Proposal preview

Passage to Panama: Nation States, Taxation and Multinational Enterprise in the Twentieth Century

Taxation, a foundation stone of nation states and modern democracy, has also been a fulcrum where the logic of sovereign states and the interests of international businesses clash. The recent publishing of the so-called Panama Papers, increasing the level of criticism against the global plutocracy and the flagrant business practices of MNEs, riveted the public’s attention on this aspect of the globalized economy. However, although attempts by MNEs to minimize the amount of taxation levied by state authorities is not a new phenomenon, the historical antecedents of the utilization of devices such as tax havens remains a largely unexplored field of study in the standard, scholarly literature. On the basis of an interdisciplinary approach, the intention in this panel is to provide new insights and perspectives on how the ‘Passage to Panama’ developed in the course of the twentieth century. Political risk related to questions of taxation have been an overlooked but decisive element for the creation of tax havens. The outbreak of the WWI, namely “the beginning of the end” of so-called first globalization” and the collapse of old empires was an enormous external shock for multinationals, which had already extensive global networks of FDI. For example, in the midst of the calamities of collapse of the Dual Monarchy and the rising risk of a communist revolution, Swiss MNEs, lawyers and banks worked closely with Liechtenstein to introduce a new tax regulation and an innovative corporate law to host a series of MNE holding companies. It served as a measure to safeguard their assets against both political risks and taxation. In 1927, Panama followed suit with similar legislation and eventually became the international hub for the relocation of assets from Nazi dominated Europe to the Americas – the beginnings of the ‘passage to Panama’.
Growing nationalism in the interwar years and collapse of international economic order posed a variety of political risks ranging from boycotting, black-listing, asset freezing, persecution of staff, to total asset seizure in the Second World War. After 1945, the rise of the modern welfare state and associated taxation regimes added to the political risks. Both international business (the financial sector, investors, law firms, as well as MNEs) and a variety of political entities (home and host nations of FDI, international organizations) had to address these new challenges. A further division of global markets through the coming of the Cold War, founding of Communist China, nationalistic economic policy in post-colonial countries and incessant regional conflicts made the ’emergency setup‘ of firms indispensable for the rest of the century. On the one hand, national governments regarded the measures taken by MNEs as a threat to their sovereignty. On the other hand, most major economic powers supported the creation of ’safe-havens‘ or loopholes, to safeguard international business domiciled in their country. International tax policy had close links to FDI-related national policies. An historical study of the taxation-MNE relationship can contribute, therefore, not only to international business history, but also to a greater understanding of the nature of sovereign states and international politics.
Albeit interdisciplinary in nature, the research questions underlying this session have a profound relationship to the ’core‘ research questions of conventional business history, namely the problems of strategy and structure. A variety of forms of organizations, such as holding company, shell-company, voting-right-trust, Interessengemeintschaft and complex structure of a variety of corporate forms were adopted to cope with what were perceived as unacceptable levels of taxation and political risk. In conventional views on the development of ’modern‘ big businesses, a linear development from simple company to holding company and, further, to the diversified divisional structure has been assumed. Although such a classical view has been intensely contested in the last two decades, attention to the variety of ’organizational designs‘ and legal setups have been largely out of scope for scholars, leaving room for re-interpretation of organizational innovations from a new perspective – an international and transnational comparative study of the complex interactions between nation states, taxation and MNEs that gave rise to the ‘passage to Panama’.

Organizer(s)

  • Neil Forbes Coventry University lsx143@coventry.ac.uk UK
  • Takafumi Kurosawa Kyoto Unversity kurosawa@econ.kyoto-u.ac.jp Japan
  • Ben Wubs Erasmus University, Rotterdam wubs@eshcc.eur.nl Netherlands

Session members

  • Ralf Banken, Goethe University, Frankfurt
  • Marten Boon, Norwegian University of Science and Technology
  • Billy Frank, University of Central Lancashire
  • Ryo Izawa, Shiga University
  • Huei-Ying Kuo, Johns Hopkins University
  • Kevin Tennent, The York Management School
  • Kristine Sævold, University of Bergen
  • Simon Mollan, The York Management School
  • Álvaro F Silva, Nova School of Business and Economics
  • Grietjie Verhoef, University of Johannesburg
  • Robert E Wright, Augustana University

Discussant(s)

Papers

Panel abstract

Taxation, a foundation stone of nation states and modern democracy, has been a fulcrum where the logic of sovereign states and the interests of international businesses clash. The recent publishing of the so-called Panama Papers, increasing the level of criticism against the global plutocracy and the flagrant business practices of MNEs, riveted the public’s attention. However, although attempts by MNEs to minimize the amount of taxation levied by state authorities is not a new phenomenon, the historical antecedents of the utilization of devices such as tax havens remains largely unexplored. On the basis of an interdisciplinary approach, this panel provides new insights and perspectives on how the ‘Passage to Panama’ developed in the course of the twentieth century. An historical study of the taxation-MNE relationship can contribute, therefore, not only to international business history, but also to a greater understanding of the nature of sovereign states and international politics.

1st half

Early American Tax Havens

Robert E. Wright (Augustana University, US)

Ronen Palan is simply wrong when he asserts that “tax havens are a distinctly modern phenomenon, whose origins lie at the earliest in the late nineteenth century” (2009). Tax havens are as old as taxation itself, but the specific forms they take depend upon the type of taxation prevailing and the available technology. In the eighteenth century, wealthy Britons could lower their real estate tax bills, which reached as high as 20 percent of a hoary appraisal, by investing in real estate in Britain’s mainland North American colonies (the ones that became the United States and Canada). The colonies imposed relatively low real estate taxes on residents and none on absentee landowners, who also avoided various local currency taxes and trade levies. For various structural reasons, tax capitalization/amortization was incomplete, allowing for tax arbitrage to occur, i.e., for British investors to earn greater after-tax, risk-adjusted returns in the New World.

Ronen Palan is simply wrong when he asserts that “tax havens are a distinctly modern phenomenon, whose origins lie at the earliest in the late nineteenth century” (2009). Tax havens are as old as taxation itself, but the specific forms they take depend upon the type of taxation prevailing and the available technology. In the eighteenth century, wealthy Britons could lower their real estate tax bills, which reached as high as 20 percent of a hoary appraisal, by investing in real estate in Britain’s mainland North American colonies (the ones that became the United States and Canada). The colonies imposed relatively low real estate taxes on residents and none on absentee landowners, who also avoided various local currency taxes and trade levies. For various structural reasons, tax capitalization/amortization was incomplete, allowing for tax arbitrage to occur, i.e., for British investors to earn greater after-tax, risk-adjusted returns in the New World.

Under Political Uncertainties: Organizational Changes in the Imperial Continental Gas Association, 1824–1987

Ryo Izawa (Shiga University, Japan)

This study followed the brief history of a British multinational utility enterprise, Imperial Continental Gas Association (ICGA). The company passed through successive waves of technological and political shocks throughout its life. Political uncertainties, such as municipalisation, wars, international taxation and nationalisation, had a critical impact on its corporate decisions. Some political events seen in the Netherlands (Rotterdam, 1887; Amsterdam, 1898), Austria (Vienna, 1899), Germany (Berlin and Hanover, 1916), France (1946) and the UK (1948 – 1949) directly forced the company to divest its works. The fear of municipalisation, nationalisation and/or international double taxation prompted the company to reorganise its corporate structure whereby ICGA gradually shifted from a company with over-centralism to a pure holding company with decentralism during the first half of the 20th century. Arguably, the political capabilities of ICGA nurtured by these experiences contributed to the survival of its Belgian business. The system in Belgium prevented not only...

This study followed the brief history of a British multinational utility enterprise, Imperial Continental Gas Association (ICGA). The company passed through successive waves of technological and political shocks throughout its life. Political uncertainties, such as municipalisation, wars, international taxation and nationalisation, had a critical impact on its corporate decisions. Some political events seen in the Netherlands (Rotterdam, 1887; Amsterdam, 1898), Austria (Vienna, 1899), Germany (Berlin and Hanover, 1916), France (1946) and the UK (1948 – 1949) directly forced the company to divest its works. The fear of municipalisation, nationalisation and/or international double taxation prompted the company to reorganise its corporate structure whereby ICGA gradually shifted from a company with over-centralism to a pure holding company with decentralism during the first half of the 20th century. Arguably, the political capabilities of ICGA nurtured by these experiences contributed to the survival of its Belgian business. The system in Belgium prevented not only (wholly-)municipalisation or nationalisation but also serious tax burdens. Thanks to its reliable stronghold in Belgium, ICGA could succeed in investing in oil and gas business in the 1960s and 1970s. In addition, the company took over all the shares of the Calor Gas Group in 1969, which was also one of the largest LPG suppliers in the UK. In 1984 ICGA was selected as an original member of the FTSE 100 Index. Then, ICGA brought down the curtain in 1987 by splitting itself into a Belgian energy company (Contibel Holdings) and a British LPG supplier (Calor Group). Eventually, the political capabilities nurtured by these experiences contributed to the survival of ICGA for 164 years.

Overseas Chinese Business Networks across the Asian Taxation Zones: A Study of the Taiwan-Singapore Tea Trade, 1895-1941

Huei-Ying Kuo (Johns Hopkins University)

This paper examines changes in tariff systems in maritime Asia between 1895 (the beginning of Japanese colonial governing in Taiwan) and 1938 (the year of the establishment of the East Asian New Order) as well as their impacts on overseas Chinese business networks. My case in point is the connection and competition between the two networks of Hokkien (southern Fujian) tea merchants: one was based in Japanese Taihoku (Taipei) and the other in British Singapore. Their transnational businesses contributed to the flow of commerce across different jurisdictions in maritime Asia during its transition from the crisis of the British free-trade imperialism and the rise of Japanese anti-Western regionalism. The merchants constantly adjusted to their geographical contour of the transnational trade in response to the changes of tariff barriers and trade agreements. The operation points to the continuing Chinese influence in the inter-Asian economy amidst inter-imperialist rivalry.

This paper examines changes in tariff systems in maritime Asia between 1895 (the beginning of Japanese colonial governing in Taiwan) and 1938 (the year of the establishment of the East Asian New Order) as well as their impacts on overseas Chinese business networks. My case in point is the connection and competition between the two networks of Hokkien (southern Fujian) tea merchants: one was based in Japanese Taihoku (Taipei) and the other in British Singapore. Their transnational businesses contributed to the flow of commerce across different jurisdictions in maritime Asia during its transition from the crisis of the British free-trade imperialism and the rise of Japanese anti-Western regionalism. The merchants constantly adjusted to their geographical contour of the transnational trade in response to the changes of tariff barriers and trade agreements. The operation points to the continuing Chinese influence in the inter-Asian economy amidst inter-imperialist rivalry.

The Anglo-Persian Oil Company: royalties,taxation and international relations in the 1920s.

Neil Forbes (Coventry University)

In the tangled aftermath of the First World War, the Anglo-Persian Oil Company was set on a course of expanding its global business and becoming established as one of the oil majors. The ability to build profits from its Persian operations was central to the company’s success. In order to extract oil from Persia, and then transport, refine, distribute and market it, APOC established a number of subsidiary companies. This structure helped to minimise the company’s UK taxation liabilities, but it also led to accusations of ‘cloaking’ and to a long-running dispute with Persia over payment of Royalties. The intention in this paper is to examine these issues in the context of the complex relationship in the 1920s between the UK’s Inland Revenue, APOC (itself two-thirds owned by the British state), and the Persian government.

In the tangled aftermath of the First World War, the Anglo-Persian Oil Company was set on a course of expanding its global business and becoming established as one of the oil majors. The ability to build profits from its Persian operations was central to the company’s success. In order to extract oil from Persia, and then transport, refine, distribute and market it, APOC established a number of subsidiary companies. This structure helped to minimise the company’s UK taxation liabilities, but it also led to accusations of ‘cloaking’ and to a long-running dispute with Persia over payment of Royalties. The intention in this paper is to examine these issues in the context of the complex relationship in the 1920s between the UK’s Inland Revenue, APOC (itself two-thirds owned by the British state), and the Persian government.

Closing all Exits. Currency Law and Company Taxation in the Third Reich 1933-1939

Ralf Banken (Goethe University, Frankfurt)

The contribution describes the important interrelation between the currency legislation and the  national socialistic tax policy in the Third Reich. The closing of all exit-options allowed the NS regime to control and manage the entire German foreign trade as well as to fight against illegal capital transfer and non-declared foreign assets. Foreign exchange measures were at least as important for the national socialist tax policy since they prevented any bypass reactions to tax increases and tightened tax collection measures. Because of its complete autarchy regarding monetary and fiscal policy, the NS regime could significantly improve economic governance through tax law. Besides this connection between currency and tax law, the contribution discusses the effects of the NS regime’s policy of autarchy on single companies and corporations in an exemplary manner. 

The contribution describes the important interrelation between the currency legislation and the  national socialistic tax policy in the Third Reich. The closing of all exit-options allowed the NS regime to control and manage the entire German foreign trade as well as to fight against illegal capital transfer and non-declared foreign assets. Foreign exchange measures were at least as important for the national socialist tax policy since they prevented any bypass reactions to tax increases and tightened tax collection measures. Because of its complete autarchy regarding monetary and fiscal policy, the NS regime could significantly improve economic governance through tax law. Besides this connection between currency and tax law, the contribution discusses the effects of the NS regime’s policy of autarchy on single companies and corporations in an exemplary manner. 

Learning by doing: political risk in the electric utility industry during the interwar period

Álvaro Ferreira da Silva (Nova School of Business and Economics)

The paper discusses political risk capabilities as a specific management function, allowing firms to survive in high-risk environments. It studies the impact of WWI in the multinational trusts and holdings thriving in the electric utility industry during the early 20th century. The incapacity of these firms to react to the negative effects of WWI, led them to a greater awareness of political risk in the unstable interwar period. This paper analyses the creation of internal capabilities to systematically collect intelligence and design emergency plans, anticipating political risks. The case of Sofina, multinational headquartered in Belgium, is singled out, disclosing the different features of risk management capabilities created within the firm: intelligence collection and analysis, contingency plans, new legal and financial structures trying to ring-fence the firm and its multinational operations across four continents in the 1930s.

The paper discusses political risk capabilities as a specific management function, allowing firms to survive in high-risk environments. It studies the impact of WWI in the multinational trusts and holdings thriving in the electric utility industry during the early 20th century. The incapacity of these firms to react to the negative effects of WWI, led them to a greater awareness of political risk in the unstable interwar period. This paper analyses the creation of internal capabilities to systematically collect intelligence and design emergency plans, anticipating political risks. The case of Sofina, multinational headquartered in Belgium, is singled out, disclosing the different features of risk management capabilities created within the firm: intelligence collection and analysis, contingency plans, new legal and financial structures trying to ring-fence the firm and its multinational operations across four continents in the 1930s.

2nd half

Unilever’s ‘Panama’ in South Africa: safe haven during the Second World War

Grietjie Verhoef (University of Johannesburg)

Companies globalizing operations during the early wave of globalization at the beginning of the twentieth century, devised strategies to expand outside metropolitan European borders. Lever Brothers established operation in the Cape Colony in 1904. Operations soon expanded into the Transvaal, a province of the new Union of South Africa (formed 1910). Operations of Unilever during the Second World War ran the risk of being nationalised by German forces as Germany extended occupation of territories to the east of Germany. The German forces invaded and occupied the Netherlands in May 1940. Assets of Dutch companies, both in the Netherlands as well as abroad, became ‘Enemy assets’, seized by Germany. Unilever then established a company in South Africa to hold assets of Lever Brothers and Unilever limited. The South African incorporated company was ‘Overseas Holdings (Pty) Ltd. (OHL). The operations of OHL became the focus of extensive legal action between the South...

Companies globalizing operations during the early wave of globalization at the beginning of the twentieth century, devised strategies to expand outside metropolitan European borders. Lever Brothers established operation in the Cape Colony in 1904. Operations soon expanded into the Transvaal, a province of the new Union of South Africa (formed 1910). Operations of Unilever during the Second World War ran the risk of being nationalised by German forces as Germany extended occupation of territories to the east of Germany. The German forces invaded and occupied the Netherlands in May 1940. Assets of Dutch companies, both in the Netherlands as well as abroad, became ‘Enemy assets’, seized by Germany. Unilever then established a company in South Africa to hold assets of Lever Brothers and Unilever limited. The South African incorporated company was ‘Overseas Holdings (Pty) Ltd. (OHL). The operations of OHL became the focus of extensive legal action between the South African tax authorities, the Commissioner of Inland Revenue, and Unilever. Complex agreements were entered into by Unilever and its investment subsidiary company, (Maatschappij voor Internationale Beleggings NV- Mavibel) to channel investments to other concerns, of which OHL was one. This paper will explore the survival strategies of Unilever, the operations of OHL in South Africa, as well as investigate the role OHL performed in the international operations of Unilever Ltd.

“Safe haven Curaçao”: the origins of a Dutch offshore centre, 1915-1960

Marten Boon (NTNU, Trondheim) & Ben Wubs (Erasmus University, Rotterdam)

The historical significance of OFCs derives not from their individual characteristics but from their place and connectedness in a growing transnational financial system that emerged from the tensions between mobile capital and the rise of the centralised, tax-levying state in the 20th century. This paper addresses these issues through a case study of the Netherlands and its crown dependencies in the Netherlands Antilles as a transnational network of OFCs funnelling international capital flows since the 1920s. The paper questions when, how and why the Netherlands, including Curaçao, emerged as OFC, and focuses on the interaction between Netherlands Antilles and Dutch authorities on the one hand and financial corporates, entrepreneurs and Dutch multinationals on the other. The paper aims to research the rise of Curaçao’s Tax Haven within the larger context of major shifts in the world economy in the first half of the 20th century and changing organisational structures of...

The historical significance of OFCs derives not from their individual characteristics but from their place and connectedness in a growing transnational financial system that emerged from the tensions between mobile capital and the rise of the centralised, tax-levying state in the 20th century. This paper addresses these issues through a case study of the Netherlands and its crown dependencies in the Netherlands Antilles as a transnational network of OFCs funnelling international capital flows since the 1920s. The paper questions when, how and why the Netherlands, including Curaçao, emerged as OFC, and focuses on the interaction between Netherlands Antilles and Dutch authorities on the one hand and financial corporates, entrepreneurs and Dutch multinationals on the other. The paper aims to research the rise of Curaçao’s Tax Haven within the larger context of major shifts in the world economy in the first half of the 20th century and changing organisational structures of multinationals and international markets. Firstly, we argue that the birth of Curaçao as an OFC at least dates back to the beginning of the Second World War when Dutch multinationals like Royal Dutch Shell and Philips transferred their legal seat to the island. Secondly, we argue that the island’s recognition as a safe haven during wartime and its subsequent evolution as an OFC, was also a function of the Dutch experience as an OFC in the 1920s. Moreover, as the Netherlands extended its network of tax treaties and developed into an OFC in its own right over the course of the century, Curaçao became an integral part of the international tax planning infrastructure. In addition, we argue that the outsized role of Royal Dutch Shell on Curaçao since the 1910s made the island an important element in Dutch corporate fiscal planning as well as priming the Netherlands Antilles’ fiscal policies in the twentieth century.

International taxation and changes to the domicile of international business: evidence from British overseas business

Simon Mollan (University of York, UK) Billy Frank (University of Central Lancashire, UK) Kevin Tennent (University of York, UK)

There is a growing interest in the role of international taxation in the history of international business (Mollan and Tennent 2015; Donzé and Kurosawa 2013; Izawa 2017; Sandvik 2010; Kobrak and Wuestenhagen 2006). We add to this literature in this paper by exploring the decision of number of British mining firms to seek to change domicile in the 1950s in part as a consequence of increasing international taxation. In the cases covered in the paper (that of the Roan Antelope Copper Mines Ltd and the Rhodesian Selection Trust Ltd, both of which operated in Northern Rhodesia; now Zambia) the decision to change domicile was resisted by the British government who sought to retain domicile for taxation and balance of payments reasons. This is used to explore a number of debates: the rise of American capital and the decline of British business overseas, decolonization; the historiography of the Free-Standing Company, and...

There is a growing interest in the role of international taxation in the history of international business (Mollan and Tennent 2015; Donzé and Kurosawa 2013; Izawa 2017; Sandvik 2010; Kobrak and Wuestenhagen 2006). We add to this literature in this paper by exploring the decision of number of British mining firms to seek to change domicile in the 1950s in part as a consequence of increasing international taxation. In the cases covered in the paper (that of the Roan Antelope Copper Mines Ltd and the Rhodesian Selection Trust Ltd, both of which operated in Northern Rhodesia; now Zambia) the decision to change domicile was resisted by the British government who sought to retain domicile for taxation and balance of payments reasons. This is used to explore a number of debates: the rise of American capital and the decline of British business overseas, decolonization; the historiography of the Free-Standing Company, and the emerging international political economy of the Cold War.

Capital Entrepôts at the Margins of States: A British Dual Position to Tax Havens, 1961-1979

Kristine Sævold (University of Bergen)

This source-based analysis examines the formation and management of a British tax haven policy formulated under the leadership of the Treasury from 1961 to 1979. The analysis demonstrates how a tax haven model was understood within Whitehall institutions to grow out of the Freeport of Bahamas from 1955, to spread throughout the 1960s, and emerge with offshore banking in the late 1970s. Despite competing positions, the British authorities allowed through ad hoc decisions a system to rise as the result of negotiated interests among four spheres of transnational agents at the margins of state. Colonial territories, foreign investors, and a consultancy industry found rooms for manoeuvre with a forgiving metropolitan state in a period of decolonization. This experience is understood to be central to the rise of what has been conceptualized within an International Political Economy-tradition as the `Offshore World` (Palan 2003), and more lately as `Archipelago Capitalism` (Ogle 2017).

This source-based analysis examines the formation and management of a British tax haven policy formulated under the leadership of the Treasury from 1961 to 1979. The analysis demonstrates how a tax haven model was understood within Whitehall institutions to grow out of the Freeport of Bahamas from 1955, to spread throughout the 1960s, and emerge with offshore banking in the late 1970s. Despite competing positions, the British authorities allowed through ad hoc decisions a system to rise as the result of negotiated interests among four spheres of transnational agents at the margins of state. Colonial territories, foreign investors, and a consultancy industry found rooms for manoeuvre with a forgiving metropolitan state in a period of decolonization. This experience is understood to be central to the rise of what has been conceptualized within an International Political Economy-tradition as the `Offshore World` (Palan 2003), and more lately as `Archipelago Capitalism` (Ogle 2017).