We’re sharing in full an article published this month here from one of the Tax Justice Network’s Senior Advisers, Tax Barrister David Quentin.
The story told by the “Paradise Papers” is ultimately about the core structural fault-line in capitalism between capital and labour. That fault-line has sheared a great distance because the relations in practice are extremely complex, with hyper-exploited labour and tax-privileged capital operating in different jurisdictions and connected only through global value chains. This article considers (1) the nature of “offshore”, (2) the global context of labour exploitation, (3) the structural relation between the two, and (4) the policy challenges that these issues might present to a future social democrat in No 10.
(1) From the Queen of England to the Hounds of Hell
2016’s “Panama Papers” offshore data leak seemed to implicate none other than then-Prime Minister David Cameron (or at least his family’s wealth) in some dodgy-looking offshore business, which set the bar pretty high for any leak which might follow. 2017’s “Paradise Papers” leak delivered, however, managing to implicate the actual Queen. And so The Establishment stands accused of endemic corruption, having seemingly been caught red-handed twice in a row.
The liberal defence of the status quo in these contexts is invariably that while the offshore system can be used for tax evasion and money laundering, the purposes to which it is put are predominantly lawful; there are (so the mantra goes) perfectly “legitimate” reasons to be offshore. And there is a some truth to this proposition, particularly as regards the Paradise Papers, which were a leak from a significantly classier outfit than the firm from which the Panama Papers originated. It is not, however, the defence that those who advance it think it is.
Indeed, it is in the very nature of “offshore” that, rather than being a place outside the jurisdiction of “onshore” as one might imagine, it is a legal space deliberately and carefully constructed out of interpenetrating legal regimes. So, for example, the reason that a hedge fund can be in the Cayman Islands for the purposes of the UK’s tax regime, and therefore escape UK tax, even though its activities are controlled by managers in London, is because of a specific exemption from UK tax for precisely this kind of situation — the Investment Manager Exemption.
Why does the UK carve out this “offshore” space for funds which are managed here? It is because the UK wants to support the City’s role as a global financial services centre. If people from the rest of the world risk having to pay UK tax by virtue of investing in a fund managed from London, they will not invest. So the UK taxes the income and gains of UK-resident investors (like, say, the Queen), but it makes sure that the fund itself is safe from the UK’s own taxes on accumulation by means of an express exemption. In other words, the UK uses the Cayman Islands (and similar jurisdictions) to create a tax-free space for rich people from everywhere else in the world to place their assets under UK-based management.
This may seem perfectly reasonable to UK elites, mindful as they are of the competitive global market for the financial services which are so disproportionately crucial to our economy, but it has the effect of creating a global space where capital can accumulate untaxed. There really is very little reassurance for anyone concerned about equality in the fact that this space is a “legal” one, or the fact that the Queen is compliant with her UK tax obligations in respect of it. The reality is that capital will always want to accumulate untaxed if it can, and it can find any number of ways of getting into such spaces while leaving no trace of itself behind in the legal spaces where tax is charged on accumulation.
The UK does not care one jot whether a non-UK-resident investor is paying their non-UK taxes in respect of their participation in a UK-managed offshore fund. So far as the UK is concerned, it may as well be the world’s most corrupt oligarchs and kleptocrats participating in that hedge fund alongside the Queen. Indeed, it is better for the UK if that is what they are — all the more accumulation in the fund, and therefore all the more remuneration for those UK-resident managers on whom the UK does charge tax.
To be clear, the Investment Manager Exemption is just one of a number of features of the UK tax code which reveal “offshore” to be constituted in part by a deliberate imposition of tax-free (or tax-reduced) accumulation on the rest of the world by the UK. A more obviously abusive and consequently somewhat notorious example is the Finance Company Partial Exemption. This is a special low rate of tax which applies where a tax haven subsidiary of a UK company is deployed as a finance hub, extracting tax-deductible payments of interest from group companies in other jurisdictions. The UK could perfectly well police the use of tax haven finance hubs to fleece other countries by imposing a full rate of tax in these circumstances. Instead it effectively takes a cut of the tax which has been avoided elsewhere.
To zoom out a further step, the UK is very far from alone in maintaining these “legal” offshore spaces. Most major economies are at it in one way or another. The USA is particularly at fault in this regard, having created the tax environment in which it was possible for the US-based tech giants to accumulate their vast offshore fortunes. Less often mentioned is the Netherlands, which is among the very worst offenders, carving out a tax-advantaged conduit space for unbelievable volumes of corporate intellectual property money.
The picture that emerges from these “legitimate” reasons to be offshore, when one unpacks them, is therefore one of wealth flowing from all over the world — out of real places where people live, work and consume — and into offshore legal spaces that have been constructed by wealthy jurisdictions for the purposes of tax-free or tax-reduced accumulation of capital.
So much for capital, for the time being. The question I want to address in the next two sections of this article is where that leaves labour.
(2) Everyone knows about it
It is a truism of tax justice that, where accumulation of capital goes untaxed (or undertaxed), it is those without wealth who have to pick up the fiscal slack by way of an increased burden of taxation on labour and consumption. What I want to do in this article, however, is think about that dynamic as it takes effect globally, in a world of hyper-exploitation of labour at the remote ends of global value chains; remote, that is, from those swollen sacs of undertaxed capital accumulating in deliberately constructed offshore spaces. This requires us to consider (in this section) the mechanisms of rent-extraction along global value chains, and (in the following section) a global tax norm called the “arm’s length” principle.
Starting, then, with rent-extraction along global value chains, this is not a malignant phenomenon on the periphery of an otherwise benign system; rent-extraction is what global value chains are for. If your business is big enough or possesses the appropriate kind of (generally intangible) asset, you can park that business on a choke-point somewhere on the winding route from raw materials to consumption, and maximise the value you extract from the chain in the form of profit, at the expense of the other firms operating along it.
The way this works in practice is unbounded in its variety. There are a few well known instances — the sportswear manufacturers and the tech manufacturers which do not actually do any manufacturing, the giant multinational which monopolises online retail, the search and social media behemoths which are fast becoming the only places where it is worthwhile advertising — but really the dynamic is endemic. And it affects everything that people in rich countries buy.
Yes, the things we buy are cheap because of cheap hyper-exploited labour abroad, we all know that, but the cheapness of that labour does not necessarily mean greater profits for the company actually employing the cheap labour. It is much more likely to mean greater profits for whichever “lead firm” (to use the global value chains jargon) is “governing” the value chain. Being a lead firm in a global value chain generally means outsourcing the business of exploiting labour to other firms in the chain, and making excess profits by using its governing position in the chain to force those other firms’ prices down. That then further compels those other firms to increase their levels of exploitation of labour.
Perhaps the best known example of this is the garment value chain. Garment brand owners and garment retailers do not manufacture garments; garments are manufactured by independent and relatively small firms who use extremely cheap labour in low-income countries. The brand owners and retailers, sitting on a choke-point between those firms and their worldwide markets, can switch suppliers very easily, and they are therefore in a dominant position as regards setting prices. This is the dynamic that keeps workers in garment-producing countries in such notoriously bad and high-risk conditions, even while the profits of garment firms that don’t even actually make garments remain high.
And underpinning the existence of those hyper-exploited workers at the further reaches of global value chains in any number of sectors are (1) gendered and racialised systems of violence and oppression, and (2) the global “industrial reserve army” whose lives are truly desperate: the further hundreds of millions without access even to basic sanitation or essential health services.
Pausing at this stage to consider some tax consequences of this dynamic of rent-extraction from global value chains, what it means is that where a company in a low-income country “articulates” with a global value chain, both the tax take from labour and the tax take from corporate profits are suppressed. The resources available to protect the workers from risk, regulate the employer, collect taxes, expand the economy through public investment &c are therefore constrained by rent-extraction going on in another jurisdiction. And that fiscal constraint has a feedback effect; the workers in a jurisdiction which is impacted by it are more readily available for hyper-exploitation.
(3) Far from this postoperaismo for evermore
But the dynamic of rent-extraction along global value chains has another less visible tax impact, which will take some further explaining. It relates to the value of business inputs. One impact of the global value chain dynamic is that the tools of rent-extraction (for example intellectual property) are extremely valuable business assets, and this must necessarily have the consequence that genuinely value-bearing inputs are commensurately underpriced.
I am referring here to freely negotiated business-to-business prices between independent market actors where the seller is not a “lead firm” — all such prices reflect the fact that, for commodities to make it from raw materials to consumption, rent-extracting capital is going to swallow up an unearned share of the value produced along the way. To illustrate by reference to the garment value chain, wholesale garments change hands on the open market at a price which reflects the dynamic whereby (i) manufacturers are compelled to use hyper-exploited labour because (ii) only “lead firms” who have made substantial investments in their brand or retail positioning can profit significantly from selling them. Too cheaply, in other words.
This is where the matter of the arm’s length principle comes in. The arm’s length principle is the principle whereby sibling companies in a multinational group are treated for tax purposes as having entered into transactions with each other at “arm’s length” prices. In other words (broadly speaking) the prices that the intra-group goods or services are treated as fetching are those they would fetch in the open market.
The idea is to achieve a fair distribution of taxable receipts and deductible expenses between the jurisdictions where the group is operating, but, as we have seen, the open market suppresses the price of genuinely value-bearing inputs. This means that in jurisdictions where such inputs are produced, even if the rules are being complied with, a suppressed receipt will be booked for tax purposes, and in other jurisdictions a commensurately-enhanced share of the group’s profits will be booked.
The adverse global tax impact of rent-extraction along global value chains (i.e. in particular the suppression of fiscal resources in low income countries where hyper-exploited labour is performed) is consequently reproduced within multinational firms, even in circumstances where the now notoriously unfit-for-purpose global corporate tax system is working exactly as it should.
Of course, the suppression of fiscal resources in low-income countries by reference to rent-extraction along global value chains and within lead firms, with its consequent feedback loop with regard to the hyper-exploitation of labour, does not lead to huge commensurate fiscal windfalls in the rich countries where capital is owned. As we saw in section one of this article, capital is positively encouraged by rich countries to accumulate tax free.
When we think of offshore wealth from the standpoint of the left in a rich country like the UK, particularly if the wealth in question is owned by a UK resident such as the Queen, or by a company which does business in the UK, we tend to suppose that it belongs onshore here in the UK. A key point I want to make in this article is that (as explained above) the huge bundles of assets sitting offshore with their “legitimate reasons” for being there did not apparate by magic — they are there because of the systematic immiseration of workers worldwide and the global industrial reserve army.
A consoling value-theoretical fantasy currently popular in some left circles is that we create value for capital by dint of, for example, our unpaid immaterial labour building the vast databases of our own commodity preferences that are held by social media giants. While this may be politically expedient from the point of view of persuading people in rich countries that surplus value is being extracted from them even though they don’t produce anything, it is a dangerous category error which serves to entrench a highly inequitable system.
By way of illustration, suppose some corporate profits are currently being booked in a tax haven because that is where some “big data” regarding consumer preferences in a rich country resides, and the arm’s-length principle attaches value to that data by virtue of its role in profitability. Suppose now that that offshore space is to be abolished — to which jurisdiction should the profits be allocated for tax purposes? The jurisdiction where the unpaid immaterial labour of expressing a preference for the commodities is performed, or the jurisdictions where people work in conditions of hyper-exploitation on the farms and in the factories and down the mines where the commodities are actually produced?
(4) Oh Jeremy Corbyn
It is fundamental to Marx’s critique of capitalism that even if a distributional settlement emanates from relations formed under the conditions of formal equality delivered by the rule of law, such a settlement may still be arbitrary. “Between equal rights”, he famously wrote in Capital, “force decides”. It is easy for us on the left to dismiss on that basis the claim that some tax-privileged return or another is “legal”, or that there are “legitimate reasons” to be offshore, but the argument is equally undermining to the proposition that the underlying corporate profits were legitimately obtained, or that the UK’s potential claim to tax the returns on the assets is legitimate.
In the context, Marx was referring to the fact that a greater or lesser degree of appropriation of surplus value takes place through the wage relation, notwithstanding formal equality in the formation of contracts between labour and capital. As I have argued here, ultimately that continues to be the core fault-line in capitalism, even if the fault-line seems to have sheared a great distance because the relations in practice are extremely complex, with the labour and the capital operating in different jurisdictions and connected only by the writhing indeterminacy of global value chains.
This presents a huge challenge of principle to purportedly social democratic policy-making in rich countries. We hear a lot from the forthcoming Labour government about how they are going to fund investment here in the UK by stamping out tax avoidance, but nothing about the global redistribution that will be necessary in order to stamp out the underlying inequalities between the people who do the work producing the stuff we consume and we who consume it.
Will Corbyn and McDonnell raise the rate of corporation tax and repeal obvious giveaways to Capital in our tax code? It is reasonable to hope that they will. Will they repeal obscure neocolonial features of our tax code that make it easier for UK companies to suck value from poor countries? Perhaps they will get round to this if we in tax justice make enough noise about it. But will they promulgate some kind of fundamental readjustment to global tax norms such that taxing rights over corporate profits are allocated to where the value is really created?
This would mean a concerted multilateral effort among rich countries to break up the juridical spaces where capital accumulates untaxed and, rather than necessarily bringing the fiscal proceeds home to places like the UK to repair the savage vandalism perpetrated here by neoliberal elites, instead allocating the fiscal proceeds between countries by reference to some sort of metric based on the need for social, economic and environmental justice globally. Realistically, I doubt that this is in prospect; the Corbyn/McDonnell project will, at least to a certain extent, rely on domestic economic growth and revenues from taxation in the ordinary way.
It is also not in prospect because it would seem to be a geopolitical impossibility, and this is reflective of what I fear may be the undoing of the present coalition between the radical left and the social democratic left in the UK: the inability of a Corbyn government to address the neocolonial position of the UK in the capitalist world order — a position of which the Queen’s holdings of offshore assets is at the very least emblematic, however “legitimate” her reasons may be for their existence.