Marx and the Corporations: Chapter 2 - The Invoice

The inception presented in last chapter period didn’t last long and soon, IT services providers, some of the largest companies worldwide, realized their profit could be further improved. The pressure of revenue and profit growth is a constant of the corporation's existence. High taxation is a burden that, with creativity, could be better addressed.

Supported by labor arbitrage, an IT company delivers services for its clients at a very competitive rate but pays high taxes within the country where delivery comes from or where the profit is reported. Like many wealthy people and companies in other sectors, the IT industry discovered the tax havens. In translation, a tax haven could be a regional invoicing center, a regional HQ, a fiscal hub, or whatever you want to call it. The usual suspects where these offshore havens were opened are the Caribbean, the Middle East, or the Far East, even some European countries relaxed when it comes to profit taxation like Cyprus. The logic is relatively simple: the most considerable markup, the highest profit, is set in the country where the fiscal regulations are more relaxed; it is not rocket science. A moving money science which supports a better profit.

Is it legal? Legal and legit business. One must be careful to demonstrate that the regional invoicing center does more than the invoicing, which is relatively easy. So, the company deploys few executives in the fiscal hub and assigns them roles in support functions like Operations, some KPIs setting, Delivery Quality, consolidation, standardization, and management. Not top management but corporate mid-management, spreadsheet management, bureaucracy stuff, nothing of the highest importance for the company. Are they essential to the company? Not really! One can argue this is costly. It costs a small fortune, but the gain from lower taxation is much higher.

You see the picture now. Is it fair? I got this question from politicians who understand how these delivery centers work. They always commented: OK, you are helping the country's economy, but the highest portion of the profit goes elsewhere. My answer was always the same, a bit elusive but accurate: think about all the benefits the local economy obtains from these delivery offshore centers, including the large amount of taxes they are paying locally. Second, if these companies would not come to our countries they will go elsewhere. Which one would you prefer? Bottom line, it must be a win/win for a corporation to invest massively in countries like ours.

I explained in Chapter 1 that IT companies discovered CEE a few years into the 21st century. The first centers were opened in the Czech Republic and Poland, some in Hungary and Slovakia, and a bit later in the Baltic countries. Only after the 2008 financial crisis were other countries in the CEE region, specifically Romania, Bulgaria, former Yugoslavian republics, and even Ukraine, Belarus, and Russia, taken into account seriously, and companies started investing there. I consider the years 2008-2009 the end of the inception phase. Just think that the 2008 crisis was, in the Western part of the world, the most severe economic worldwide disaster since the Great Depression of 1929. The companies reacted by increasing their offshore presence, leading the IT market to what it is today: a mature, solid network of worldwide specialists delivering quality services for the world's largest and most successful companies. In other words, no offshore and nearshore presence, no business!

Next week a new chapter: 3. The Demand.