Swiss National Science Foundation Visiting Fellowship
Where and how much tax large corporations pay is an issue that has high public and political salience. This became very clear when 135 countries signed up to the Organisation for Economic Cooperation and Development (OECD) and the G20’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in 2021. This scheme aims to curb aggressive tax competition—when states cut corporate tax rates and deregulate in order to attract foreign direct investment. The literature on tax competition has established that governments set tax rates in response to one another (Devereux et al., 2008). The long-predicted race to the bottom of tax rates (for a review, see Wilson, 1999) has not come to pass, however. Explanations for variation in corporate tax rates between states were drawn in early analyses from classic theories of the structural power of business, but more recently, political (political ideologies, trade unions etc), institutional (veto players and regimes types), and socio-economic (dept-to-GDP ratios) accounts have been put forward (Lierse, 2021).
The proposed research suggests an additional, complementary explanation: that the creation, sustenance, and reinvention of so-called ‘BEPS-tools’—aggressive tax planning structures which facilitate base erosion and profit shifting— is subtly rebalancing the structural power dynamic that exists between transnational corporations (TNCs) and offshore financial centre (OFC) states. That is, TNCs like Apple, Alphabet, or Johnson and Johnson, some of the largest corporations in the world, should have all the structural power in a system where they have complete discretion over (dis)investment decisions; yet, if an OFC can tailor a tax environment to a specificity that is hard for a firm to replicate elsewhere, this weakens a firm’s exit option strategy and, in turn, strengthens the OFC’s structural power. I argue that the nexus formed of professional services firms and the state within the ‘international tax ecosystem’ (Laage-Thomsen & Seabrooke, 2021) can create a ‘golden cage’, which TNCs find difficult to escape, thus empowering large OFC states to not engage in the beggar-thy-neighbour tax competition, that is, states are using their structural power strategically (Culpepper, 2015). I further argue that this explanation is complementary to extant theories on tax competition, and helps better explain the strategies and successes of Conduit-OFCs such as the Netherlands, Ireland, and Switzerland (Garcia-Bernardo et al., 2017), who have well developed professional services ecosystems.
The project is organised into three work-packages (WPs), (1) Create, (2) Sustain, and (3) Reinvent, with a proposed output of (at least) two major conference presentations, two blogposts in major academic websites, and three articles in top-tier journals. WP1 Create examines the state-professional services nexus necessary to provide a successful environment for BEPS-tool creation, and the structural power dynamics between an OFC state and TNCs. WP2 Sustain investigates how the control over meaning and ideas by professional services firms (Carstensen & Schmidt, 2016; Seabrooke & Wigan, 2016), combined with how states can wield productive, institutional, and structural power (Barnett & Duvall, 2005), enables BEPS-tools to be sustained in the face of legal, political, and popular challenge. WP3 Reinvent creates a publicly available original database of BEPS-tools, to investigate the extent to which these tools influence foreign direct investment (FDI) stocks in OFC states. WP1 Create will produce one cross-sectoral case-study for its journal article; WP2 Sustain will produce a research note focusing on policy implications; and WP3 Reinvent will produce a cross-temporal and cross-sectoral quantitative analysis of the structural power argument for the third article. The aim of the produced outputs is to disseminate not only high-quality research which will have theoretical and empirical contributions along with an open-access database, but also to help inform and facilitate better, fairer tax policymaking.
Dr. Ciarán O'Flynn 