to sought  their scapegoats more widely to include the finance sector, energy companies and technology giants. These companies were often blamed for tax avoidance and for being the begetters of inequality.

 

The American high corporate tax regime seemed to have inspired copycats in Europe: In late 2012, the executives from Amazon, Google and Starbucks were brought before a parliamentary committee and berated for paying little in the way of profit tax. Starbucks was so embarrassed that it promised to pay an additional amount of tax that the committee deemed to be legally required in that country – specifically an additional $32 million voluntary payment to the British tax authorities(Bullough, 2012; Economist, 2014).

 

How Much is Enough?

 

The unhappy truth is that, even though  companies in U.S. and in other OECD countries, on average, pay more tax on labor(such as employers’ social security contributions) than on profits, it is still widely but wrongly believed that the only tax they pay is corporate tax, which is the one levied on their profits. According to the available published evidence, the average global company, in addition to paying property taxes, sales taxes, environmental taxes, and so on, also pays as much as 43.1 percent of its commercial profits in tax, of which 16.1 percentage points is profit-related, 16.3 is labor-related and 10.7 are  others(Economist, 2014).

 

Today, the tax revenue from corporate profits of the OECD  countries, including the United States,  has declined since the economic crises. According to OECD  figures, the average member country now  raises about 2.7 per cent of the GDP in the form of profit taxes. This is less than the pre-crises value of 3.5 percent raised in 2007(Economist, 2014). Across the political and financial spectrum, officials and experts agrees that the current value is probably just a reflection of the lower profits being reported  by corporation since the crises, and not a structural shift. The upshot is that this value seems to have held fairly steady.

 

A growing body of evidence suggests that the current tax regimes in OECD countries including U.S. were developed when global trade has a smaller share of the GDP:  At the time when companies were more national  in character and the local economies were largely concerned with the exchange of physical products made and sold in physical locations. But today, the trade arena has changed a great deal. From an entirely practical standpoint, individual American states and most OECD  countries are finding it difficult to impose sales taxes in this modern economy that is increasingly and heavily dependent   on services and intangible goods traded over the internet.  This do partly explains the decline in corporate tax revenue since the economic crises.

 

It should be observed here that the three main approaches to taxing corporate profits include residence(where the company’s owner lives), source(where the goods and services are produced) and destination(where the goods and services are consumed).  So, if an American company, for instance, produces computers in a Chinese subsidiary which are sold in Britain, China is the source, United States is the residence  and Britain is the destination. The bottom line is that all the three countries – America, China and Britain – can claim a share of the tax revenues in this example. In this case, a sales tax or value-added tax system would obviously focus on the destination which, in this case, is Britain. In contrast, a tax regime that is based on personal income tax that is charged when the shareholders receive dividends or make capital gains, would raise money in the residence which, in this case, is America. Finally, a profit based tax regime will concentrate on China, which is the source. In a practical sense, the elements of all the three systems are being used among the advanced nations of the world.

 

Given that the subsidiaries of multinational companies trade with each other all the time, the biggest challenge arise when it comes to deciding where profit is generated. The main concern here is that, in order to maximize the profits generated in low tax jurisdiction, subsidiaries in these jurisdictions may start getting  involved in activities that would distort the market such as  overcharging subsidiaries in high tax countries – a practice known as transfer pricing. To get around this problem thereby ensure that the prices are similar to those a company might pay if dealing with an unrelated business, tax authorities in America and other OECD countries  often ask for intra-company transactions to be made on an “arm’s-length” basis. With standardized goods such as commodities, this principle is easy to apply. However, it becomes much harder to apply when it comes to more specialized products, such as a multinational retailer  who uses a franchise system in which the parent’s brand is considered to be an intellectual property. In this case, all the individual franchises of the parent company – wherever they may be – are obviously dependent on the parent’s brand and hence must pay a fee to the latter  for that privilege. Note that the intellectual property of the parent company can also be held in  a subsidiary  that is located in low-tax country – a perfectly legal way of reducing the company’s tax burden.

 

Another legal way for reducing the tax burden is to load up subsidiaries in high-tax countries with lots of debts, with most of the loans borrowed from subsidiaries located in low tax regimes. This approach will lower the affected company’s overall tax bill because interest payments are tax-deductible. 

 

The availability of the above strategies, and the fact that many U.S. and OECD  corporations are using them, has led to a series of cat-and-mouse  games as governments try to crack down on such strategies and companies devise ever new approaches to exploit tax rules to the full. Hence it is a self-evident truth that the current corporate tax system in both U.S. and OECD countries have resulted in both high compliance costs for multinational corporations as well as a very high administrative costs for the tax authorities. In the U.S in particular, the corporate tax system leaves a bad taste since it  hobbles the country in global competition. In addition, it does little or nothing to promote equality, which is considered to be its original and still recited justification. Besides, it is rife with distortions that erode efficiency – distortions that promises to get much worse in the future(Institute for International Economics, n.d.; Economist, 2014). It would be logical, therefore, to suggest that, the corporate tax system in these countries is in urgent need of reform.

 

It should be acknowledged that U.S.’s companies have not been sitting on their hands waiting to be fleeced. One of the approaches  which many of them are adopting is to form business structures  such as partnerships that act as ‘pass-through’ vehicles. A rise in these form of structures has become one of the biggest change in U.S.’s corporate governance in 21^st century. And such structures generally avoid corporate income taxes provided that all profits are remitted to investors each year. But, across the political spectrum, politicians and experts agrees that this leads to a three-tier tax system: First, the partnerships escape the tax on profits. Second, the multinational corporations cut down their tax bills by shifting  both production and profits  to countries with low tax regimes. Third, the smaller companies – the losers, since they have less room for maneuver – will be left ‘carrying the baby alone.’

 

The Way Forward

These simple explanations are easy to square with the fact that five of the ten biggest worries of the small businesses are tax-related. From a practical perspective, the tax code is bound to be more and more complex as governments  try crack down on the multinationals’  strategies. There is a slight possibility that time may help reduce the problem. With some governments lowering their tax rates to attract multinational corporations, and with many businesses already escaping  the profit tax, the world may very slowly  be moving away from corporate profit tax. Many scholars believe that it would  be a sensible reform if corporate profit tax is allowed to disappear altogether in, say, 50 or 100 years’ time.

 

The trickiest issue is that countries may end up creating a new form of  tax avoidance  if they abandon the profit tax in isolation. In every country, there’s always people and corporations who are willing to take advantage of any government policy, provided that they will gain from it. Thus, abolishing corporate tax will give people the incentive to shelter their money  in companies – an option that would, in the long run, might undermine income tax. Because a profit levy acts like a withholding tax, the loss of revenue  might be substantial  if it becomes abolished. Added to this problem of revenue loss is the fact that many shareholders, including pension funds, might make no contributions at all to the revenue pool since they are either based overseas(often in low-tax centers) or have a tax-exempt status.

 

Both the United States and OECD  countries don’t find it funny to be stuck in this spiral. Many of them do realize that, the corporate geese that are plucked too much won’t just hiss: they will either fly away or they will find a way of not paying it by lobbying for the best deals. For the United States, the solution to the problem is simple: lower tax rates, few exemptions,  and a tax system that focuses on individuals  not companies.

 

 

 

 

 

References

 

Bullough O. (2012): Coffee Break. Latitude. Retrieved April 29, 2014 from http://latitude.blogs.nytimes.com/2012/12/12/after-avoiding-taxes-for-years-starbucks-has-become-a-target-for-london-protesters/?_php=true&_type=blogs&_r=0

 

Economist(2014): Special Report – Companies and the State. Retrieved April 29, 2014 from http://www.economist.com/news/special-report/21596667-relationship-between-business-and-government-becoming-increasingly-antagonistic

 

Institute for International Economics(n.d.): Replacing the Corporate Income Tax. Retrieved April 29, 2014 from http://www.iie.com/publications/chapters_preview/3845/5iie3845.pdf

 

Pomerleau K., Lundeen A.(2014): The U.S. Has the Highest Corporate Income Tax Rate in the OECD. Tax Foundation. Retrieved April 29, 2014 from http://taxfoundation.org/blog/us-has-highest-corporate-income-tax-rate-oecd

 

Rothbard M.N.(2010): Jean-Baptiste Colbert and Louis XIV. Ludwig von Mises Institute. Retrieved April 29, 2014 from http://mises.org/daily/4540