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Posted by on Apr 28, 2015 in Banks, Budget, Business, Economy, Finance, Government, International, Politics | 4 comments

Regulating Multi-national Corporations

sec_us-securities-and-exchange-commissionsec_us-securities-and-exchange-commissionThe word multi-national makes regulation of corporations and financial institutions along with equitable taxation extremely difficult. Though most of a corporation’s business may be in a particular country or countries and most of its manufacturing or investments may take place in another nation, the company may locate its headquarters and primary habitat in a completely different nation that has nothing to do with these or with its country of origin. The nation that it chooses as its home may provide it with special benefits independent of customers, manufacturing, or the locale of its investments. To make the choice of its home country appear reasonable, the company may build some of its units in the nation where it placed its headquarters. Of course, the main reason for the corporation’s choice of locale is the tax benefits or subsidies it will receive.

Some nations have low corporate tax rates to try and attract businesses to locate there and some will subsidize the building of factories or headquarters to increase the number of jobs that will be provided. In fact, there is often competition between nations to see how much they can provide in tax breaks or subsidies to guarantee that corporations will locate there. It’s a game of beggar thy neighbor to try and win business. (American states try the same strategies to try and attract businesses from other states, by giving subsidies or tax breaks.) Unfortunately, although businesses may be drawn to low tax nations or ones granting subsidies, the nations may ultimately find that their special treatment of the corporation that benefitted was not worthwhile. Though some additional jobs may have been provided, the revenue surrendered on subsidies or tax breaks may make the deal a losing proposition for the nation (though a good one for the corporation). However, the financial aspects may not be evident for some time, and too late to change the terms of the agreements.

Inversions also become popular a few years ago, where a larger company bought a smaller one in a low tax country and located its headquarters there to cut its tax burden. By executive order, President Obama and Treasury Secretary Lew made this strategy less profitable and it has not been used recently.

What are the kinds of regulations that governments want to place on multi-national corporations. The most important controls are related to large banks, making sure they do not take undue risks in trading. Trading should also be done with their own money and not that of their clients. And they should have enough reserve cash to protect them if they economy suddenly goes south. Salaries and bonuses of top executives should also be reasonable and hopefully tied to performance.

For manufacturing, extraction, (oil, gas, and mining) and service corporations, bribery of officials in foreign countries to generate business must be controlled. Compliance with environmental regulations must be watched as well, particularly the release of toxic materials into the air, water or soil. Salaries and bonuses of CEOs and top executives must also be monitored to be certain they are in line with profits.

And for all financial institutions and corporations, proper payment of taxes and fees must be checked to be certain there are no discrepancies, with reduced revenues going to the countries that should be paid. Manipulation of currencies and interest rates by banks must also be prevented and there must be adequate management of mortgages and derivatives, and bundling of loans and investments with proper classification in relation to risk.

There are several problems that arise with regulation of financial institutions and corporations. One is that different nations and the European Union have different rules, regulations, and regulatory agencies that make it difficult for financial institutions and corporations to conform to the different demands made upon them. This could be solved by having uniform regulations among the various regulatory agencies in different countries, but all are reluctant to surrender their sovereignty and control. In order for regulations to be effective, they have to be uniform and enforced by the countries, a situation that appears unlikely in the near future. In addition, special tax breaks and subsidies to attract businesses have to stop and tax policies also have to become similar. Having uniform regulations and tax policies would certainly make it easier for corporations to prepare the necessary forms and make it easier for the regulatory and tax agencies to be certain everything was in order.

However, uniformity in regulation and taxes is a pipedream that will not happen for a while. There are still countries that want to offer tax breaks and subsidies to entice businesses, and the issue of surrendering sovereignty to develop uniform regulations remains to be solved. (My regulations are better than your regulations.)

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