28 September 2020

Money Disappears, Likewise Art

'The Wealth Defence Industry: A Large-scale Study on Accountancy Firms as Profit Shifting Facilitators' by Lena Ajdacic, Eelke M. Heemskerk and Javier Garcia-Bernardo in (2020) New Political Economy comments 

Corporations increasingly engage in innovative ‘tax planning strategies’ by shifting profits between jurisdictions. In response, states try to curtail such profit shifting activities while at the same time attempting to retain and attract multinational corporations. We aim to open up this dichotomy between states and corporations and argue that a wealth defence industry of professional service firms plays a crucial role as facilitators. We investigate the subsidiary structure of 27,000 MNCs and show that clients of the Big Four accountancy firms show systematically higher levels of aggressive tax planning strategies than clients of smaller accountancy firms. We specify this effect for three distinct strategies and also uncover marked differences across countries. As such we provide empirical evidence for the systematic involvement of auditors as facilitators in corporate wealth defence. 

 The authors state 

The growth of financial markets, ongoing financialization, and increasing financial fluidity enables corporations to shift profits, assets and costs from one region to another (Clausing 2016, Seabrooke and Wigan 2017, Tørsløv et al. 2018). This gives multinational corporations (MNCs) an advantage over states, and triggers tax competition among those states eager to retain and attract MNCs (Genschel, Kemmerling and Seils 2011). The consequences of this dynamic are difficult to ignore: the amount of profits shifted to low tax countries is 600–1100 billion US$ every year according to some of the latest studies (See e.g. Clausing 2016, OECD 2015, Janský and Palanský 2017, Tørsløv et al. 2018). The tax losses for states due to corporate profit shifting activities are increasingly seen as problematic as they lead to diminishing state capacities and to a distortion of fair competition mechanisms, as claimed by the European Commission (2015, 2016) and the OECD (2015). 

The growing literature on tax avoidance has had a keen eye for both innovative corporate ‘tax planning’ strategies (Lanz and Miroudot 2011, DeBacker et al. 2015, Wagener and Watrin 2014, Beer and Loeprick 2015) as well as for the regulatory role of states to counteract such strategies or mitigate its effects (Palan 1998, Genschel and Schwarz 2011, Rixen 2013, Haberly and Wójcik 2015, Genschel and Seelkopf 2016, Jones and Temouri 2016). But this is not the complete picture. There is a third key player in this game of tax avoidance and competition. We call this the wealth defence industry, formed by the professional service firms that provide tax services and the technical knowledge which companies need to develop their profit allocation strategies. According to the UK House of Commons the provision of tax services to companies and wealthy individuals forms an industry, ‘worth almost £2 billion each year in the UK, and £25 billion globally’ (2013, p. 7). And while ‘some tax advice results in transactions or restructuring that are undertaken for commercial reasons and are neutral, much of the advice is aimed at minimising the tax that wealthy individuals or corporations pay’ (UK House of Commons 2013). 

Suppliers of wealth defence services need to be able to trace legislative changes across countries, design and promote legal, accounting and financial vehicles to overcome national boundaries by carefully placing assets and liabilities in specific jurisdictions (Suddaby et al. 2007, Wójcik 2013). Accountancy firms stand out in the wealth defence industry as they are able to deliver on these requirements. Since the 1980s, the field of accountancy has undergone profound changes (Sikka and Willmott 1995, Teck-Heang and Ali 2008). Traditionally, the core business of accountancy firms was to provide financial accounting and auditing, thereby disclosing reliable information to investors, and contributing to financial stability (Arnold 2009). As a response to commercial pressures however, accountancy firms developed into lucrative business opportunities, expanding in particular towards consulting and tax services. With this reorientation, the profession changed from a predominantly domestic, relatively neutral expert guild into a high-fee-earning, multifaceted broker in the global economy. 

A series of mergers amongst the largest firms led to a high market concentration with the so-called Big Four accountancy firms dominating the market today. In addition to their advantage in terms of size, Deloitte, PricewaterhouseCoopers, E&Y and KPMG are multi-jurisdictional and cross-disciplinary, bringing together accounting, law, tax and supply chain management (see also Strange 1996). Several authors attribute a proactive role to accountancy firms in profit shifting (Strange 1996, Sikka and Mitchell 2011, Sikka and Willmott 2013). PwC, for example, developed innovative tax schemes for a multinational in the beverage sector, SABMiller, which led to large tax losses in several African countries (Sikka and Willmott 2013). Recently, the Paradise Papers leaked confidential documents which showed how Deloitte and PwC provided tax advice for their client Blackstone, a private equity group. They carefully outlined each step that Blackstone should follow to minimise various types of tax liabilities in multiple countries (www.icij.org). After these revelations, the Council of the European Union urged tax planners to provide more transparency about their activities (2018). 

We respond to the growing call for more insight into the role of suppliers in tax innovation by introducing the wealth defence industry as a key player and ask a simple yet pertinent question: how and to what extent do accountancy firms influence the wealth defence strategies of their corporate clients? Our investigation is informed by previous insights on this matter, gained mainly through journalistic investigations, leaks and in-depth case studies. Our objective is to provide a systematic analysis across a large number of firms and jurisdictions. 

We are particularly interested in how firms use their subsidiary network as tools for their wealth defence. Jones et al. (2018) give an excellent example of work that establishes a systematic understanding of the extent to which accountancy firms are involved in the wealth defence business. Investigating 6,000 multinational companies, they showed that clients of the Big Four have a higher presence in offshore jurisdictions than other companies. We build on this research approach and conduct a large-scale analysis of subsidiary structure-related tax planning strategies for about 27,000 multinationals and ask how these strategies are related to the auditors of the companies. By applying mixed multivariate regression models, we are able to differentiate between the influence of the Big Four auditors and the influence of other firm level and country level variables. In particular we study how Big Four presence at MNCs relate to three types of strategies that reflect the tax aggressiveness of corporations: those aimed at utilising the benefits of Offshore Financial Centres (OFC); those aimed at using particular corporate forms (holding or management entities) to reduce tax burdens; and those that use particular complex corporate ownership structures to increase the coordination efforts of tax authorities. 

As one of the first large scale empirical investigations into the wealth defence industry, our work is necessarily of an exploratory nature. We offer a novel analysis on tax planning strategies by multinational corporations using the largest dataset available today; we add to previous work by taking into account the multidimensionality of wealth defence and therefore consider not one but three tax planning strategies; we expand previous work on the use of offshore financial centres by MNCs by considering the role of both sink and conduit OFCs (Garcia-Bernardo et al. 2017); and finally we are able to show how the influence of accountancy firms on corporate wealth defence structures varies across countries. We find that being audited by the Big Four accountancy firms indeed increases the use of OFC subsidiaries as well as holding and management subsidiaries for firms with a large international exposure, and that clients of the Big Four have a higher subsidiary network complexity if measured in terms of depth and entropy. Our findings underscore the important role of the wealth defence in the fundamental political economic struggle between states and corporations. 

The remainder is structured as follows: First, we introduce the concept of the wealth defence industry. Second, we zoom in on the historic context for accountancy firms as key players in this wealth defence industry. This allows us to develop propositions on the role of accountancy firms for aggressive tax planning strategies of MNCs. Subsequently, we introduce our research design and dataset, followed by the empirical results regarding auditor involvement in wealth defence strategies. Finally, we discuss the insights gained through this study as well as the limitations we still face.

'The nomos of the freeport' by Stefan Schwarzkopf and Jessica Inez Backsell in (2020) Environment and Planning D: Society and Space comments 

 This article provides a genealogy of the freeport, which are tax-free warehouse facilities for collectors and investors to store artwork and other luxury collectibles in a way that exempts them from customs duties and taxes. The case of the freeport raises questions about the fate of art in neoliberal wealth management regimes, but also questions about the geopolitical and spatial nature of financialized capitalism. The article works with Carl Schmitt’s theory of the spatial framing of political–economic orders around the juxtaposition of land and sea and shows that freeports detach themselves from this oppositional logic. Further, we propose that a full understanding of the freeport as space–time arrangement needs to take recourse to a particular medieval theological concept, namely that of purgatory. Based on this interpretative framework, we argue that mobility-oriented sociological concepts are insufficient to grasp the nature of the freeport.