Capital, Nationality, and State Sovereignty: New Links for the 21st Century
Marc Morgan-Milá
Ph.D. Candidate at Paris School of Economics, 48 Boulevard Jourdan, 75014, Paris
Please cite the paper as:
Marc Morgan-Milá, (2016), Capital, Nationality, and State Sovereignty: New Links for the 21st Century, World Economics Association (WEA) Conferences, No. 1 2016, Capital Accumulation, Production and Employment:, 15th May to 15th July 2016
This paper has been included in the publication
“Capital and Justice”
Abstract
This paper investigates the link between capital, nationality and state sovereignty, both historically and in the context of our current globalized world. It challenges the conventional viewpoint that capital has no nationality, which implies limited state sovereignty with regards to fiscal policy and developmental strategies. I argue that while capital does not properly ascribe to a de jure nationality, it has always had a de facto nationality that follows the nationality of the capitalist, as testified by the history of economic policy and decision- making. But the political-economy paradigms within which this nationality has been manifested have changed over time and so have the tools for states to preserve their sovereignty. In the current environment of advanced information technology, fiscal competition and an increasing presence of tax havens, I motivate and evaluate various proposals to give capital a de jure nationality for the benefit of state sovereignty in the 21st century.
Comment by Grazia Ietto-Gillies on:
‘Capital, Nationality, and State Sovereignty: New Links for the 21st Century’
by Marc Morgan-Mila’
This interesting paper is on a very topical issue. Even before the recent uncovering of the Panama Papers, the issue of tax havens and tax avoidance used by private citizens and by corporations was in the spotlight. As was the related issue of large transnational corporations (TNCs) minimizing their tax liabilities via the manipulation of transfer prices. For example in Britain, a Parliamentary Enquiry by a Select Committee on Public Accounts chaired by the MP Margaret Hodge has openly shamed and called to account companies such as Google and Amazon.
The paper I comment on concentrates on issues of nationality for both individuals and corporations. The author distinguishes between de jure and de facto nationality. It discusses their relationship in some details and how these two modalities affect taxation liabilities and fiscal revenues of countries. In relation to capital, there is an assumption that the attribution of de jure nationality is more uncertain and problematic than the de facto attribution. Personally, I think this is true only if we assume that a nationality could/should be ascribed to ‘capital’ as an abstract concept. However, capital only makes sense in the context of property relationships. In this context capital does not and cannot have a nationality of its own. The owners of it do. They can either be private citizens or corporate identities, both of which do have well defined nationalities and both of which are liable to taxation. If we accept this to be the case, then what is the problem with taxation and tax avoidance? The tax avoidance being discussed is the one that takes place in the context of the internationalization of assets – be they financial or non-financial.
The author writes (p.5): ‘…the globalization argument for capital having no nationality is …redundant, and at most used as an excuse.’ There is in this statement an implicit – probably unconscious – acceptance of the globalization argument. Yes, we hear and read how in the era of globalization capital has no country and no nationality. We are almost led to accept these ideas as positive statements of an obvious and unchanging reality. They are not. It has been a deliberate decision of neo-liberal policy makers across the western world to sell this globalization argument to the world as an ‘undeniable truth’. In this they have operated under pressure from financial and corporate lobbyists as well as under their own ideological beliefs. The digital technologies have made it possible for capital to move effortlessly and almost costlessly from country to country. But it was deliberate policies that made it a reality. The policies could be reversed or modified. There could be a debate as to the costs and benefits of full versus partial reversal. However, policies could and should be passed and implemented to achieve full transparency and traceability. The paper suggests some ways in which governments – with the cooperation of international institutions such as the IMF – can arrive at more transparency and openness and thus higher revenues. A global tax on capital is seen as a vehicle for more transparency as well as for more efficient collection and fairer allocation of tax revenues across countries. Will we achieve it? Unlikely as long as the neo-liberal credo is in operation.
Let us now deal more specifically with the TNCs. Their defining characteristic is direct production and ownership of assets – via foreign direct investment – in more than one country. Following Steven Hymer’s seminal work (1976 [1960]) many theories of the TNC have been developed. They do not all deal with the same issues and type of activity. In Ietto-Gillies (2012) I tackle the issue of why we need specific theories of the TNC. The question is pertinent because, after all, direct business activities across regions of the same nation-state are not the subject of special theories even when the country is very large and has many regions/states like the US. When a firm from Massachusetts invests in Oregon or one from England invests in Wales we do not see the need to apply special theories to explain their behaviour. But we do see the need for special theories when firms operate across national frontiers. Why? What is special about national frontiers? Is it a matter of geographical distance? Or of cultural distance? Not quite. There is more to it.
National borders delimit nation-states not only as geographical territories but also as loci of regulatory regimes in relation to a variety of elements. Specifically relevant to business are the following regulatory regimes:
(a) fiscal regimes;
(b) labour and social security regimes;
(c) environmental and safety standards regimes;
(d) currency regimes.
They encompass all the laws, customs and regulations related to these areas. The regulatory regimes for these areas tend to be more uniform – though not completely uniform – between regions of the same state than between different nation states.
The divergence between regulatory regimes across nation-states allows TNCs to develop location and pricing strategies that maximise their profits. A particular case in point is the strategy regarding the manipulation of transfer prices i.e. the prices charged by one unit of the company to another for internal transfers of goods and services. Corporations are known to follow pricing strategies that aim to minimize the overall tax liabilities for the company as a whole rather than in relation to each subsidiary separately.
The practice of manipulation of transfer prices is known to be widely practiced. It is difficult for governments’ revenue departments to monitor the processes and query the set prices for internal transfers because many components and services do not have clear equivalents on the market. Nonetheless, there has been quite a bit of literature on this such as Eden (2001) and OECD (2010). The latter is a set of guidelines for companies and tax administrators. The manipulation of transfer prices is not legal or quasi legal. It is illegal but difficult – though not impossible – to detect. Governments determined to stamp it out – rather than pretend to – could follow a variety of strategies not mutually exclusive.
They could close loopholes in tax legislation. They could follow the trails by assigning to these jobs well-trained experts and adequate resources. They could stop so-called revolving doors in which tax experts from governments tax revenue offices retire and move into lucrative jobs in the private sector where they can use their experience from the public sector to help company avoid taxes. Last, but not least, determined governments could use their international political and economic clout to negotiate disclosure and transparency in tax havens countries. It was interesting to see that the Chair of the UK Selected Committee on Taxation mentioned above resorted to ethical arguments. Such arguments particularly when used by governments and figures representing public institutions are wrong and a sign of powerlessness and defeat. Companies should – and should be made to – pay taxes according to the laws of the country and not out of morality and compassion. If the laws are easily circumvented then it is the duty of governments to change them and make them effective. Resorting to publicly shaming companies and to rousing the consumers to put pressure on the same companies is a clear sign of defeat by governments. Moreover, in some cases the market position of these companies is so strong – Google or Amazon – that there is little chance of them losing customers. Might Ms Hodges have put pressure on the government to close down loopholes and follow one of the above strategies? She probably thought that the political environment is not favourable to such changes.
Another area in which differentials in regulatory regimes is of benefit to companies working across frontiers and thus across loci of different regulatory regimes, is labour and social security regimes. Companies can devise strategies to benefit from using different labour and its skills in various countries according to the cost of labour. Moreover, the labour force working for the same company but located in different countries is spatially and socially fragmented. It therefore finds it more difficult to organise and bargain together with management. This is in contrast with the TNCs that can plan, organize and control across national frontiers. Thus the TNCs have advantages towards their fragmented labour force and they can exploit them strategically for their own benefit .
Ceteris paribus, operating transnationally gives companies advantages over companies that operate within national-frontiers only. It is the existence of different regulatory regimes across different nation-states that allows companies to develop strategies designed to maximize their world wide profits. It is thus the existence of different nation-states with their specific regulatory regimes that makes it necessary to develop specific theories of the TNCs.
The response of neo-liberal politicians to the challenges posed by TNCs to the laws of their country has too often been a self-defeating one. The move towards: downward competition between different countries for the attraction of FDI via lower taxation rates or via labour and social security regimes more favourable to companies. This is leading to downward convergence in fiscal regimes as well as in social security and labour regulation regimes. My view is that convergence may be beneficial in that it would prevent companies playing countries against each other. However, we should aim for a convergence that benefits labour and citizens and not just companies.
References
Balcet, G. and Ietto-Gillies, G. (2016), ‘Internationalization, outsourcing and labour fragmentation. The case of FIAT’ (mimeo)
Eden, L. (2001), Taxes, Transfer Pricing, and the Multinational Enterprise, in A.M. Rugman and T.L. Brewer (eds), The Oxford Handbook of International Business, Oxford: Oxford University Press, ch. 21, pp. 591-619.
Hymer, S.H. (1960, published 1976), The International Operations of National Firms: A Study of Direct Foreign Investment, Cambridge, MA: MIT Press.
Ietto-Gillies, G. 2012. Transnational Corporations and International Production. Concepts, Theories and Effects, Cheltenham, UK and Northampton, MA, USA: Edward Elgar.
Organization for Economic Cooperation and Development (OECD), (2010), Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators, Paris: OECD
Grazia Ietto-Gillies
g.iettogillies@yahoo.co.uk
Thank you Grazia for your comments and for your theoretical insights into TNCs. I would like to emphasise the following points.
You comment that:
“In relation to capital, there is an assumption that the attribution of de jure nationality is more uncertain and problematic than the de facto attribution. Personally, I think this is true only if we assume that a nationality could/should be ascribed to ‘capital’ as an abstract concept. However, capital only makes sense in the context of property relationships. In this context capital does not and cannot have a nationality of its own. The owners of it do.”
– The idea of a de jure nationality of capital, as opposed to a de facto nationality, is to complement the legal nationality of capital owners. A world financial registry, with the automatic exchange of bank information between countries, would in effect certify the jurisdiction of financial capital, attaching it to an owner for tax purposes, and thereby giving it a nationality in law (the language I use may not fit the context but I chose it for illustrative purposes). In relation to nonfinancial capital, a similar registry could be created for the activity of TNCs, managed by say the U.N., which would detail the global profits of corporations and the geographical/jurisdictional distribution of their sales, payroll and fixed capital. This would determine the nationality make-up of TNCs and facilitate a fairer distribution of corporate tax revenues.
“National borders delimit nation-states not only as geographical territories but also as loci of regulatory regimes in relation to a variety of elements.”
– I fully agree with this point and the analysis you make of the relevant regulatory regimes for business.
“It was interesting to see that the Chair of the UK Selected Committee on Taxation mentioned above resorted to ethical arguments. Such arguments particularly when used by governments and figures representing public institutions are wrong and a sign of powerlessness and defeat…Companies should – and should be made to – pay taxes according to the laws of the country and not out of morality and compassion. If the laws are easily circumvented then it is the duty of governments to change them and make them effective. Resorting to publicly shaming companies and to rousing the consumers to put pressure on the same companies is a clear sign of defeat by governments.”
– I think this is an important point, especially when, as you mention, many of the TNCs in questions have strong bargaining power related to their respective industry market shares.
“It is thus the existence of different nation-states with their specific regulatory regimes that makes it necessary to develop specific theories of the TNCs.”
– This prepares the group for fruitful future research.
Lastly I would emphasis that convergence is a good thing if it is from above, so that countries avoid a ‘race to the bottom’ mentality both in terms of competitiveness and public revenue.