As I make my way across the time zones to Dar es Salaam (the capital city of Tanzania,
with a population of about 3 million), I want to fill in a bit more on the
background for my trip, described in my prior post. My research on free zones is about
understanding how multinational companies adjust their worldwide operations in response
to taxation, and what side effects emerge.
Most multinational companies are formed in developed
countries, like the United States. But most of their operations are in
developing countries, where manufacturing, processing, and other functions take
place. There are many reasons to set up
a manufacturing facility offshore, including the desire to have a factory
located close to a target market (though in our age of cheap shipping, this is
much less of a problem than it has been historically) and reduced labor costs (a
dominant factor). Another major factor,
however, is taxation: most developed countries, led by the US,
have determined that multinationals should not generally be burdened by
taxation on active business profits earned offshore. US multinationals with money to invest in
starting up a plant can look around the globe for the most appropriate offshore
location.
As it turns out, the most appropriate location for
manufacturing and processing is usually one that provides a suitable workforce
and legal structure but that doesn’t impose very much taxation. As developing countries compete to attract
multinationals’ outbound investment, reducing tax burdens has become de rigueur. The proliferation of free zones around the
world illustrates the result of tax competition: there are over 100 free zones
currently in existence, with more countries enacting legislation all the time. Next post: why attracting foreign investment
is so important.
Globalization/Trade
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