Panama, Tax Havens and Megacorporations

Full disclosure: I don’t trust today’s mega tech corporations. Undoubtedly, they provide services that we all like, and nowadays, even need. But I don’t trust the supranatural profits that they extract. That screams either market failure or monopolizing techniques, or most likely, a combination of both: surreptitious in the former, unscrupulous in the latter. And these profits largely rest and accumulate offshore.

That brings us to Panama: a tax haven not located offshore but categorised as such given the general characteristics of tax havens. Revelations this week of national figureheads and establishment leaders having financial links to this offshore destination are just another in a recent catalogue of expositions of potential tax impropriety. Of course there are legitimate reasons to use tax havens for financial matters, but they are largely eclipsed by improper ones. Coming back to multinationals then, resting profits offshore could be characterised as either depending on the approach adopted. It could be an immoral shift of otherwise taxable profits, or it could be a rational response to loopholes in the international tax framework.

Indeed, the problem of profits ending up in tax havens was the catalyst for the OECD’s recent Base Erosion and Profits Shifting project. A fundamental problem at the heart of the OECD’s project however was that it was never going to depart from the arm’s length principle. In and of itself, the principle is defensible. It is problematic however when combined with the existence of tax havens, as corporations will inevitably use the rule so as to shift profits to places where they are not taxable (or where tax is minimised). Thus it becomes apparent the crucial problem in reforming the international tax rules: tax havens and countries which operate to facilitate tax havens.

This is all the more problematic in the 21st century when so much of a large tech companies’ value is wrapped up in intellectual property. Patents are issued for products processes which are novel. Herein lies the glaringly obvious problem with applying an arm’s length principle to transactions concerning something which is patented: it attempts to find a comparator for that which is unique. This fundamental tension allows companies to price patented materials in a manner most advantageous to them. When the patent itself is held offshore, the profits follow suit.

So what’s the solution? Fundamental reform of the international tax rules? Getting tough on tax havens? Increased resources in the hands of the revenue authorities and increased co-operation? In truth there is no simple answer. But in the case of multinationals engaging in aggressive tax practices, I’ve blogged elsewhere that a resolution may lie in antitrust/competition law enforcement. It should be remembered that Teddy Roosevelt took on America’s corporate titans in the early 20th century with the Sherman Antitrust Act. There is precedence in thinking outside the box on this one.



About taxatlincolnox

Tax law academic. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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6 Responses to Panama, Tax Havens and Megacorporations

  1. We both agree that the current international tax system is not ‘fit to purpose’, especially involving MNCs. I describe the problems here In moving forward to a practical solution I think that there are some things that all the stakeholders need to first agree upon:

    1) The Numbers: There are all kinds of numbers out there and little attempt or desire to try and properly calculate or substantiate them. The best “Get the numbers right” person I have run across is Maya Forstater (;

    2) Recognise that Tax Competition is a reality given the Prisoner’s Dilemma: That being said, there are some jurisdictions which are going to forgo some corporate taxation in exchange for increased VAT, employment or other economic benefit;

    3) Country by Country Reporting is NOT the miracle cure-all: As it does not change the basis of taxation in any way, it simply allows for easier identification of transfer pricing challenge opportunities;

    4) Tax Collection Agencies need to be more robust: This requires the political will (and funding) to make sure that they operating at maximum efficiency and effectiveness. Data dumps like the Panama Papers are only as useful as the ability for tax authorities to deal with the firehose of information coming at them

    I find you potential solution of using competition law intriguing as a possible solution but do you agree that we need to recognise and agree on these preliminary issues before proper examination of how Tax Policy should change is debated.


    • Hi David,

      Thank you very much for reading the blog and for commenting. I’d agree generally that those issues identified need to be first considered. But in this blog, I suppose I’m driving at the point that tax competition itself may be the ‘nail in the wheel’ (changing the tyre will not stop it going flat) which ensures that change to the rules can never quite eliminate the problems its seek to cure.
      So to this end, the blog seeks to analyse and solve the problem of offshore hoarding from the perspective of antitrust law, rather than trying to tackle the much bigger problems in the international tax framework.



  2. It would take a few thousand words to do it proper justice (I had in mind at one stage to write a thesis on this), but in brief, let’s say the EU Commission takes this on: you’d start by taking one of the large tech companies; establish that they are dominant in their particular market; and then the aggressive tax strategy could be characterised as an abuse. It might seem strange that a legal activity could infringe Competition Law, but there are plenty of per se legal activities which companies have engaged in over the years which have been found to be abusive (or in US lingo the companies have been guilty of monopolisation).


  3. Maya says:

    Hi Stephen
    I wanted to follow up on two things (thanks for tagging me David).

    Firstly – the big multinationals that you address in your post don’t feature much in the Panama Papers of the headline.The issues there seem to be more about wealthy and/or politically connected people using opaque corporate and trust structures, potentially to hide their assets for the purposes of tax evasion, scams, corruption, theft of public assets, to avoid making full declarations of their interests or to escape creditor, ex-wives etc… which is a different thing from BEPS type tax issues….different sets of questions and different potential solutions (and so we shouldn’t interpret these kinds of offshore hoards as being the same as tech companies offshore cash piles which are clearly declared).

    Secondly – On your proposal re: competition policy. I’m not sure it would work. Or that it should; Where there is market dominance & abuse the solution is surely to deal with this through anti-trust provisions so that consumers don’t get fleeced… not to allow companies to exploit consumers, but then tax the excess off them.

    Also I am not sure how it would apply in practice….. Take the case of Apple. They are nowhere near having a monopoly on smart phones. What they have is a monopoly on (new) iphones, for which many people are willing to pay a premium. That premium seems to me to derive largely from activities of Apple in California rather than their retail & wholesale operation in countries like the UK.


  4. Hi Maya,

    Thank you very much for the comments.

    On your first point, I accept that I really only used the Panama story as a segwey-I’ve just made a slight amendment to the blog to try to make that clear.

    On your second point, I’ll take it that one would first have to establish dominance in some market-but it’s worth remembering for competition law purposes, that this could be any market, and need not be so far as a monopoly but merely an ability to act independently of competitors to an appreciable extent.

    Preventing dominant undertakings from abusing their market power is an antitrust provision which is designed to protect consumers, but I’ll grant you that how this assumption plays out in practice may not be clear in the short term and more often becomes apparent in the long term.

    If you’re interested, here’s a case the German antitrust regulator is taking against Facebook. It’s innovative to say the least but it also underlines the malleability of Competition Law.



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