“Westphalian sovereignty is the principle of international law that each nation state has sovereignty over its territory and domestic affairs, to the exclusion of all external powers. The principle of non-interference in another country’s domestic affairs, and that each state (no matter how large or small) is equal in international law is recognized. This doctrine is named after the Peace of Westphalia, signed in 1648, which ended the Thirty Years’ War.” 

“It is ironical that Terror organizations on one side and Tax havens on the other have completely undermined Westphalia consensus. In that context countries like India have every right to exercise its freedom to pursue terrorists who are undermining its existence whether sponsored by foreign countries or home grown. The concept of territorial jurisdictions and sovereignty are no more valid in the context of terror organizations since they damage both India and its own host countries over period of time. India must protect its national interests and institutions by challenging inimical forces wherever they are located without worrying about Westphalia consensus”.

 

In the context of the strikes made against terror camps on the border of Manipur/Nagaland by the Indian Army; there has been number of discussions about national sovereignty and the role of individual States. Actually in the last few decades the activities of transnational corporations aided by tax havens on one side and terrorists on the other side have destroyed the concept of nation state and its sovereignty evolved after the 30 years’ war in 1648 in Westphalia. Westphalian sovereignty is the principle of international law that each nation state has sovereignty over its territory and domestic affairs, to the exclusion of all external powers. The principle of non-interference in another country’s domestic affairs, and that each state (no matter how large or small) is equal in international law is recognized. This doctrine is named after the Peace of Westphalia, signed in 1648, which ended the Thirty Years’ War .After that war major continental European states – the Holy Roman Empire, Spain, France, Sweden and the Dutch Republic – agreed to respect one another’s territorial integrity. As European influence spread across the globe, the Westphalian principles, especially the concept of sovereign states, became central to international law and to the prevailing world order.

Scholars of international relations have identified the modern, Western-originated, international system of states, multinational corporations, and organizations, as having begun at the Peace of Westphalia. Henry Kissinger in his important book on “world Order” says:

“No truly global “world order’ has ever existed. What passes for order in our time was devised in Western Europe nearly four centuries ago, at a peace conference in the German region of Westphalia, conducted without the involvement or even the awareness of most other continents or civilizations. A century of sectarian conflict and political upheaval across Central Europe had culminated in the Thirty Years’ war of 1618-48- a conflagration in which political and religious disputes commingled, combatants resorted to “total war” against population centers, and nearly a quarter of the population of Central Europe died from combat, disease, or starvation. The exhausted participants met to define a set of arrangements that world stanch the bloodletting. Religious unity had fractured with the survival and spread of Protestantism; Political diversity was inherent in the number of autonomous political units that had fought to a draw. So it was that in Europe the conditions of the contemporary world were approximated: a multiplicity of political units, none powerful enough to defeat all others, many adhering to contradictory philosophies and internal practices, in search of neutral rules to regulate their conduct and mitigate conflict.

“The Westphalian peace reflected a practical accommodation to reality, not a unique moral insight. It relied on a system of independent states refraining from interference in each other’s domestic affairs and checking each other’s ambitions through a general equilibrium of power. No single claim to truth or universal rule had prevailed in Europe’s contests. Instead, each state was assigned the attribute of sovereign power over its territory. Each would acknowledge the domestic structures and religious vocations of its fellow states as realities and refrain from challenging their existence. With a balance of power now perceived as natural and desirable, the ambitions of rules would be set in counterpoise against each other, at least in theory curtailing the scope of conflicts. Division and multiplicity, an accident of Europe’s history, became the hallmarks of a new system of international order with its own distinct philosophical outlook. In this sense the European effort to end its conflagration shaped and prefigured the modern sensibility: it reserved judgment on the absolute in favor of the practical and ecumenical; it sought to distill order from multiplicity and restraint.

“The seventeenth-century negotiators who crafted the peace of Westphalia did not think they were laying the foundation for a globally applicable system. They made no attempt to include neighboring Russia, which was then reconsolidating its own order after the nightmarish “Time of Troubles” by enshrining principles distinctly at odds with Westphalian balance; a single absolute ruler, a unified religious orthodoxy, and a program of territorial expansion in all directions. Nor did the other major power centers regard the Westphalian settlement (to the extent they learned of it at all) as relevant to their own regions.¹

The three core principles on which the consensus rested are:

1. The principle of the sovereignty of states and the fundamental right of political self determination
2. The principle of legal equality between states
3. The principle of non-intervention of one state in the internal affairs of another state

Interestingly, all three are questioned by contemporary leaders of West and radical Islam.

Tony Blair the then Prime Minister of UK in his famous Chicago Address -1999-suggests

“The most pressing foreign policy problem we face is to identify the circumstances in which we should get actively involved in other people’s conflicts. Non -interference has long been considered an important principle of international order….

“But the principle of non-interference must be qualified in important respects. Acts of genocide can never be a purely internal matter. When oppression produces massive flows of refugees which unsettle neighboring countries then they can properly be described as “threats to international peace and security”.²

The NATO intervention in Kosovo and Afghanistan as well as US intervention in Iraq provide recent examples of breakdown of idea of Westphalia. Similar is the humanitarian crisis faced by India regarding refugees from East Pakistan.

Interestingly Radical Islam also considered that the world order based on Westphalian consensus will collapse. “In the aftermath of the 11 March 2004 Madrid attacks, Lewis ‘Atiyyatullah, who claims to represent the terrorist network al-Qaeda, declared that “the international system built up by the West since the Treaty of Westphalia will collapse; and a new international system will rise under the leadership of a mighty Islamic state.”³

The spread of ISIS across countries and activities of Boko Haram based in Nigeria in Kenya and Chad re-emphasis this point. Radical Islam do not accept territorial boundaries since it works for a global regime for global Ummah.

The recruitment by these terror organizations is also across continents and countries which does not respect territorial sovereignty. The talk about Caliphate indicates that they are trans-border organizations.

On the other side we find global corporations transcending sovereignty in search of global profits. For this they use tax havens as a tool.

Tax havens–numbering more than 70 jurisdictions–facilitate bank facilities with zero taxes and no-disclosure of the names and in many cases anonymous trusts holding accounts on behalf of beneficiary. Basically lawyers and Chartered accountants will deal with mattes. Sometimes a post box alone will be operative system. In the case of Bahamas one building seems to have had tens of thousands of companies registered there.

Luxemburg (population half a million!) registered companies of various countries have evaded taxes significantly from their legal jurisdiction. The key findings of the activities of transnational companies cutting across territorial jurisdiction is given below.

• Pepsi, IKEA, AIG, Coach, Deutsche Bank, Abbott Laboratories and nearly 340 other companies have secured secret deals from Luxembourg that allowed many of them to slash their global tax bills.
• PricewaterhouseCoopers has helped multinational companies obtain at least 548 tax rulings in Luxembourg from 2002 to 2010. These legal secret deals feature complex financial structures designed to create drastic tax reductions. The rulings provide written assurance that companies’ tax-saving plans will be viewed favorably by Luxembourg authorities.
• Companies have channeled hundreds of billions of dollars through Luxembourg and saved billions of dollars in taxes. Some firms have enjoyed effective tax rates of less than 1 percent on the profits they’ve shuffled into Luxembourg.
• Many of the tax deals exploited international tax mismatches that allowed companies to avoid taxes both in Luxembourg and elsewhere through the use of so-called hybrid loans.
• In many cases Luxembourg subsidiaries handling hundreds of millions of dollars in business maintain little presence and conduct little economic activity in Luxembourg. One popular address – 5, rue Guillaume Kroll – is home to more than 1,600 companies.
• A separate set of documents reported on by ICIJ on Dec. 9 expanded the list of companies seeking tax rulings from Luxembourg to include American entertainment icon The Walt Disney Co., politically controversial Koch industries and 33 other firms. The new files revealed that alongside PwC tax rulings were also brokered by Ernst & Young, Deloitte and KPMG, among other accounting firms.⁴

The big four accounting firms namely KPMG/E&Y/Deloitte and PwC have facilitated the movement of funds of clients across borders and territories to make tax “planning” easier for these companies. USA is literally waging war with major Giants like Amazon/Google/Microsoft etc. for not paying adequate taxes in USA in spite of being US based companies. Most of these companies have moved their profits to other Tax Havens.

Global firms such as Starbucks, Google and Amazon have come under fire for avoiding paying tax on their British sales. There seems to be a growing culture of naming and shaming companies. But what impact does it have?⁵

Royal Commission into tax loopholes a must—says a report in Australia.⁶

There is an increasing clamor in USA about Congress Should Pass the Stop Tax Haven Abuse Act to Combat International Tax Avoidance. This has been highlighted by both TAX justice network as well as Global Financial Integrity.

A simple method of trade mis-invoicing by global companies using tax-havens have impacted developing countries nearly 730Billion USD in 2012 says Global Financial integrity. Another interesting finding by GFI is about terror financing using Tax haven route.

Because of the increasing wariness of MNCs using Tax havens for avoidance of taxes and the opaque ways of functioning of these off-shore structures, demands are growing about their activities and even closing down of these tax havens by European parliament etc.

Due to relentless pressure from OECD as well as G20 many of these secretive jurisdictions are becoming more transparent.

But the fact of the matter is these Trans National Companies and Tax Havens together have significantly undermined the concept of sovereignty and territorial jurisdictions.

It is ironical that Terror organizations on one side and Tax havens on the other have completely undermined Westphalia consensus. In that context countries like India have every right to exercise its freedom to pursue terrorists who are undermining its existence whether sponsored by foreign countries or home grown. The concept of territorial jurisdictions and sovereignty are no more valid in the context of terror organizations since they damage both India and its own host countries over period of time. India must protect its national interests and institutions by challenging inimical forces wherever they are located without worrying about Westphalia consensus.

(The author is Professor of Finance at IIM-Bangalore)