Tax dodging and the birth of the British Empire

The story of the Company is a mix of fabrics and famine; corruption and colonialism; trade and taxes. When they first arrived in India, East India Company employees were customs-tax-paying traders like any other. Mughal emperors allowed them to set up factories and trading posts in tiny settlements that would later become Madras, Bombay and Calcutta. In return, the emperors got access to lucrative British export markets.

East India Company as Tax Collectors

The early eighteenth century was a time of change. In 1717, the then emperor waived customs duties for Company trade. But by that point, the empire was disintegrating and regional rulers were becoming more powerful.

Decades of contested power and Anglo-French conflict followed before the East India Company won Bengal for Britain in 1765. In a dramatic shift, Company employees suddenly assumed the role of tax collectors for Bengal and later for most of the rest of India. As hopeless as they were at playing this role, the revenue they did manage to collect doubled the value of East India Company shares.

The origins of modern tax law

By the twentieth century, the East India Company’s military exploits had brought it to near-bankruptcy and it had long stopped trading. But it remained one of the first and most iconic multinational corporations. The way the Company operated must have influenced WWI Allies as they developed rules for taxing companies doing business in more than one country.

If tax is conceived as a way of paying for public goods and redistributing wealth, the current international system doesn’t make a lot of sense. If it is understood as a way of funding colonial expansion, it all begins to fall into place.

The East India Company’s monopoly over trade with the East Indies was originally granted because it could loan the Crown large sums of money to pay for colonial wars. Later, its monopoly position was tolerated because of the customs income its trade brought in. Over the years, the Company paid varying amounts of tax to the British authorities. But the notion that it should also pay tax in Company-controlled British India would have been nonsensical.

These days, most individuals and domestic companies pay most of their income tax to the governments that provide the services they use. This doesn’t hold for companies operating in more than one country.

Rather than paying taxes to help fund the infrastructure and services they use to help them make money, multinationals pay most of their corporate income tax wherever they originally come from. Countries usually agree to divvy up taxing rights, allowing the host country to levy tax on some proportion of multinational profits. But the underlying assumption behind those agreements is that any tax revenue they don’t agree to share is collected by the multinational’s country of origin.

The impact on the global South

Foreign investment has enormous potential, if Southern governments can put in place infrastructure and services to make it work for their citizens. It seems ridiculous that the current international tax system leaves them without the resources they need to make that investment. But if we adopt a colonial worldview, it makes perfect sense that multinationals pay most tax to the country whose flag they fly.