Empty threats

Theresa May’s threat for Britain to set up as a corporate tax haven after Brexit is empty.

King Lear, Act 2, scene 4:

Lear: No, you unnatural hags,
I will have such revenges on you both,
That all the world shall—I will do such things,—
What they are, yet I know not: but they shall be
The terrors of the earth.

This is very much the Trump style. I’ll cancel the Paris Agreement! Mexico will pay for the Wall!

Making credible threats is still an essential part of diplomacy. An Fengshan, spokesman for China’s policy-making Taiwan Affairs Office, said on 14 December :

Upholding the ‘one China’ principle is the political basis of developing China-US relations, and is the cornerstone of peace and stability in the Taiwan Strait. If this basis is interfered with or damaged then the healthy, stable development of China-US relations is out of the question, and peace and stability in the Taiwan Strait will be seriously impacted.

Major national interest? Check. Means to deliver on threat? Check. Careful wording allowing plenty of space for future escalation? Check. This threat is serious. Like this one.

https://www.youtube.com/watch?v=q2CX20bBNJE

You can also go wrong by being too specific. Theresa May, in her Brexit speech on January 17:

While I am sure a positive agreement can be reached – I am equally clear that no deal for Britain is better than a bad deal for Britain. Because we would still be able to trade with Europe. We would be free to strike trade deals across the world. And we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain. And – if we were excluded from accessing the Single Market – we would be free to change the basis of Britain’s economic model.

What had she been drinking?

A threat by a country of 64 million to set up as a tax haven at the expense of a neighbouring trade bloc of 446 million is not credible. The larger unit simply has too many ways of hitting the mobile international companies that might be tempted. You do business here, you pay our taxes. In this case, Colbert’s dictum that taxation is “pulling the goose’s feathers with the least amount of hissing” does not apply: the governments of the 27 remaining EU countries have a political interest in making Brexit painful. It is wishful thinking to suppose that this will be swept away by an economic interest in trade. And shifting corporate taxation is a zero- or negative-sum game.

Going into the details does not help May’s case. From time to time, politicians like Sarkozy turn a momentary spotlight on the tax havens. The pressure fades – but there is now an expert tax forum at the OECD, and the menu for doing something is getting much clearer.

The simplest solution is formulary apportionment  (aka unitary taxation) of corporate profits across tax jurisdictions. The total profits of a public company are declared credibly to their stockholders. You stop giving any credit to the creative accounting by which firms shift profits to low-tax jurisdictions: it is their home turf and you can’t beat them on it. So change the rules entirely. You allocate the total declared profits across countries according to more objective indicators of real economic activity, like sales, value added, capital stock or payroll.

This scheme is already applied for state corporate taxes within the USA and Canada, so there are no killer objections of principle to extending it across borders. There would be many technical difficulties: an agreed standard for profits (GAAP or IFRS?), and the choice of objective indicators of activity. There would also be political ones, there being many losers as well as winners and an overall gain.

So far, the tax havens have survived. How do they do it? First, it’s a vital interest for Luxembourg, Switzerland, Liechtenstein, Jersey, Panama, the Cayman Islands and the rest. They field their A teams in the committees all the time. The interest of the big countries that would gain goes up and down, and is reduced by conflicts of interest – maybe outright corruption, I hope not but it’s a possibility. Second, the tax havens give ground when they must. Banking secrecy has just about gone. The flickering spotlight has shifted to “tax efficient” and opaque corporate structures.

Still, the survival of tax havens, like shipping flags of convenience, is an anomaly. If big, powerful countries and blocs really had a mind to it, they could roll over both in a week. We saw this with Swiss banking secrecy after 9/11.  A second moment of truth came with Google’s Apple’s Irish tax break. The EU Commission has sent Google Apple a bill for back tax – for €13bn. This has to be paid to the Irish government, which is fighting in a stereotypically Irish way not to be paid.

Any attempt by a post-Brexit UK to set up as a giant tax haven would arouse furious and united EU opposition. It would overcome the many hesitations and technical obstacles that have so far prevented radical European action on international corporate taxation. The EU can find ways to present Google and Microsoft with a simple choice: do business with us and pay tax, or with little Britain, and good luck to you.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

11 thoughts on “Empty threats”

  1. There was a time we ignored credible threats and it bit us in the ass:

    "By the end of the month, the US Ambassador in Moscow reported that Soviet and Chinese contacts told both the British and Dutch Ambassadors that if foreign troops cross the 38th parallel, China would intervene.[27] This specific warning was also repeated to various journalists, and on 29 September, the Associated Press in Moscow reported that both China and the Soviet Union would take a “grave view” of US forces crossing the 38th parallel.[28] Finally, at the end of the month, in a major public policy address celebrating the first anniversary of the establishment of the People’s Republic of China, Zhou En-lai branded the United States as China’s worst enemy and stated that China will not allow a neighbor to be invaded.[29]

    Once again, these warnings were ignored, and US-UN forces continued to push the DRPK forces northward. On 2 October, Mao cabled Stalin advising that China would intervene and asked for Soviet military assistance.[30] Three days later, the CCP Central Committee officially decided to intervene.[31] US intelligence, however, continued its reporting theme that while Chinese capability was present, Chinese intent was lacking. On 6 October, the US Joint Intelligence Indications Committee stated that the Chinese capability to intervene had grown, but the Chinese threat to do so was questionable.[32] That same day, the CIA Weekly Summary advised that the possibility of Soviet or Chinese intervention continued to diminish. It also restated the belief that Soviet requirements would drive any such decision."

  2. Point of Information – it is Apple, not Google, that the EU fined $13bn. Being Irish, I will not comment further, except that there is a saying in Gaelic that translates as "If you are not strong, you better be smart". The small countries you list would see it that way. But the time for those types of smarts is probably up. Morally, Ireland is probably not entitled to the money anyway.

  3. The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers, with the smallest possible amount of hissing. — Jean-Baptiste Colbert
    http://www.wife.org/taxfactsandquotes.htm

    Taxation is the gentle art of picking the goose in such a way as to secure the greatest amount of feathers with the least amount of squawking.
    http://www.ivdgl.org/pages/c-taxhaha/dir-humor.ht

    Jean-Baptiste Colbert
    The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.
    http://quotations.about.com/od/moretypes/a/taxquo

      1. Unable to respond to ‘Parlez-vous français” affirmatively I resorted to http://dicocitations.lemonde.fr/ and found you have stated: "The art of imposition consists in plucking the goose to obtain as many feathers as possible." I have always heard the quote with the inclusion of a lack of protest from the goose.

  4. Different kinds of threats have different main audiences. The main audience for empty threats is members of the threatener's tribe, who hear "I'm on your side against all those nasty people who say what we're doing is stupid, wrong and self-destructive." The very emptiness of the threat may serve to reassure the secondary audience, thus reducing the likelihood of immediate retaliation.

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