Subsidiaries and Supply Chains

How did Apple manage to pay an effective tax of 0% on its European profits? Will the new global minimum tax agreement change this? Duke Professor Rachel Brewster explains how corporate families are structured to take advantage of different countries’ laws; Chicago professor Adam Chilton empirically explores the regulation of supply chains; while Berkeley Professor Stavros Gadinis explains why progressives and conservatives alike call for sustainability in corporate governance.

In this episode of Borderlines, we discuss successful global coordination efforts, such as the spread of anti-corruption efforts from the US to the world, as well as harmonization in accounting standards. But we also debate the major costs of a global economy structured around the free flow of capital, and regulation that ends at the national border. 

About:

Borderlines from Berkeley Law is a podcast about global problems in a world fragmented by national borders. Our host is Katerina Linos, Tragen Professor of International Law and co-director of the Miller Institute for Global Challenges and the Law. In each episode of Borderlines, Professor Linos invites three experts to discuss cutting edge issues in international law.

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Episode Transcript

Katerina Linos:

Apple, the American tech giant, has put $15 billion in an escrow account and is fighting tooth and nail to get it back. The Irish government, to whom the money is allegedly owed, says it doesn’t want the billions. European regulators argue that through a complex net of subsidiaries and a tax deal with the Irish government, Apple has completely avoided paying taxes on all of its corporate profits across Europe. “When an American corporate giant pays no tax anywhere,” European regulators ask, “how can smaller firms compete?” A final decision from the European Court of Justice is expected soon.

Katerina Linos:

I’m Katerina Linos, Professor of International Law at UC Berkeley, and host of Borderlines. With me today to discuss how multinational corporations structure their global operations to take advantage of different countries’ laws through subsidiaries and supply chains are three experts: Rachel Brewster, Jeffrey and Bettysue Hughes Professor of Law at Duke Law School; Adam Chilton, Professor of Law and Walter Mander Research Scholar at the University of Chicago Law School; and Stavros Gadinis, Professor of Law at Berkeley Law School.

Katerina Linos:

Rachel, what can companies achieve by creating subsidiaries in foreign countries? What exactly is a subsidy and how do you set it up? Should the average American be concerned?

Rachel Brewster:

Thanks, Katerina. Let’s start with a question of what subsidiaries are. A subsidiary is a corporation that is majority or wholly owned by another corporation. They’re incredibly common for most major American multinational corporations. For American corporations that are in the top 100 largest U.S. corporations, they’ll have an average of about 200 subsidiaries. But if we’re talking about a large energy company or an extractive industry, it’s not uncommon for these corporations to have about 5,000 subsidiaries. And the relationship can be interesting. You can have subsidiaries owning subsidiaries, so you can get some very interesting family trees.

Rachel Brewster:

Why would a company want to try and create a subsidiary?

Rachel Brewster:

Multinational corporations have a lot of reasons for wanting to create subsidiaries. Some of them are fantastic and some of them are less global welfare maximizing. First, when you do business overseas, sometimes foreign governments would want you to create a subsidiary under their national laws. So that’s one of the reasons why multinationals might set them up.

Rachel Brewster:

In addition, the subsidiary allows the corporation to create a separate “legal person,” and yet the parent corporation can control the subsidiary. They can appoint all their managers. They can approve all major decisions. They can direct operations. And they can reap the profits that the subsidiary makes.

Rachel Brewster:

Having a separate legal person conducting the business of the parent corporation in a foreign country has a number of benefits. At a general level, the biggest benefit to a parent corporation is the idea that the subsidiary can limit its liability. So what does it mean? Once a subsidiary is its own legal person, then it can operate in a foreign country. And if there’s any claims, any lawsuits against that subsidiary, then plaintiffs can recover against the subsidiary, but only to the extent of the subsidiary’s assets. Plaintiffs can’t go after the parent corporation’s assets.

Rachel Brewster:

So corporate law scholars would call this internal asset partitioning. So it’s a great way for a parent corporation, for a major multinational to be able to do business around the world and yet protect the assets of its shareholders by allowing the subsidiary to do business. But if it is engaged in a risky endeavor, for instance, that there’s major environmental damage, or there’s a mass tort, then the parent subsidiary can disclaim any responsibility for the actions of the subsidiary.

Rachel Brewster:

It might need to capitalize the subsidiary to a certain level. But if there’s then claims on the subsidiary, then they can let the subsidiary go bankrupt. And those plaintiff’s claims are exhausted, even if the claims aren’t fulfilled. This is true even if the parent corporation has been taking profits from that subsidiary for years.

Rachel Brewster:

So it’s definitely possible that the subsidiary has made maybe $15, $20 million for the parent corporation, but the parent corporation gets to keep those profits. So this really puts a lot of the risk of the subsidiary on the country in which it’s doing business and the citizens there, and does a good job of protecting the shareholders in the home country where the subsidiary is based.

Rachel Brewster:

Our current legal system takes this idea of separate legal personality very seriously. There is a very strong legal principle that’s not only in the United States, but basically accepted around the world, that subsidiaries are separate legal individuals and that parents are simply not legally liable for their activity.

Katerina Linos:

So, Stavros, are there some examples of subsidiaries where the risk downside falls on the host country and all of the upside is in a country where the parent is based, such as the United States?

Stavros Gadinis:

As Rachel was saying, this is a very commonplace technique that is employed all over the world. So for example, in the manufacturing industry, manufacturing plants are very often their own subsidiaries. Each plant is a separate subsidiary, just so that if there is environmental liability, for example, it doesn’t affect the performance of the other plants owned by the same company.

Stavros Gadinis:

In the shipping industry, every ship is its own subsidiary, so that if there’s an oil spill in the middle of the ocean, the other ships that belong to the same ship owner are not subject to enforcement by creditors for cleaning up the oil spill. In banking, large banks have thousands of subsidiaries that invest in different assets. So if one class of assets doesn’t do so well, then the other subsidiaries investing in different class of assets don’t see their profitability hurt by bad performance in one of these subsidiaries.

Katerina Linos:

Great. I’d like to hear more about efforts to regulate subsidiaries. Have there been some examples of successful supervision requirements? Has the EU put in place different rules? Has the US been the leader in this area? And what are some of the problems with the approach?

Stavros Gadinis:

So what I think is a very interesting example in the way this is playing out is actions that are happening now in the area of climate change. Now, as you know, there’s been an international treaty, the Paris Treaty, that is trying to impose certain emission limitations and constraints. But from imposing plant net zero emission requirements, to having each company actually do it, there is a long road.

Stavros Gadinis:

So what you see now, and the main difference today, compared to, let’s say 10 years ago, or 15 years ago, is that shareholders are now pushing for change within companies. If you are following the conversation we’re having with Rachel, the concern–the reason–companies are creating subsidiaries, is to protect profits for shareholders. That’s the idea, that shareholders will benefit from having risk limited.

Stavros Gadinis:

However, now the shareholders themselves are saying, “Wait, yes, we want you to protect our profits but not at the expense of the environment,” let’s say, or at least, “We need to impose certain limitations on how we do that.” Now you might be thinking, well, but shareholders–was there a point in time when shareholders actually wanted to destroy the environment or they didn’t care about it so much? Well, what you see now is that large chunks of shareholding, especially in large publicly-traded companies, are owned by just a few shareholders: large institutional funds like BlackRock, Vanguard, State Street, Fidelity. Together, they own about 20% to 30% in every public company.

Stavros Gadinis:

And so a bunch of investors bonded together and they realized that over 80% of global carbon emissions come from just 160 companies in the world. So they’ve created an investor group that is trying to push for change within the companies. Now, you also asked about EU. The EU is far ahead of the U.S. In that respect. There are certain directives that require European companies to make public disclosures about certain issues–the non-financial items disclosure.

Stavros Gadinis:

And that is an attempt to bring to light actions by corporations that maybe are not regarded strictly or conventionally important for business purposes, but they are important from other perspectives. And there’s also a lot of initiatives. The EU is working on a new directive to try to create an taxonomy, for example, of what will be considered green or sustainable production methods or green or sustainable products. And obviously, when this comes out, then many companies will have to follow suit if they want to continue selling their products in the European market.

Katerina Linos:

So, Adam, can we talk about anger towards China around the world and what role foreign acquisitions have played in this debate?

Adam Chilton:

In the United States and also in Europe and other countries, there’s been real concern over the increasing rise of Chinese companies that are either buying up U.S. companies or European companies and acquiring them, or making new investments in setting up U.S-based subsidiaries that are owned by Chinese companies. And this has led to both concrete changes in the existing legal regulations of foreign investment and also deep political struggles.

Adam Chilton:

So, for instance, the United States has a regime called the CFIUS regime, which is the Council on Foreign Investment in the United States, which is an intergovernmental agency chaired by the Secretary of Treasury that has the right to review and potentially block attempts by foreign companies to acquire U.S. companies.

Adam Chilton:

Now, the work of the CFIUS committee has reached over the last 15 years or so as Chinese companies have tried to buy up more and more U.S. companies. So we’ve seen a rise of the activity of CFIUS really focused on Chinese companies buying U.S. companies. And there’s these high profile examples like the ThinkPad brand of laptops being bought by Lenovo or Smithfield Farms, the large agricultural producer, or Maytag, the washing machine maker, et cetera, these sort of iconic U.S. brands being bought up by Chinese companies.

Adam Chilton:

Now, in addition to this, there’s concern about the rise of Chinese companies that set up U.S. subsidiaries to do business, and the highest profile example of this in the last few years has been TikTok. So TikTok is owned by a Chinese company. It has its U.S. operations, however, that are owned by a Chinese company. And Donald Trump while president basically explicitly ordered TikTok to sell its U.S. based operations to a major American company like Microsoft or Oracle or some other player that had the capital and the ability to take it over.

Adam Chilton:

The same thing happened with Grindr, the dating app, where it was owned by a Chinese company. And in both cases, the concern was that there was just a huge amount of private information that this Chinese firm had access to that could be used in various nefarious ways and we wouldn’t even really know what it was that was being getting access to. So there was pressure to sell these apps to the U.S. companies. Now, at least in the TikTok case, that didn’t happen before Trump left office, and so we’ve sort of fallen off the agenda in the Biden Administration, but that was a real concern.

Adam Chilton:

Now, this also isn’t just a U.S.-only phenomenon. So for instance, Europe in just 2019, I believe, set up its investment supervision mechanism, as it calls it, which is similar to the CFIUS committee in the United States, which is sort of a European-wide effort to monitor investments coming into Europe. And really it’s the same concerns that drive it, which is what are sometimes referred to as “weaponized investments” being made by China. So strategic investments that China’s making, either acquiring companies, buying real estate, buying property, building infrastructure projects, et cetera, around the world, where the concern is that the Chinese government is using this in a strategic way that can improve its national security position or undermine the freedom of speech or undermine democracy.

Adam Chilton:

And what people are concerned about is not only that these Chinese companies could then acquire assets that could be strategically useful in technology or information or whatever, but the ownership of major assets by Chinese companies could really also change our culture in a problematic way, too.

Rachel Brewster:

I’m going to play moderator. So Adam, we saw a lot of these same concern when the Japanese were buying a lot of property in Manhattan–they bought the Rockefeller Center in the 1980s–and a lot of similar U.S. pushback there. Is there something fundamentally different about China than Japan? Because those concerns about Japanese investment, I think, now are viewed to be overblown, and now Japanese investment seems to be welcomed in the U.S.

Adam Chilton:

So there’s been really five periods in the last 120 years where the U.S. has freaked out about foreign investment. And each of them has been where there’s a geopolitical threat. So the first is World War I where the United States passed a law called the Trading with the Enemy Act, which basically said that the U.S. government could seize whatever German assets or private German companies that were operating and doing business in the United States. So in World War I and World War II, that was the concern, was Germany and German allies having investments in the United States.

Adam Chilton:

So that’s period one. Period two is the 1970s when the petroleum exporting states of the Middle East, the OPEC countries, started buying up assets in the United States like crazy and pouring money into the United States Stock Market and various investments. And so that’s what in 1975 led to the creation of CFIUS. And so that’s when the U.S. first started reviewing foreign investment in the United States. And that was all concern over investments from the Middle East.

Adam Chilton:

Period three is exactly what Rachel mentioned, which is–and this was probably where it reached a peak–was in the late 1980s when Japan’s economy was just crazy hot and Toyota, and Nintendo, and these Japanese companies were just taking over the world and they were buying up extremely prominent U.S. assets like Rockefeller Center and real estate in Manhattan, and California, and in Beverley Hills, et cetera. And so that led rise to the legal power to block investments from other countries, which is the first time we had that in 1988.

Adam Chilton:

Period four is post-9/11. The famous example there is the Dubai world ports deal where a company owned by Dubai was going to buy a six U.S. ports, including the Port of Baltimore. And everyone was afraid of this scenario, that maybe if our ports are controlled by a company based in another country, that terrorists or a bomb or something could be smuggled in through our ports and that losing control of that was really problematic.

Adam Chilton:

And then finally, period five is this concern about China, which is really just the last 10 to 15 years. Now, if history is our guide, you would think that at some point that the threat from China will fade, the geopolitical threat, the animosity, whatever it is. And it’ll be more like a German or Japanese investment where now if Toyota wants to build a factory in Kentucky or South Carolina, people are generally pretty excited about all the jobs that it’s going to create. And so it’s possible we’ll be in the same place there in the future like we were with Japan or Dubai or other countries in the past.

Rachel Brewster:

So I would just throw in here, too, that I think that this concern about who has access to what private information, the Grindr concern, the TikTok, it’s not just limited to the U.S. government or the EU with regards to China, but China’s pretty worried about it with the U.S. and the EU as well. So any Chinese corporation that wants to list on a U.S. exchange needs to comply with U.S. accounting standards and be open to audits and accounting.

Rachel Brewster:

But they haven’t been, largely. They’ve been able to say, “Well, we have Chinese auditors and this is acceptable to you.” But Congress recently passed an act called Holding Foreign Companies Accountable Act, which explicitly says, “No, if these Chinese companies want to list on a U.S. exchange, they have to start opening their books to us.” And I think the Chinese government is very upset about this possibility–what kind of information U.S. authorities could be demanding of Chinese corporations.

Rachel Brewster:

So I think you saw this most recently with the listing of DiDi, which is basically the Chinese Uber. And they have incredible information on who is being picked up where, delivered where, what government officials are visiting whom in the middle of the night. And so the Chinese government responded very strongly when DiDi listed and said that we did not approve this listing. And you see a lot of this now, where the Chinese government is quite concerned about its major corporations and whether or not they should be listing on U.S. exchanges.

Rachel Brewster:

And my prediction is that DiDi and some other very prominent Chinese corporations will not have primary or secondary listings on U.S. exchanges in about five years if kind of tensions between the U.S. and China don’t decrease.

Stavros Gadinis:

I’m not sure how prominent it was in the previous four periods of U.S. concern about foreign investments, because then we’re mostly concerned about assets being acquired. But now, because technology has changed so much, it’s not just the assets that are the problem, but the information itself. And that adds another layer of complication, because the information doesn’t have to be located in Manhattan. And it can be located anywhere, and it can be located somewhere very far out of reach for the arm of U.S. enforcement authorities.

Adam Chilton:

Yeah, that’s one thing that is very different, is that I think the concern in earlier periods when the U.S. was worried about foreign companies, either investing or doing business in the United States, was very much about real property. Like, “Will this foreign company own this important building?” or factory or whatever. And now it’s really about data and intellectual property. Will a Chinese company get access to information about how our most complex communications technologies work? Or will they get access to data on individual users, financial information, personal lives, et cetera? So it really is a change to a concern about the acquisition of information.

Adam Chilton:

Now, another thing that’s probably important to emphasize: one, I think real, concern in this period is also a concern about reciprocity. And that’s pretty key with the concerns with China specifically, but perhaps to Russia to an extent too. And what I mean by that is China still has the so-called great fire wall up, which makes it so that Chinese internet users in China, unless they have a VPN or some other way to get around it, are prohibited from visiting sites like Google. So they can’t get access to Gmail, or Google, or other U.S. major tech companies.

Adam Chilton:

But at the same time that the Chinese government is keeping our internet companies out, we are letting TikTok and other apps sweep the country. And so we have this sort of non-reciprocal relationship where we’ve stayed largely open to China, but China hasn’t stayed equally as open to us. And I think that is a concern that is slightly different than the other periods of concern, is, for instance, in the 1970s, it’s not that we were furious that we couldn’t invest in Saudi Arabia, it’s just we were concerned about the Saudi Arabian sovereign wealth fund owning critical assets in the United States.

Adam Chilton:

So the reciprocity concern and also this information privacy concern and IP concern I think are at least a little distinct than prior periods.

Katerina Linos:

I understand that when companies own subsidiaries, they can be forced and often are forced to monitor their activities. But what about companies that set up looser relationships with foreign suppliers and they don’t have any direct control, at least legally? Adam, can you talk to U.S. about supply chains, how they’re strong structured, what the pros and cons of that relationship are? Do they present similar problems to those Rachel and Stavros described?

Adam Chilton:

Sure thing. One area of complication here is the increasing complexity of company supply chains. And so a company that makes a product in the United States, whether or not it’s a piece of electronics, or basketball shoes, whatever it may be, is doing business with suppliers all around the globe that supply component parts for them. And one concern is that even if the American company or the German company or whatever it may be is not directly violating environmental laws or human rights laws or other laws that are designed to improve the corporate responsibility of the companies, that they might be just buying supplies and component parts from companies that are.

Adam Chilton:

Because of this, there’s been a wave of so-called supply chain compliance laws that have been passed in countries around the world. So one prominent example of this is the United Kingdom has a law that it passed in 2015 called the Modern Slavery Act. And what the Modern Slavery Act tries to do is ensure that companies publish statements talking about the steps that they’ve taken to ensure that their businesses, in no way, are encouraging or allowing for modern slavery.

Adam Chilton:

Another example of this is that California has a law on supply chain transparency that requires companies that do a certain amount of business within the State of California to put up a website that provides information about how it monitors and tracks their supply chains. Germany just the summer passed a law as well, doing the same thing.

Adam Chilton:

Now, the idea of these laws is twofold, which is you first try to tell companies that they should be taking steps to monitor their supply chain, and two, that they have to disclose those steps publicly in some way. And then the hope is that once companies are monitoring their supply chain and disclosing those efforts, that consumers can make different decisions about who to buy their tennis issues from based on who seems to be taking their supply chain compliance issues more seriously.

Katerina Linos:

And are you optimistic that these disclosure regimes will work? Some of your scholarship gives us reason to question how well these disclosure regimes work.

Adam Chilton:

So in some cases, think it’s possible that a consumer movement will arise where there’s a lot of public awareness around a particular company where they’re buying food from or textiles from or wherever it may be. But in the normal case, I just think it’s really difficult for the consumer to understand what’s going on.

Adam Chilton:

So for instance, I own a MacBook computer and I own an iPhone. Apple has a statement about its supply chain on its website. I’ve studied these things. Based on just reading that statement, I wouldn’t really know if Apple’s doing an amazing job or a terrible job or anything in between, because they have a long sort of legalese statement about all of their compliance and monitoring accountability, audits, et cetera. And it’s just tough to know, as a regular person, what that means to me.

Adam Chilton:

The point just being the information that is being disclosed is sufficiently technical and complicated and difficult to get your head around that I don’t think that individual consumers are very likely to make individual purchasing decisions based on having read some of these statements or even heard about their contents.

Katerina Linos:

Let’s talk about tax. So I know that for decades there have been efforts to make sure that dual taxation is avoided. Since the turn of the century, corporations have said, “It’s unethical and impractical for me to be taxed on my profits both in Europe and in the U.S.” But now, there are situations like the Apple situation where it seems that this system of dual taxation treaties is being abused and corporations end up with very limited tax obligations around the world.

Katerina Linos:

I know the Biden Administration and the OECD are pushing for a new initiative for a global minimum tax. How is that working, Rachel? Can you tell us more about it?

Rachel Brewster:

Sure. Well, for multinational companies, depending on what industry you’re in, subsidiaries can serve different functions for you. So particularly in the extractive industries such as oil, subsidiaries can be wonderful at limiting your environmental risk in certain areas. But particularly for tech corporations or for corporations that have high levels of IP, subsidiaries can be wonderful vehicles for tax avoidance.

Rachel Brewster:

So I think here, multinational corporations would highlight that everything they’re doing is legal and they’re simply paying the least tax they could possibly pay, but they are definitely going to extreme lengths to minimize their global tax bill. So for a corporation like Apple, the subsidiaries they use to minimize their tax is incredibly complicated. So I’m going to give an overly simplified example.

Rachel Brewster:

So Apple, Google, Nike–you can set up a subsidiary in a low- to no-tax jurisdiction. So Ireland is a particularly popular choice for this. And sometimes corporations even enter into specific agreements with the Irish government to get even lower tax rates than the general Irish corporate tax rate.

Rachel Brewster:

So in these instances, if a corporation has some valuable intellectual property–so for Nike, the swoosh trademark, or for Apple, some of its patents and copyright–you can transfer all those assets that were often developed in the United States and you can transfer them to an overseas subsidiary, most often based in Ireland. At that point, the Irish subsidiary owns all of that intellectual property and can be sold to them, actually pretty cheaply. And then what the American parent will do is it will lease back the intellectual property from the Irish subsidiary.

Rachel Brewster:

So in this case, the Irish subsidiary is making tons of money. Why? Because the intellectual property is what’s really valuable and all the other parts of the corporate family for Apple, or for Google, or for Nike are paying all this money into Ireland. That means most of the multinationals profits are actually going to be based in the low- to no-tax jurisdiction.

Rachel Brewster:

In the meantime, Apple or Nike can actually deduct all the licensing fees they’re paying to the Irish subsidiary from their own American taxes. As a result, the amount of profits they can claim in the United States or in other higher tax jurisdictions is close to nothing, and has often been nothing.

Rachel Brewster:

So here, the subsidiaries often are created purely for tax purposes. That Ireland’s comparative advantage here is not that it’s an IP powerhouse, but that it has wonderful corporate tax laws that allow this income to be based in a very low-tax jurisdiction. The result of all of this is that major multinational companies, that we think of as some of the most profitable and richest companies in the United States or in Europe, effectively pay very little tax to their home countries.

Rachel Brewster:

And so why should Americans care about this? Well, on one hand, it might not be fair to smaller and more medium-size enterprises who do not have the ability to set up such incredibly complicated tax systems, so they’re paying higher taxes. They’re not able to compete with really large multinationals as well. So we can have some market-based concerns. But I think Americans would simply say, well, who’s footing our tax bill? I mean, either then, if the largest and wealthiest American corporations aren’t going to be paying these tax bills, then it’s going to shift to less mobile assets. And who are those? Those are American workers.

Rachel Brewster:

So either American workers have to pay higher taxes because the corporations are not doing so, or we simply have to decrease the social safety net, because we can’t afford the type of programs that we might have been able to afford before. Or, our debt is significantly higher. So all of these have very real impacts on Americans.

Rachel Brewster:

You’re right that there is now a big effort to try to limit the ability of multinational corporations to do this. I think that there’s a consensus among both most European countries (take out Ireland), and the United States, that this is really just a competitive race that everybody’s losing, right? First off, it’s hard to compete with Ireland. We’d have to almost eliminate our corporate tax rate, but the existence of the ability of corporations to do things has driven down corporate tax rates in most OECD nations. And governments aren’t sure that that’s really where they would like to be going with this.

Rachel Brewster:

And so there’s now an effort to say that there needs to be a minimum tax that even the subsidiary pays. And you could set that tax rate at 20%, at 15%, at 12%, but there needs to be some minimum. And if that tax rate is not paid by the subsidiary in the low- to no tax jurisdiction, then that tax has to be paid by the parent corporation to its home country.

Rachel Brewster:

Needless to say, some countries are not excited about the global minimum tax proposal. The Irish government is not excited. Bermuda is not excited. And so there is a need to build consensus among this at the OECD. U.S. administrations have not been interested. It’s largely been the U.S. who has said, “Oh, our multinational corporations, even though they’re not paying high taxes in the United States, maybe it helps them competitively”–their ability to have low tax bills.

Rachel Brewster:

And so we haven’t been particularly interested in reeling it back in and being an active participant in the BEPS [base erosion and profit shifting] negotiation. But I think that there’s been a major change now. I think after . . . two things have changed. I think that first off, the degree to which multinational corporations have been taking advantage of this is just increasing. I think a little bit of this profit shifting happened before, but now so many major corporations are in the game. So the corporate tax base in the U.S. has significantly decreased, which I think is worrying policymakers.

Rachel Brewster:

And secondly, I think that there’s just a change now. This idea that, at least with the Biden Administration, that we do want major domestic programs, that we need to fund them, that we don’t want to do it through deficit spending, and the tax base should be corporations. And so I think that this administration’s desire to really join the BEPS program is what has now kind of led to this possible treaty for a global minimum tax suddenly being on the horizon.

Adam Chilton:

Getting an agreement on this requires a multi-lateral agreement with countries from around the world coming together and being willing to make a deep commitment. And that’s proven exceedingly difficult to get. And so it’s possible to get sort of general statements on issues like climate change, but getting deep commitments that all of the world’s major powers are committed to isn’t so easy anymore. And this is, in part, because the rise of China and the reemergence of Russia, but also just even within the West, the United States isn’t perfectly on the same page as other European countries.

Katerina Linos:

I just wanted to go around for everyone to say, “Hey, here’s an example of something that did work,” in this otherwise bleak landscape.

Stavros Gadinis:

Let me start with an example of optimism. I don’t know if it is at the global scale, but just a few months ago, a group of investors which were mindful about climate change, after years of trying to get big oil companies to make commitments and failing to do so, they launched a successful campaign against the board of directors of Exxon and managed to get three of their members elected on the board.

Stavros Gadinis:

Now, obviously this is not a majority on the board, but to make the directors of Exxon accountable to their shareholders for failing to take action on climate means a new level of claiming initiative by shareholders, and a new level of intensity that I don’t think people on the board were expecting. And they definitely weren’t expecting it to be as successful.

Stavros Gadinis:

So the fact that people are willing to use all sorts of legal mechanisms, from international treaties down to individual votes in company boards, that suggests that there is a willingness to change right at this moment.

Adam Chilton:

I think a common example that’s used at the supply chain space is Nike. So Nike, in the early-1990s, there were a number of reports that documented that the contractors and factories that were making Nike shoes in places like Indonesia were making some incredibly low salaries–cents for the hour of making shoes in these incredibly harsh conditions. And then those subcontractors sold the shoes to Nike and they were sold in the U.S. in incredible markups.

Adam Chilton:

And so there began to be campaigns, to try to publicly ask prominent athletes about their affiliations with Nike, to college students organized protests at Nike stores; there were questions that were asked at press conferences of Nike. And Nike ended up having this problem where it was perceived as using sweatshops to sew tennis shoes and then sell these Air Jordans at incredible prices back in the U.S.

Adam Chilton:

And as the story goes that Nike began to take this pretty seriously and was concerned about how devastating it would be for its image. And so it started up this campaign to, first put out a list of every factory in the world that made any of its shoes or any of its products so you could actually specifically see that these are the factories in Bangladesh and Indonesia and Vietnam, et cetera, that made the shoes. And then to do just a huge number of audits of those factories, to say that we’ve gone to the factories again and again to make sure that anyone that we contract with has bathroom breaks for their employees, paid a fair wage, et cetera.

Adam Chilton:

That’s often held out as the example that the supply chain compliance movement wants to get for everyone, right? If we could all have, not just one company that we focus our attention with, but if every clothing manufacturer, every coffee company, every company that includes chocolate in any of its products and is buying cocoa from around the world, if we could get people to focus in that same way for every company, then we’d be able to really change the contracting.

Adam Chilton:

So the consumer campaign can work when you get awareness around the product, but of course that doesn’t always happen in the way that it did with Nike.

Rachel Brewster:

The major example I would think of is the Foreign Corrupt Practices Act, the FCPA. I think on Cold War concerns, there was this idea that it was hurting the perception of America, and particularly the operation of the capitalist system–like that it was in fact kind of underhanded and based on corruption. But that’s–when we now talk about ending corruption and the problems of bribery, that is not the narrative at all. It is entirely a narrative about helping developing countries really kind of have economic growth and social development and how corruption is so corrosive to any part of that development.

Rachel Brewster:

And then a lot of that got taken up by economists at the World Bank who, in their own work, saw how much corruption was really preventing the World Bank from fulfilling its mandate of building infrastructure projects that could actually help countries–that the infrastructure projects would be shoddily built, or not built at all, because of the high levels of corruption in the projects.

Rachel Brewster:

And so a bunch of those economists together with some civil society people left the World Bank and formed Transparency International, which was a major player in pushing European governments to accept the OECD anti-bribery treaty. And to this day highlights the levels of corruption and kind of keeps monitoring the levels of corruption in the developing world–putting pressure on those governments, but also putting pressure on nations who do a lot of exports, right? So the largely OECD nations to do more to stop their businesses from supplying a lot of these bribes.

Rachel Brewster:

And so I think that that’s an example of an organization that has had a really big impact. I mean, they obviously haven’t solved the problem, but they have moved the ball significantly.

Katerina Linos:

I think the recent scandal over the head of the international financial institutions and whether she was pressured by China to change China’s rankings on the Doing Business index indicates how significant these efforts to rank countries and report on their corruption levels or on other practices can help move the needle.

Katerina Linos:

Thank you for listening to this episode of Borderlines. Some themes that will stick with me include the power of subsidiaries to shield parent companies from liability. It is striking that when an oil tanker sinks, no one with sufficient assets is typically held responsible to clean up the mess. This, despite the fact that we see a lot of concentration in ownership elsewhere, and that institutional shareholders hold 20% to 30% of every public company these days.

Katerina Linos:

I also like how we came full circle, from the idea that a digital giant, Apple, could effectively pay no tax, to a new agreement on global corporate minimum tax to avoid profit shifting. Finally, in this episode we noted how older concerns about multi-national corporations have shifted over time. Once, we worried most that MNCs could acquire critical national assets. Now, we worry that through multi-nationals in technology, we have lost control over information.

Katerina Linos:

If you want to read more on these themes, check out the Borderlines show notes. The next episode of Borderlines examines why major international agreements, such as the Paris Agreement for Climate Change, the Iran Nuclear Deal, and the global minimum tax agreement, are not legally binding and what this means for transparency and accountability. If you enjoy this episode, subscribe to Borderlines.

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