Corporate structural change for tax avoidance: British multinational enterprises and international double taxation between the First and Second World Wars

ABSTRACT

This study demonstrates the actual impact of international double taxation on the management of British multinational enterprises between the First and Second World Wars. In particular, it focused on tracing the process by which the tax-minimisation strategy affected corporate-level strategy. In three cases examined using corporate archival sources, the companies reorganised their corporate legal structure for tax avoidance. Yet the effects on their management were not uniform. (1). The corporate structural change for tax avoidance of Rio Tinto and Silica Gel Corporation did not alter the extant corporate strategy. (2). Tax strategy of Imperial Continental Gas Association entailed changing extant corporate strategy. (3). The legal structure of Unilever gradually and unintentionally influenced the extant corporate strategy. These heterogeneous responses of the firms imply that the institutional pressure of a tax law does not always lead to organisational isomorphism and can affect the corporate-level strategy over time.

KEYWORDS:

• International taxation
• international double taxation
• international business history
• business history
• history of tax law
• institutional theory
• new institutionalism
• international tax system
• British multinational enterprises
• World War I
• interwar period
• World War II

Acknowledgements

I would like to thank Takafumi Kurosawa, Ray Stokes, Junko Watanabe, Duncan Ross and Neil Rollings for their precious advice, as well as referees, whose remarks greatly improved this article. All remaining errors are my own.

Disclosure statement

No potential conflict of interest was reported by the author.

Data availability statement

The authors confirm that the data supporting the findings of this study are available within the article and its supplementary materials.

Notes on contributor

Ryo Izawa is associate professor at Faculty of Economics, Shiga University, Japan. He holds a PhD in Economics from Kyoto University and specialises in business and economic history.

Notes

1 A report showed that 83 per cent of the largest US companies and 95 out of the 96 largest quoted companies in the UK, the Netherlands and France had tax haven subsidiaries (Tax Justice Network, 2009). Besides, 4 of listed 60 Canadian companies reported no subsidiaries in known tax haven jurisdictions (Gibson, 2017).

2 The following works show brief histories of international tax system before the Second World War; UK: Picciotto (1992), Avery-Jones (2009, 2013), US: Graetz and O’Hear (1996), Japan: Fuchi (2016).

3 The trend appears to be changing when we look over the recent articles’ titles of Business History. See, Deconinck, Poelmans, and Swinnen (2016); Chick (2018); Pittaki (2018).

4 E.g. Unilever: Wilson (1954a, 1954b), Courtaulds: Coleman (1969), Brunner, Mond: Reader (1970, 1975), Imperial Continental Gas Association: Anon (1974), United Africa Company: Fieldhouse (1994), British American Tobacco: Cox (2000), Royal Dutch Shell: Jonker and van Zanden (2007).

5 Mulligan (2008) and Hong (2012) performed experimental studies, under the same concern as Glaister and Hughes (2008), by using interview and questionnaire methods.

6 See, Hutzschenreuter and Kleindienst (2006), Hitt et al. (2017).

7 See, Tilcsik (2010), Bromley and Powell (2012).

8 For instance, let the income of Country B’s Branch Y of parent Company X, residing in Country A be 100, A’s tax rate be 20% and B’s tax rate be 15%. Under the foreign tax credit introduced in the UK during the period, income after tax = 100 − (100 × 0.15) – {100 × (0.2 ÷ 2)} = 75. Under the foreign tax deduction, income after tax = 100 − (100 × 0.15) − {(100 − 100 × 0.15) × 0.2} = 68.

9 Before 1945, the UK had only concluded a comprehensive bilateral tax treaty with Ireland Free State in 1926. In contrast, there were 54 treaties, mainly within continental European countries. Between 1945 and 1955, the UK made 60 tax treaties (50 treaties with Dominions and Colonies; 10 treaties with other countries). See, Avery-Jones (2009, p. 231) and Avery-Jones (2013, p. 29).

10 Changes of corporate domicile, it must be the typical technique to avoid international taxation during that period. In fact, when the Second World War broke out, the British government first prevented the way and promulgated article 6A of the Defence (Finance) Regulations, 1939. The rule of ‘the prohibition of transfer of businesses abroad, &c’ demanded that firms were not able to transfer their corporate domicile, except with the consent of the Treasury (H.M. Stationery Office, 1941). The regulation really applied to the case of Great Boulder Proprietary Gold Mines on 27 Sep. 1940, in spite of the fact that an extraordinary general meeting of the company had approved the transfer of domicile to Australia one week before (The Times, 1940a, 1940b).

11 In 1928, Rio Tinto purchased a 10% interest in Silica Gel Corporation (Harvey, 1981).

12 As for the Federal extraordinary war tax, a holding company with a capital of Swiss Fr. 500,000 (of which Fr. 250,000 are paid up) and a net profit of Swiss Fr. 25,000 had to pay Swiss Fr. 2,109.35 every four years. The details were as follow: Tax on paid-up capital of Swiss Fr. 3,375 (Swiss Fr. 250,000 × 0.0135), Tax on non-paid-up capital of Swiss Fr. 843.75 (Swiss Fr. 250,000/4 × 0.0135), Half exemption for holding company. Then, annual rate of the federal tax was almost 2.1%. The Cantonal taxes on privileged holding company in Geneva were 1% on the paid capital and 0.5% on the non-paid capital. When the holding company was located in Cologny, a municipality in the Canton of Geneva, the company only paid extra 6% of Cantonal tax. On the other hand, when the holding company was located in Geneva Town, it had to pay more taxes (e.g. Taxe professionnelle fixe). Thus, Cantonal and local taxes in Geneva was 1.6–4% in the above-mentioned company’s case (Rio Tinto, 1928c).

13 Three Swiss: Gustave Dunant (Banker, Geneva), Pierre Lombard (Banker, Geneva), and Eugène Borel (Lawyer, Geneva).

14 When the Silica Gel S. A. was registered in 1929, the 1000 shares were monopolised by Britons (Anderson, 511 shares; Robbins, 485 shares; the others, 4 shares). See, Rio Tinto (1929b).

15 It is hard to trace the actual function of the Office. Rio Tinto decided to withdraw from the silica gel enterprise because many technical problems could not be solved by the end of 1930. See, Harvey (1981, p. 222).

16 The financial company could sometimes charge higher rates than were politically possible for ICGA.

17 Belgian revenues were £326,203 (total revenue of ICGA: £499,126) in 1927, £410,791 (£755,631) in 1931 and £387,645 (£748,940) in 1933.

18 The amount placed in Belgium was Frs. 67,759,225 (approximately £500,000) during the 1936–1940 period (Bourne-Paterson, 1970, p. 232).

19 According to the annual report of ICGA in 1935, which condoled the sudden death of Périer, he was appointed as ‘the Chief Executive Officer in Belgium in 1931’ (Imperial Continental Gas Association, 1935a, pp. 2–3). Local staffs were not excluded from local management. The agents, who were appointed as negotiators with local authorities and consumers, were always native of the countries concerned. While the majority of the engineers were English, some local staffs (e.g. Drory family) filled posts of Chief engineers in the stations (Hill, 1950, p. 229). However, it appears for the first time that a local staff was responsible for regional management.

20 He resigned from the position on 30 November 1934 because of his appointment as Prime Minister. After he resigned as the Prime Minister, he was re-appointed as a Director of the Association on 14 June 1935. He attended the Board meeting held in the UK almost every month until the final-resignation, 1 October 1940 (Imperial Continental Gas Association, 1934, 1935b, 1940).

21 When a Belgian employee cooperated with the project of company history led by R. A. Bourne-Paterson, the employee answered that ICGA was the first in Belgium to apply the ‘intercommunale mixte’ system (Imperial Continental Gas Association, 1971).

22 See also Izawa (2018).

23 The organisation of Van den Berg was referred at the formation of dual structure (Wilson, 1954b). Unilever is categorised as a separate entity structure in dual-listed companies (DLCs), wherein ‘the operating activities remain fully owned by each of the two merged companies, and the companies retain their domiciles, listings, and shareholders’ (De Jong, Rosenthal, & Van Dijk, 2009, pp. 498–499).

24 General reserve and reserve for contingencies of Unilever Limited were £100,000 in 1934, £417,547 in 1935, £600,000 in 1936. Balance carried forward were £299,597 in 1934, £367,363 in 1935, £714,727 in 1936. General reserve and reserve for contingencies of Unilever. N.V. were Fl. 2,500,000 (£347,222) in 1934, £417,547 in 1935(£347,222), Fl. 2,500,000 (£277,777) in 1936. Balance carried forward were Fl. 3,802,920 (£299,597) in 1934, Fl. 4,127,761(£573,300) in 1935, Fl. 4,462,150 (£495,794) in 1936 (Unilever, 1934; 1935; 1936).

25 Unilever ‘emerged in the postwar era with a strongly held philosophy of management built around independent operating companies whose managers were given maximum responsibility and freedom’ (Bartlett & Ghoshal, 1989, p. 41).

26 Conversely, even if tax avoidance is the most important factor, the company might use other reasons in public.

27 See, Hillman, Keim, and Schuler (2004) and Mellahi, Frynas, Sun, and Siegel (2016).

28 See, Saevold (2017) and Jones, Temouri, & Cobham (2018).

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science under the Grant-in-Aids for Scientific Research (16K13377, 18K12825).