Fiscal investments: a journey against globalization

The silhouette of a large-sized liner, with flag of convenience, sailing as a luxury touring residence of billionaires without physical relationship with any State that would tax their incomes, was the protagonist of an article of fiction that I read 20 years ago. I had not thought again in the great transatlantic until has reminded me the alarm bells rang in Washington by a rush of so-called fiscal investments of U.S. companies: purchases of one company by other to shift its headquarters to the jurisdiction of lower taxation of that acquired After Pfizer tried, without success, take control by 69.4bn of British AstraZaneca, took place the purchase by Burger King of the Canadian Tim Hortons by 11.4 bn. Also, the announcement by Mediatronic (a group of medical instrumentation) that will purchase by 42.9 bn Covidien, based in Dublin.  And that from AbbVie, (a pharmaceutical), that she will do the same with UK Shire by 54bn. All these deals have given rise to a rare consensus between Democrats and Republicans on the need to take measures to put difficulties to this run away of, in the words of President Obama, tax deserters.

Could be interesting to think on what determines corporate “citizenship”. Burger King ultimately is controlled by a group of “private equity” Brazilian. Also thinking on the right rate of corporate tax to avoid confiscatory percentages when accumulate with the personal taxation of their owners. However, today I will focus on the efficient cause which makes possible the phenomenon of fiscal investment, which is none other than the mismatch between the world economic system, based on the free flow of goods and capital that we call globalization, and the political system that remains at the State level.

States were born to ensure that free movement within its borders, function that develop through a legal system which guarantees the property rights, and defend it front external aggressions. Also to provide communications and transport infrastructures, as well as, later on, to give education and to train the population in the skills that employers need, are State’ missions that they still keep. Tax levies on the companies are justified to obtain resources that pay for such activities and are determined by the corporate domicile or location of their effective management.

The globalization’ legal system, resulting from multilateral and bilateral inter-country agreements, allows goods and capital of a company based in a jurisdiction be traded elsewhere. So, has all the business logic to search the fiscally most advantageous location. However, two of their consequences call into question the sustainability of this process.

The first one is that this practice weakens financially the State, provider of the services necessary for the development of economic activity. In the Pfizer and AbbVie sector, for instance, to the General’s defense of the legal framework, to build infrastructures and to train populations, adds one so critical as financing the wave of research on which pharma companies surf for the discovery of new drugs, as well as to maintain the national health systems that create demand for these medicines.

The second consequence brings us to that other tax payers, small and medium enterprises and individual citizens, will see raise their tax bills to keep those State functions running, as stated a few days ago the US Treasury’ Secretary, Jack Lew, with the consequence of social unrest and a demand for reactive policy measures that it entails.

Returning to the ocean liner of that fictional story, if these consequences take place, his pleasant sailing will become uncertain. In many places there would be no updated wharves where to be moored, in other harbours would ban his entrance or they would require him towering mooring rights or, if seeking help in the presence of pirates, the U.S. Navy not would give that. Perhaps now is time to change the economic globalization course and to avoid her to die of success, to introduce forms of political globalization, of global governance, which ensure that the contribution of enterprises to the public expenditure does not depend on their greater or lesser mobility.

Enric R.Bartlett Castellà
Associate Professor of Public Law
ESADE Law School (Ramon Llull University)

This article was published in Spanish on Tuesday 23 September 2014 in Expansión. P. 62

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