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Vanessa Ogle, Archipelago Capitalism: Tax Havens, Offshore Money and the State, 1950s-1970s

Ogle, Vanessa. “Archipelago Capitalism: Tax Havens, Offshore Money, and the State, 1950s–1970s.” The American Historical Review 122, no. 5 (December 1, 2017): 1431–58.

Origins. Ogle, 2017, 1431-3. A 1906 legal case determined that De Beers Consolidated Mines, a company formed, headquarted and economically-active in South Africa, was resident in Britain and liable to tax on its income. This was because its directors meeting was held in Britain and hence ‘where the real control was exercised’. In 1907, in response to this ruling, Egyptian Delta Land and Investment Co. Ltd moved all operations, inluding board meetings, to Cairo. See Picciotto, Sol. International Business Taxation: A Study in the Internationalization of Business Regulation. New York: Quorum Books, 1992. The uneven nature of colonial sovereignty and legal frameworks (‘company and bank laws or tax codes and accounting standards’) aided ‘tax avoidance, and capital accumulation’. In the post-colonial world, the unevenness of empire was replaced by an ‘archipelago-like landscape of distinct legal spaces—sometimes carved out within a national territory, sometimes located in smaller territorial units on the margins of more sizable states, sometimes hosted in city-states’.

Tax havens and the state. Ogle, 2017, 1433-4. There is an apparent paradox that this offshore world arose as the world-system organised itself around ‘bounded, homogeneous national state spaces’ and expansive, state-led projects. But it resulted from ‘government decisions and support, most typically pushed by lawyers, accountants, former diplomats and politicians who were now engaged in business, and former spies and people with ties to intelligence services’. See the revolving door problem in politics - what is being created now? Moreover, the relatively small-scale of archipelago capitalism ‘created conditions that eventually made it impossible for the old nation-state-based political-economic order to survive after the 1970s’. Huge claim, but very significant if true. The interwar years to the 1970s and 1980s saw a set of ‘limited experiments in circumscribed spaces, during an age otherwise characterised by interventionist states and embedded markets’. These experiments then moved onshore from the 1970s onwards in Europe and North America.

Timeline and geography. Three distinct phases: Ogle, 2017, 1436.

1. 1920s to WWII.

Emergence phase that followed (a) wider application of income taxes post-WWI and (b) post-war inflation and political and economic instability. Assets flowed to safe havens (Switzerland, Liechenstein, Luxembourg) and emerging tax havens (the Channel Islands, Bermuda, the Bahamas). Come back and scoop up the refs, please.

2. 1945 to 1975.

Growth phase , including development of specialist professions, sub-specialisms, marketing and educational techniques. New havens opened up: Bahrain, Cayman Islands, Delaware, Hong Kong, Lebanon, Malta, Netherlands Antilles, Panama and Singapore. The Euromarket (i.e., dollar-denominated transactions outside the US) developed as a way of avoiding banking and financial regulation. This was centred in London, with offshoots in Luxembourg, the Bahamas, Singapore and Panama.

Returnees from empire , who either wanted to remove their assets from former colonies or protect themselves from domestic taxes, were an important early market. Malta and Jersey served the British market, while Monaco served those retreating from, especially, Indochina, Algeria, Tangier and Morocco.

‘Diplomat capitalists’ Ogle, 2017, 1439-41 - those ‘politicians and former diplomats and intelligence officials’ able to communicate with and coordinate public and private sector interests, with contacts in the metropole and former colonies - were central to the expansion of archipelago capitalism.

Case study
Edward R. Stettinius Jr., a former US Secretary of State, founded Stettinius Associates-Liberia Inc. He used political ties to create an economic aid program to Liberia. Stettinius was involvled in drafting Liberia’s Maritime Code, which created a flag-of-convenience shipping registry that offered much looser regulations than ship-owners would otherwise be subject to if they registered in their own jurisdictions. Stettinius Associates offered a service registering ships.

Development Ogle, 2017,1442-4 was linked to the development of the offshore system (not really covered in the state-centric historiography). The 1955 Hawksbill Creek Agreement, for example, was an agreement between a US citizen and the British Crown in the Bahamas. The Grand Bahama Port Authority Ltd, controlled by Groves, agreed to dredge a deepwater harbour for a port and to provide utilities and and an airstrip. In return, the government allowed the Port Authority to control company licensing (they were exempted from taxes on income and profits for thirty years) and immigration. The Port Authority was subsequently controlled by figures who mixed their economic and political interests. Similar deals were proposed in the Turks and Caicos Islands, the BVI and Antigua. It’s not clear if these other deals happened: it seems like there is no archival evidence in the UK’s National Archives or the Bank of England archive that they did.

Professional advisors Ogle, 2017, 1444-5 lobbied governments to make favourable concessions towards secrecy and tax avoidance. In 1968, Price Waterhouse was commissioned by the Ministry of Overseas Development to advise on Montserrat’s fiscal sustainability; their report suggested a tax and banking code that both favoured trusts and secrecy and would avoid a rewrite of existing double-taxation agreements with the UK. Similarly, the Cayman Islands were advised by ‘an expatriate tax Council’ before enacting ambitious trust laws.

Euromarket and Eurobond Ogle, 2017, 1446-9 market directed increasing share of transactions through tax havens. From mid-1960s, measures to protect the US balance-of-payments encouraged corporates to borrow through foreign subsidiaries. The Eurobond market - where bonds ‘were floated simultaneously…to investors anywhere in the world’ - eventually became more important than the Eurodollar market. First Eurobond issue in 1963, by the Italian highway authority Autostrade Italiane. ‘The bond was issued in Schipol Airport to avoid the British stamp tax…interest coupons were payable in the tax haven of Luxembourg to avoid British income tax’. Some jurisdictions, e.g. Luxembourg, allowed Eurobonds to be issued as bearer bonds. The number of banks in Luxembourg doubled between 1970 and 1975.

The European public sector Ogle, 2017, 1449 was a major borrower from offshore markets. This included local governments building public housing, public corporations building infrastructure and nationalised utilities. In an estimate from 1976, governments and government institutions accounted for 44% of Eurobond issuance.

The non-European Eurobond market Ogle, 2017, 1449-52 (including Nassau, Singapore and Panama) was about a quarter of the size of the European market. Issuance in the Netherlands Antilles was driven by a DTA with Britain that allowed corporates to issue bonds through a subsidiary there, loan the proceeds to the parent entity and deduct interest payments due to the subsidiary from corporation tax due in the UK. Bondholders could then be paid without deducting tax. From 1969, the Federal Reserve allowed US banks to set up subsidiaries in places like the Bahamaas and the Cayman Islands. There were around 100 such branches by the early 1970s; the business of such branches was normally done in London and taxes were delayed until ‘repatriated to the US head office’. It seems strange that we have gone full circle from the 1906 decision here without comment. If all relevant decisions are being taken in London or New York, what change made this OK? 31% of the assets of foreign branches of US banks were located in the Bahamas and Cayman Islands in 1973. Following the US recession of the early 1970s, the Eurodollar market turned to non-Western world for demand, with consequences for debt stability.

Foreign trade zones Ogle, 2017, 1455 offered light regulation, tax holidays and an absence of unions. First example was Puerto Rico in 1947. Others in Panama (1948), Shannon, Ireland (1959), Mexico, Taiwan and Korea (1960s) and much more widely in the 1970s. China relied heavily on special economic zones post 1978.

3. 1970s onwards.

Rapid expansion phase , as some of the experiments of earlier years moved from offshore to onshore, and the offshore system became more embedded into the financial system.

Moving offshore onshore Ogle, 2017, 1452-3 was a priority for financial centres that were losing business. New York, which was on the verge of default in 1975, was an early mover. In 1978, New York state passed legislation (approved by the Federal Reserve Board in 1981) that allowed banks to open accounts that treated foreign customers as if they were offshore. These International Banking Facilities had ‘limited reserve requirements’ and had the interest payment ceiling lifted; deposits(?) were exempt from local and state, but not federal, taxes.