There’s a short video doing the rounds of Facebook at the moment which shows the changes to the world’s national borders over the last 1,000 years.
The video shows a map of the world, with the borders moving back and fro – countries and empires appearing and disappearing with alarming speed.
Any student of history will know that nothing remains static – borders change through all sorts of reasons, although war and domination (normally by a larger empire) are the most common causes.
One need only witness what is happening in the Ukraine for a clear modern example.
Sometimes, when the border between two sovereign states moves a little bit of territory gets left behind. Those little bits of territory are called ‘enclaves’ and they have been important in the development of taxation law.
Click here to see five enclaves with truly unique tax systems.
Land locked and surrounded
Take the Channel Islands – Jersey, Guernsey and Sark – which historically were possessions of the French, through the person of the Duke of Normandy.
When the Duke became the King of England, after defeating Harold in 1066 at the battle of Hastings, his dominion consisted of the British Isles, the Channel Islands and Normandy – a position future kings inherited until 1259, when Henry III surrendered his claim to Normandy, but carved out the Channel Islands.
However, the Channel Islands never became part of the United Kingdom which enabled them, some 900 years later, to develop a highly attractive tax regime as it was not constrained by British tax law. The Islanders’ economies have been dining out on this innovation ever since.
Strictly speaking, the Channel Islands are not an enclave as they are not land-locked and surrounded by a foreign territory, but their story illustrates the taxation point nicely.
If you want an example of a truly land-locked enclave then you have San Marino, an enclave within Italy and Campione d’Italia, which is part of Italy (and therefore also an exclave) which is totally surrounded by Switzerland.
Another enclave/exclave is Busingen, which is a part of Germany and, like Campione, totally enclosed by Switzerland.
The most famous ‘fiscal enclave’ is Monaco – even though it is strictly not an enclave as it has its own coastline, although it is totally surrounded by France on the three other sides.
Monaco, like San Marino (and others) has a highly attractive tax regime and has used this fact to attract wealthy foreigners to its territory.
It has been able to do this because France does not have dominion over fiscal matters within Monaco.
What people find amazing about Monaco is that it looks like and feels like France (indeed there is no discernable border) but there is zero income tax, whereas France has rates of tax up to and including 75%. It is no wonder, therefore, that Monaco has become the playground of the rich.
Click here to see five enclaves with truly unique tax systems.
