How Microsoft and Shell exploit 130-year-old legal trick to hide profits

A legal framework established in New Jersey over 130 years ago continues to shape modern economies, enabling sophisticated corporate structures that facilitate profit shifting and tax avoidance. The state's relaxed corporation law allowed for the creation of holding companies, where one company could own another, which in turn could own another, creating layers of control.

This innovation, initially a technical legal detail, revolutionized business by allowing ownership to be detached from physical operations. Control could be dispersed across chains of subsidiaries and special-purpose vehicles, rather than being concentrated where production, sales, or decision-making occurred. This separation is a root cause of many modern regulatory challenges.

Corporations like Microsoft and Shell have leveraged this structure to move billions of dollars in profits to subsidiaries in low-tax jurisdictions such as Puerto Rico and Bermuda, often paying less than one percent in taxes. The ability to shift profits through transfer pricing, royalties, and internal financing is a direct consequence of the legal ability to separate the producing entity from the entity that owns the brand, capital, or reaps the profit.

Furthermore, this corporate architecture allows for the separation of environmental and social responsibilities from the core business assets. A factory might cause significant environmental damage, while the company's valuable assets are held elsewhere. When compensation is due, those affected are often left without recourse. Similarly, the company employing workers may not be the one dictating prices or production targets, and the entity that becomes insolvent, as seen with René Benko's empire, may not be the one holding the valuable intellectual property or real estate.

As the article posits, the creation of legal entities that can act like humans but lack human accountability, shame or the possibility of imprisonment, combined with the ability to own each other, has led to an "owner without qualities." This capacity for functional division, while driving corporate efficiency, also enables the division of responsibility, a potentially underestimated systemic flaw of modernity.