Group subsidiaries, tax minimization and offshore financial centres: Mapping organizational structures to establish the
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Group subsidiaries, tax minimization and offshore financial centres: Mapping organizational structures to establish the ‘in-betweener’ advantage Richard Phillips1, Hannah Petersen1 and Ronen Palan1 1
City, University of London, Northampton Square, Clerkenwell, London EC1V 0HB, UK Correspondence: R Palan, City, University of London, Northampton Square, Clerkenwell, London EC1V 0HB, UK e-mail: [email protected]
Abstract International business and public policy research have examined the techniques that multinational enterprises (MNEs) use to shift revenues to subsidiaries in offshore financial centres (OFCs) in order to minimize tax liability and arbitrage for their advantage. While study of such tax arbitrage strategies has looked to geographical locations and legal dimensions to better understand these strategies, it has ignored the structural and organizational relationship between MNEs and their subsidiaries. We define two distinct types of OFCbased corporate entities based on their location among and apparent control over other MNE affiliates: ‘stand-alone’ OFCs at the end of a chain of MNE subsidiaries; and ‘in-betweener’ OFCs with equity control over further entities and hence apparent flexibility to redirect profits to other MNE subsidiaries further down the chain. We hypothesize that when MNEs have in-betweener OFCs controlling a substantial share of overall MNE profits, this indicates greater MNE interest in aggressive tax planning (ATP). We then evaluate empirical support for our claims based on an ‘equity mapping’ approach identifying stand-alone and in-betweener OFCs in 100 of the largest MNEs operating globally. This study demonstrates that a key factor determining tax arbitrage is not the amount of value registered on OFC subsidiaries’ balance sheets, but rather the portion of the group’s operating revenues and net income controlled by OFC subsidiaries. National taxing authorities could benefit from tracking in-betweener OFC locations and behaviour to counter ATP strategies, decrease sovereign arbitrage, and increase MNE tax revenue. Journal of International Business Policy (2020). https://doi.org/10.1057/s42214-020-00069-3 Keywords: multinational enterprise; MNE subsidiary; MNE organizational structure; offshore financial centre; tax arbitrage; legal jurisdiction
Electronic supplementary material The online version of this article (https://doi.org/10.1057/s42214-020-000693) contains supplementary material, which is available to authorized users. Received: 6 December 2018 Revised: 20 March 2020 Accepted: 23 May 2020
The online version of this article is available Open Access
INTRODUCTION In this paper, we propose that the location and structure of multinational enterprise (MNE) subsidiary entities registered in offshore financial centres (OFCs) position those MNEs to engage
Offshore financial centres
more easily in tax arbitrage among national tax authorities as part of a broader tax minimization strategy. We identify two types of MNE subsidiary entities located at different points in an
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