Hostname: page-component-7c8c6479df-ws8qp Total loading time: 0 Render date: 2024-03-29T12:04:52.073Z Has data issue: false hasContentIssue false

Arbitrage power and the disappearing financialized firm

Published online by Cambridge University Press:  09 November 2023

Ronen Palan*
Affiliation:
City, University of London UK
Richard Phillips
Affiliation:
City, University of London UK
*
Corresponding author: Ronen Palan, Department of International Politics, City, University of London, Northampton Square, London EC1V 0HB, UK. Email: ronen.palan.1@city.ac.uk.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Modern corporations have increasingly been adopting a decentred, layered, and multi-jurisdictional form as a strategy of boundary manipulation known amongst tax lawyers and accountants as ‘regulatory arbitrage’. The argument we put forward in this article is that the scholarly work that treats these strategies as mere tax avoidance practices has contributed to an underestimation and misrecognition of the way contemporary multinationals operate in markets. These strategies, which we explain in terms of arbitrage power, exploit the difference between exchanges in an imaginary ‘smooth’ market of the economic textbook and a global market that is divided among legal authorities, each imposing their own rules, regulations, and taxations. Arbitrage power exploits differences between the location of market exchange and the location of the registration of property title transfers, combining this with a manipulation of formal systems for recognizing business enterprises in order to escape some or all of the rules and regulations of society. The result is a marked difference between the ‘brochure multinational’, the way multinationals are seen and presented in their glossy brochures, and the way multinationals are legally and practically organized nowadays.

Type
Article
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NCCreative Common License - ND
This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-No Derivatives licence (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits noncommercial re-use, distribution, and reproduction in any medium, provided the original work is unaltered and is properly cited. The written permission of Cambridge University Press must be obtained for commercial re-use or in order to create a derivative work.
Copyright
© 2022 The Author(s)

References

Allen, D. (2005) Transaction costs. In: Clark, D. (ed.) Encyclopedia of Law and Society: American and Global Perspectives. London: Sage, 893916.Google Scholar
Amazon (2020) Amazon.com, Inc. - SEC Filings Details. Available at: <https://ir.aboutamazon.com/sec-filings/sec-filings-details/default.aspx?FilingId=13875159>. Accessed 23 September 2021..+Accessed+23+September+2021.>Google Scholar
Amin, A. (ed.) (1994) Post-Fordism: A Reader. Oxford: Blackwell.CrossRefGoogle Scholar
Arrow, K.J. (1994) Methodological individualism and social knowledge. American Economic Review, 84(2): 19.Google Scholar
Arsht, S. (1976) A history of Delaware corporation law. Delaware Journal of Corporate Law, 1(1): 122.Google Scholar
Atkinson, G. (2009) Going concerns, futurity and reasonable value. Journal of Economic Issues, 43(2): 433–40.CrossRefGoogle Scholar
Avi-Yonah, R.S. (2005) All of a piece throughout: The four ages of U.S. international taxation. Available at: <http://www.ssrn.com/abstract=742525>. Accessed 19 April 2019..+Accessed+19+April+2019.>Google Scholar
Avi-Yonah, R.S. (2019) Globalization, Tax Competition and the Fiscal Crisis of the Welfare State: A Twentieth Anniversary Retrospective. Herzliya: IDC.Google Scholar
Beugelsdijk, S., McCann, P. and Mudambi, R. (2010) Place, space and organization: Economic geography and the multinational enterprise. Journal of Economic Geography, 10(4): 485–93.CrossRefGoogle Scholar
Blumberg, P.I. (1993) The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality. Oxford: Oxford University Press.Google Scholar
Cheffins, B.R. (2015) Delaware and the transformation of corporate governance. Delaware Journal of Corporate Law, 40: 1.Google Scholar
Clausing, K.A. (2016) The effect of profit shifting on the corporate tax base in the United states and beyond. Available at: <https://papers.ssrn.com/abstract=2685442>. Accessed 31 March 2018.CrossRef.+Accessed+31+March+2018.>Google Scholar
Coase R.H. (2007) The nature of the firm. Economica, 4(16): 386405.Google Scholar
Cobham, A. and Jansky, P. (2018) Global distribution of revenue loss from corporate tax avoidance: re-estimation and country results. Journal of International Development, 30(2): 206–32.CrossRefGoogle Scholar
Commons, J.R. (1924) Legal Foundations of Capitalism. Madison: University of Wisconsin Press.Google Scholar
Commons, J.R. (1990) Institutional Economics. Vol. I: Its Place in Political Economy. New Brunswick, NJ: Transaction Publishers.Google Scholar
Crivelli, E., de Mooij, R.A., and Keen, M.M. (2015) Base Erosion, Profit Shifting and Developing Countries. Washington, D.C.: International Monetary Fund.CrossRefGoogle Scholar
Damgaard, J., Elkjaer, T. and Johannesen, N. (2019) Empty corporate shells in tax havens undermine tax collection in advanced, emerging market, and developing economies. Finance & Development, 11: 3.Google Scholar
Davidson, P. (1991) Is probability theory relevant for uncertainty? A Post Keynesian perspective. Journal of Economic Perspectives, 5(1): 129–43.CrossRefGoogle Scholar
Desai, M.A., Foley, C.F. and Hines, J.R. (2006) Do tax havens divert economic activity? Economics Letters, 90(2): 219–24.CrossRefGoogle Scholar
Desai, M.A. and Dharmapala, D. (2018) Revisiting the uneasy case for corporate taxation in an uneasy world. Journal of the British Academy, 6(s1): 247–84.CrossRefGoogle Scholar
Dharmapala, D. (2008) What problems and opportunities are created by tax havens? Oxford Review of Economic Policy, 24(4): 661–79.CrossRefGoogle Scholar
Dupuy, P.-M., Petersmann, E.-U. and Francioni, F. (eds.) (2009) Human Rights in International Investment Law and Arbitration. Oxford: Oxford University Press.CrossRefGoogle Scholar
Epstein, G.A. (ed.) (2006) Financialization and the World Economy. Cheltenham: Edward Elgar.Google Scholar
Fama, E.F. (1980) Agency problems and the theory of the firm. Journal of Political Economy, 88(2): 288307.CrossRefGoogle Scholar
Ferran, E. (1999) Company Law and Corporate Finance. Oxford: Oxford University Press.Google Scholar
Fleischer, V. (2010) Regulatory arbitrage. Texas Law Review, 89: 227.Google Scholar
Foucault, M. (1998) The History of Sexuality Volume 1: The Will to Knowledge. London: Penguin.Google Scholar
Freedman, J. (2008) Beyond Boundaries: Developing Approaches to Tax Avoidance and Tax Risk Management. Oxford: Centre for Business Taxation.Google Scholar
Froud, J., Johal, S., Leaver, A. and Williams, K. (2006) Financialization and Strategy: Narrative and Numbers. London: Routledge.CrossRefGoogle Scholar
Garcia-Bernardo, J. (2021) Offshore Finance and Corporate Tax Avoidance. Amsterdam: Ipskamp.Google Scholar
Grandy, C. (1989) New Jersey corporate chartermongering, 1875-1929. Journal of Economic History, 49(3): 677–92.CrossRefGoogle Scholar
Greenfield, K. (2008) The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities. Chicago, IL: University of Chicago Press.Google Scholar
Hirschman, A.O. (1990) Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations and States. Cambridge, MA: Harvard University Press.Google Scholar
Hodgson, G. (1974) The theory of the falling rate of profit. New Left Review, (I/84): 5582.Google Scholar
Jevons, W.S. (1879) The Theory of Political Economy. London: Macmillan and Co.Google Scholar
Josephson, M. (1962) The Robber Barons. New York: Harcourt, Brace and Co.Google Scholar
Karayan, J., Swenson, C. and Neff, J. (2002) Strategic Corporate Tax Planning. Chichester: Wiley.Google Scholar
Kay, N.M. (2000) Pattern in Corporate Evolution. Oxford: Oxford University Press.CrossRefGoogle Scholar
Kaye, T.A. (2014) The offshore shell game: U.S. corporate tax avoidance through profit shifting. Chapman Law Review, 18: 185.Google Scholar
Keynes, J.M. (2016) General Theory Of Employment, Interest And Money. London: Atlantic.Google Scholar
Krugman, P. (1996) What economists can learn from evolutionary theorists. Available at: <http://web.mit.edu/krugman/www/evolute.html/>. Accessed 9 June 2020..+Accessed+9+June+2020.>Google Scholar
Kudrle, R. (2019) The continuing turmoil in international business taxation. Paper presented at the International Studies Association Annual Conference, Toronto, Canada.CrossRefGoogle Scholar
Lanz, R. and Miroudot, S. (2011) Intra-firm trade: Patterns, determinants and policy implications. OECD Trade Policy Papers, 114.Google Scholar
Lipietz, A. (1987) Mirages and Miracles: The Crisis in Global Fordism. London: Verso.Google Scholar
Marshall, A. (2009) Principles of Economics. New York: Cosimo.Google Scholar
Matheson, T., Perry, V.J. and Veung, C. (2013) Territorial vs. worldwide corporate taxation: Implications for developing countries. IMF Working Papers, 13(205).CrossRefGoogle Scholar
Mirowski, P. (1992) Against Mechanism: Protecting Economics from Science. Lanham, MD: Rowman and Littlefield.Google Scholar
Modigliani, F. and Miller, M.H. (1958) The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(3): 261–97.Google Scholar
Moss, L.S. (2010) Carl Menger's theory of exchange. American Journal of Economics and Sociology, 69(1): 266–89.Google Scholar
North, D.C. (1990) Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Orts, E.W. (2013) Business Persons: A Legal Theory of the Firm. Oxford: Oxford University Press.CrossRefGoogle Scholar
Palan, R. (2010) International financial centers: The British-Empire, city-states and commercially oriented politics. Theoretical Inquiries in Law, 11(1): 149–76.CrossRefGoogle Scholar
Palan, R. (2015) Futurity, pro-cyclicality and financial crises. New Political Economy, 20(3): 367–85.CrossRefGoogle Scholar
Palan, R., Petersen, H. and Phillips, R. (2021) Arbitrage spaces in the offshore world: Layering, ‘fuses’ and partitioning of the legal structure of modern firms. Environment and Planning A: Economy and Space, https://doi.org/10.1177%2F0308518X211053645.Google Scholar
Palan, R.P. (2020) An evolutionary approach to international political economy: The case of corporate tax avoidance. Review of Evolutionary Political Economy, 1(2): 161–82.CrossRefGoogle Scholar
Panayi, C.H. (2006) Treaty shopping and other tax arbitrage opportunities in the European Union: A reassessment - Part 1. European Taxation, 46(3): 104–11.Google Scholar
Partnoy, F. (2018) The law of two prices: Regulatory arbitrage, revisited. Georgetown Law Journal, 107: 1017.Google Scholar
Penrose, E.T. (2009) The Theory of the Growth of the Firm. Oxford: Oxford University Press.Google Scholar
Phillips, R., Petersen, H. and Palan, R. (2020) Arbitrating sovereign rules: Estimating the share of corporate income and profits controlled by OFC-based subsidiaries. Journal of International Business Policy, 4(2): 286307.CrossRefGoogle Scholar
Phillips, R., Pyle, J., and Palan, R. (2021) The Amazon Method: How to take advantage of the international system to avoid paying tax. CITYPERC Policy Report. Available at: <https://researchcentres.city.ac.uk/_data/assets/pdf_file/0009/607698/The-Amazon-Method-2021.pdf>..>Google Scholar
Polak, P., Robertson, D.C. and Lind, M. (2011) The new role of the corporate treasurer: Emerging trends in response to the financial crisis. International Research Journal of Finance and Economics, 78: 4869.Google Scholar
Robé, J.-P. (2011) The legal structure of the firm. Accounting, Economics, and Law, 1(1).Google Scholar
Rogers, M.A. (1981) Income Tax Law for Corporate and Unincorporated Bodies in Nigeria. By Ola, C. S.. Ibadan: Heinemann Educational Books (Nigeria), 1981. xx and 556 pp. Journal of African Law, 25(1): 4950.Google Scholar
Samuelson, P.A. (1938) The empirical implications of utility analysis. Econometrica, 6(4): 344–56.CrossRefGoogle Scholar
Shaviro, D. (2010) The rising tax-electivity of U.S. corporate residence. Tax Law Review, 64: 377.Google Scholar
Slemrod, J. and Wilson, J.D. (2009) Tax competition with parasitic tax havens. Journal of Public Economics, 93(11): 1261–70.CrossRefGoogle Scholar
Speck, S.G. (2015) The social boundaries of corporate taxation. Fordham Law Review, 84: 2583.Google Scholar
UNCTAD (2016) World Investment Report 2016: Investor Nationality - Policy Challenges. Geneva: UNCTAD.Google Scholar
UNCTAD (ed.) (2015) Reforming International Investment Governance. Geneva: UNCTAD.Google Scholar
Walras, L. (2013) Elements of Pure Economics. London: Routledge.CrossRefGoogle Scholar
Waterman, A.M.C. (2019) The evolution of ‘orthodoxy’ in economics: From Adam Smith to Paul Samuelson. The Independent Review, 24(3): 325–45.Google Scholar
Weber, M. (1978) Economy and Society: An Outline of Interpretive Sociology. Berkeley, CA: University of California Press.Google Scholar
Yablon, C.M. (2006) The historical race competition for corporate charters and the rise and decline of New Jersey: 1880-1910. Journal of Corporation Law, 32: 323.Google Scholar
Zucman, G. (2013) The missing wealth of nations: Are Europe and the U.S. net debtors or net creditors? Quarterly Journal of Economics, 128(3): 1321–64.CrossRefGoogle Scholar