Passage to Panama: Nation States, Taxation and Multinational Enterprise in the Twentieth Century II



Taxation, a foundation stone of nation states and modern democracy, has also been a fulcrum where the logic of sovereign states and the interests of international businesses clash. The recent publishing of the so-called Panama Papers, increasing the level of criticism against the global plutocracy and the flagrant business practices of MNEs, riveted the public’s attention on this aspect of the globalized economy. However, although attempts by MNEs to minimize the amount of taxation levied by state authorities is not a new phenomenon, the historical antecedents of the utilization of devices such as tax havens remains a largely unexplored field of study in the standard, scholarly literature. On the basis of an interdisciplinary approach, the intention in this seminar is to provide new insights and perspectives on how the ‘Passage to Panama’ developed in the course of the twentieth century. Albeit interdisciplinary in nature, the research questions underlying this project have a profound relationship to the ’core‘ research questions of conventional business history, namely the problems of strategy and structure. A variety of forms of organizations, such as holding company, shell-company, voting-right-trust, Interessengemeintschaft and complex structure of a variety of corporate forms were adopted to cope with what were perceived as unacceptable levels of taxation and political risk. In conventional views on the development of ’modern‘ big businesses, a linear development from simple company to holding company and, further, to the diversified divisional structure has been assumed. Although such a classical Chandlerian view has been intensely contested in the last two decades, attention to the variety of ’organizational designs‘ and legal setups have been largely out of scope for scholars, leaving room for re-interpretation of organizational innovations from a new perspective – an international and transnational comparative study of the complex interactions between nation states, taxation and MNEs that gave rise to the ‘passage to Panama’.

Offshore and off the beach: Gentlemanly Capitalists, the City of London, and the development of island tax havens

Kristine Sævold (University of Bergen) and Simon Mollan (University of York)

Gentlemanly Capitalism is a historiographical interpretation of international economic history (Cain and Hopkins 2002; Cain and Hopkins 1994). Its central argument is that in the UK a fusion of the interests of the aristocracy and landed gentry with that of the emerging financial elites created conditions for the creation of a “gentlemanly order”–an international political economy of finance and elite socialization (Dumett 1999; Daunton 1989). The outcome of this was the development of modern capitalism, British imperialism, and the centrality of the City of London to the world economy, especially before 1914 when taxation was very light, regulation was limited, and government intervention in the economy was minimal. This Gentlemanly world was fractured by the two world wars, the great depression, and then by decolonization and the rise of American capitalism–along with increasing international taxation, regulation, and models of economic governance that required much greater state intervention (Michie and Williamson 2004). This eroded the political-economy on which the Gentlemanly order was based. As an agglomeration economy, the City transformed from being both an international commercial and financial center to being solely focused on finance. The cosy world of Gentlemanly finance that existed in the 1950s and 1960s gradually crumbled, to be replaced by the faster pace of late 20th and early 21st century international finance–a revival that was based on the City developing new “offshore” activities, notably the Euromarkets and international banking (Mollan and Michie 2012; Augar 2008; Schenk 1998; Schenk 2010; Cassis 2010). This paper addresses a neglected aspect of this story, which is the ways in which the island tax havens partially replicated the institutional structures, economic agglomerations, and laissez faire business environment, of the pre-1914 City of London in the mid-20th Century. The paper takes a trans-historical comparative approach. The central argument that we develop is that the patterns of the emergence of the island tax havens created "mini-Cities of London” that mirrored many of the original functions of the City as a headquarters location and clustering of commercial services. In addition, the island tax havens recreated the low taxation, limited regulation and minimal government intervention of the pre-1914 era, while also affording wealthy financial and business elites a lifestyle–off the beach–that enabled the Gentlemanly order to endure much longer than has generally been thought.  The paper makes a broader contribution to the literature on tax havens (see, for example, Ogle 2017; Palan 2006) by re-interpreting the history of havens in the context of City historiography, including its cultural and social aspects.


'Foreign capital seems to have settled permanently in The Netherlands.' The role of tax evasion in the rise of Amsterdam as an international financial centre, 1914-1940.

Jeroen Euwe (Erasmus University Rotterdam)

The outbreak of the First World War triggered the emergence of Amsterdam – at the time a financial backwater – as the most important international financial centre of continental Europe during the interwar period. This emergence of Amsterdam was in part caused by the monetary instability in most of Europe during and especially in the aftermath of the war, which caused a flow of money into countries that were seen as safe havens. However, according to contemporary reports in both the popular and the professional press, tax evasion was as much of a driving force as fear of inflation. This is not surprising, since taxation increased significantly in both the former central powers as well as allied nations. In 1937, W.J. Hartmann concluded in his dissertation on the development of Amsterdam as a financial centre that 'foreign capital seems to have settled permanently in The Netherlands,' for an important part because of fiscal reasons. This paper will be a preliminary exploration of how the rise of Amsterdam as an international financial centre is linked to its role as a safe haven for foreign capital, and particularly as a tax haven. It will especially focus on the origin of this flight capital, and the role of the fiscal, judicial and institutional frameworks that made Amsterdam a favourite destination. Its aim is to provide a starting point for a discussion on possible approaches for a research project on this issue.


Fiscal legislation during the German occupation

Hein A.M. Klemann (Erasmus University)

In the 1930s, it was clear already that the Dutch tax system was old fashion and inefficient. Officials of the Finance Ministry and fiscal experts agreed that a modern legislation, with an income tax, a withholding tax on wages, compensations for social circumstances, taxation of profits and corporation taxes were absolutely necessary, but Parliament refused to cooperate. Therefore, shortly after the cabinet left and the officials of the ministries could introduce legislation without worrying about the opinion in Parliament, new legislation was introduced. From 1941 the Netherlands had an income tax withholding tax on wages with compensation for families with many children – the highest ministerial official was a Catholic. Under German pressure a tax on profits over 6% of corporations was introduced. In 1941 the Dutch ministry of Finance was split, and the taxation system became an independent organization, officially under a Dutch official, but de facto under dr. Rudolf Rinkfeil. Rinkefeil was a German fiscal specialist who introduced the modern German taxation system in the Netherlands, including profit and corporation taxes. As a consequence, tax pressure increased from 10-12% to 25%. As after the war, the Social-democratic and Catholic coalition governments wanted to introduce a modern welfare state with a well-developed social security system, such a high level of taxation was needed. Therefore, they accepted the German system.  


“Safe haven Curaçao”: the origins of a Dutch offshore centre, 1915-1960

Marten Boon (NTNU, Trondheim) & Ben Wubs (Erasmus University, Rotterdam)

The historical significance of OFCs derives not from their individual characteristics but from their place and connectedness in a growing transnational financial system that emerged from the tensions between mobile capital and the rise of the centralised, tax-levying state in the 20th century. This paper addresses these issues through a case study of the Netherlands and its crown dependencies in the Netherlands Antilles as a transnational network of OFCs funnelling international capital flows since the 1920s. The paper questions when, how and why the Netherlands, including Curaçao, emerged as OFC, and focuses on the interaction between Netherlands Antilles and Dutch authorities on the one hand and financial corporates, entrepreneurs and Dutch multinationals on the other.

The paper aims to research the rise of Curaçao’s Tax Haven within the larger context of major shifts in the world economy in the first half of the 20th century and changing organisational structures of multinationals and international markets. Firstly, we argue that the birth of Curaçao as an OFC at least dates back to the beginning of the Second World War when Dutch multinationals like Royal Dutch Shell and Philips transferred their legal seat to the island. Secondly, we argue that the island’s recognition as a safe haven during wartime and its subsequent evolution as an OFC, was also a function of the Dutch experience as an OFC in the 1920s. Moreover, as the Netherlands extended its network of tax treaties and developed into an OFC in its own right over the course of the century, Curaçao became an integral part of the international tax planning infrastructure. In addition, we argue that the outsized role of Royal Dutch Shell on Curaçao since the 1910s made the island an important element in Dutch corporate fiscal planning as well as priming the Netherlands Antilles’ fiscal policies in the twentieth century.


Multinational Enterprise, Profits and Taxation: the Anglo-Persian Oil Company in the 1920s

Neil Forbes (Coventry University, UK)

Capitalist development from the nineteenth century has constantly posed questions for the way the state is structured and functions and led, not infrequently, to interventionist solutions. The coming of the First World War and the subsequent collapse of the old empires marked the beginning of the end of what is thought of as the fist wave of globalization. It was certainly an enormous external shock for multinationals, which had already extensive global networks of FDI. At the same time, national governments were looking to raise ever higher amounts of revenue through taxation in order to meet the welfare demands of working-class electorates. On the one hand, national governments regarded the measures taken by MNEs as a threat to their sovereignty. On the other hand, most major economic powers supported the creation of ’safe-havens‘, or loopholes of one kind or another, to safeguard international business domiciled in their country.

The intention in this paper is to provide a new insight and perspective on such developments in the 1920s, by re-examining the activities of the Anglo-Persian Oil Company – a predecessor of BP – in its disputes with Persia over royalties, and its relationship with the British state, which itself had major interests in the Anglo-Persian, over profits and taxation. Did this symbiotic relationship between a strategically important MNE, controlling vital natural resources, and the state amount to a Faustian bargain that represented the interests of an embryonic military-industrial complex? Or was it more a reflection of the growing interdependence between institutions that characterized the development of the modern, corporatist state?  Such an historical study of the taxation-MNE relationship can contribute, therefore, not only to international business history, but also to a greater understanding of the nature of sovereign states and international politics.


The Sweet Tax Haven Back Home

Antonie Doležalová (Charles University, Prague)

There is no research or literature that focuses on tax havens in the Czech historiography.   Therefore my paper is going to be based on my existing research of the interwar Czechoslovakia`s budget policy and deal with a hypothesis that it was the state`s tax policy that opened the door for a search of tax havens.

Czechoslovakia was founded upon the ruins of Austria-Hungary on the 28th October  of 1918.  All of the Czechoslovak 18 governments agreed on relatively extensive state interventions in the economy that manifested themselves by state protectionism, nationalisation, monetary and land reform and the so-called nostrifikace [domestification] of industry.

Following the establishment of independent Czechoslovakia, the state budget was regulated by Act No. 11/1918 Code of Law, according to which all the acts of the former monarchy remained in effect. From the very beginning it was obvious that firstly, compared with the Austrian budget, Czechoslovak expenditures rocketed. It became clear, with increasing urgency that the Austrian budget policy  would not be able to cover all of the new state's requirements. And secondly, there was a rising trend of planned and actual budget deficit and a rising trend of tax burden.

At the same time, the new state was not able to collect the required taxes and hence introduced a new taxes and continuously issued  new and new state obligations including the National Freedom Loan obligations. With them, the state introduced a complicated system of tax incentives and tax concessions by which the state brought into the tax system not only an element of uncertainty but also created an uneven status for the different tax payers depending on their relationships to the economic-political elites. The state therefore created  a tax haven for concrete tax payers directly in their own country.


The Real Effects of Tax avoidance

Mintra Dwarkasing (Erasmus University), Narly Dwarkasing (Erasmus University), Jasmin Gider (Tilburg University) and Yiqing Lu (NYU Shanghai)

This paper investigates the impact of tax avoidance on financing and investment decisions by firms. Tax avoidance can increase internal funds available, but it may also increase opacity, which can aggravate financing constraints. We build a simple theory that predicts that if the opacity cost of tax avoidance outweighs the benefit of reduced tax burden, then investment and investment-cash flow sensitivity may go down due to tightened financial constraint. Empirically, we exploit differential exposure to a stark change in tax avoidance opportunities, unexpectedly and unintendedly caused by entity classification rules in 1997 (so called Check the Box regulations) for firms that have foreign subsidiaries in place, and firms that do not. Firms with foreign presence increase their tax avoidance activities more pronouncedly following CTB. Constrained firms do not increase investment, but experience rating downgrades, and pay out more dividends. Their investment-cash flow sensitivity declines. These findings are inconsistent with the hypothesis that tax avoidance alleviates financing constraints and promotes investment.