Daily Archives: April 3, 2019

04/3/19

MNCs in Britain: Consequences of Brexit

The number of multinational companies who are considering leaving or cutting down their operations in Britain as a result of Brexit is large, including firms such as JP Morgan Chase, Ford and Philips. Jobs, factories and headquarters are being shifted out to Europe in order to retain access to European markets and avoid taxation issues. Reports on income in Britain showed that as a result of slowed business investment, consumer spending above its means was what drove the small amount of GDP growth seen in 20181. Consumers, the government and businesses were all borrowers in the last quarter of 2018, which meant a heavy reliance on inflows of foreign investment. The growth of this reliance will be particularly troubling in the face of falling FDI into Britain out of Brexit concerns, especially in the situation of growing debt levels.

An article published by the Economist2 sheds light on what will be the emergence of an interesting dilemma. Despite the aforementioned number of firms moving operations out of Britain, foreign investment into the country was shown to grow 7% last year; the benefits of investing in Britain are not lost on some investors, including low corporate tax rates and the widespread availability of high human capital. This is simultaneous to the implementation of policy in Britain that presents a far more selective attitude towards foreign investment than in the past, with higher controls on the types and sources of foreign investment3.

While current demand for investment into Britain does exist, it is unlikely the nation will have the opportunity to turn their nose up at select foreign investment for much longer, given a growing dependence on foreign capital, a soon to be much smaller network and a thinning pool of investors. What is in store for Britain appears to be a role reversal, from a highly desirable host country with control over its foreign investment policy to a host that is forced to bend to the will of prospective investors.  It remains to be seen how Britain will choose to operate between its growing desire to place itself, the state, at the forefront of its economy, and its need for foreign investment, side effects included, to avoid crippling its growth.

 

Sources

  1. “British consumers keep economy growing amid business caution.” (2019). The Financial Times. https://www.ft.com/content/9de0ec52-5205-11e9-9c76-bf4a0ce37d49
  2. “Why foreign investment into Britain remains so strong.” (2018). The Economist. https://www.economist.com/britain/2018/04/07/why-foreign-investment-into-britain-remains-so-strong
  3. UK cracks down on foreign investment to protect national security(2018). CNN. https://money.cnn.com/2018/07/24/investing/foreign-investment-rules-uk/index.html
04/3/19

Amazon: an MNC that does not pay federal taxes

Amazon made $11.2billion in profits in 2018 but paid no federal tax. This tech giant is the leading online shopping MNC with an annual revenue of $232.887billion. However, it recently scrapped plans to build a second headquarter in New York after facing backlash over a proposed $3billion in tax subsidies. Opponents questioned why a company as successful as amazon should be lured to NY with taxpayer’s cash. Especially after the report by the Institute on Taxation and Economic Policy (ITEP) published a report showing Amazon was not paying a single cent in income taxes for the second year in a row.

In 2018, Amazon nearly doubled its profits, from $5.6bn to $11.2bn. But far from paying the statutory 21% income tax rate, it reported a $129m federal income tax rebate for the year – a tax rate of -1%.“You can’t lay the blame too much on Congress,” said Gardner. “It wasn’t Congress that came up with these ideas. They are the product of a lobbying blitz from these companies. These companies wrote the law in many cases.”

In a statement sent to the Guardian after the publication of this article, Amazon said it “pays all the taxes we are required to pay in the US and every country where we operate, including paying $2.6bn in corporate tax and reporting $3.4bn in tax expense over the last three years. “Corporate tax is based on profits, not revenues, and our profits remain modest given retail is a highly competitive, low-margin business and our continued heavy investment.”

Given this enlightenment, it is fairly obvious the power that MNCs hold when it comes to lobbying for policies that are in their favour. If a company like amazon cannot be accounted to pay taxes than the burden of generating tax revenue becomes heavier for the average citizen. Yes, a company this big is positively productive for the economy as they generate jobs, investments and pay other stake holders in the supply chain. But, this company’s operations does not economically add any value to anyone not affiliated with amazon. However, the billions that they can provide in taxes can be used to finance several social projects and infrastructure development.

References
Rushe, Dominic (2019) Amazon made an $11.2bn profit in 2018 but paid no federal tax. Retrived from
https://www.theguardian.com/technology/2019/feb/15/amazon-tax-bill-2018-no-taxes-despite-billions-profit

04/3/19

SNC Lavalin: State Vs. MNC

SNC-Lavalin Group Inc. is a Montreal based Canadian MNC that provides engineering, procurement and construction services in various industries and globally operates in fifty countries. In 2012 they were accused of a bribery and fraud scandal; they were accused of criminal charges “defrauding Libyan organizations of an estimated $130 million” and paying nearly “$48 million to Libyan public officials” in exchange for construction contracts. In 2019 they are the centrepiece of an ongoing political scandal that involves alleged political interference and obstruction of justice by the Prime Minister’s Office (PMO).

In 2016, the company started a lobbying effort with the newly elected Liberal government; advocating for the rapid adoption of legislation allowing Deferred Prosecution Agreements (DPA) and changes to Ottowa’s integrity regime that prevents it from doing business with bad actors. Due to the the ongoing criminal prosecution, the company’s stock had significantly tanked (buy stocks now!) and the company has since threatened to shutdown its Canadian operations and set up shop in America. The shutdown will cost 9,000 jobs and all in PM Justin Trudeau’s hometown; 2019 December is elections. One can only speculate now, but the question is did the PMO senior staffers exert improper/illegal pressure on the attorney general? The PM has denied any wrong doing. SNC CEO Neil Bruce has denied the above accusations and said, “A company cannot be prosecuted as a criminal, but if the company does not get the DPA then 9000+ innocent employees would lose their jobs as SNC attempts to secure greener pastures”.

Parag Khanna highlights that globalization and capitalism has shifted power from states to MNCs. This scandal directly embodies this power struggle. Here we have an MNC exercising it’s power to influence policy makers (including the PM) and successfully implemented the DPA. A policy that overlook their crimes on foreign soil and let it continue its operations. However, the state is resisting but SNC is continuing its coercion tactics by applying economic pressure (loss of jobs and relocation to a different nation).

The question is, who will yield?

References:

Swain, Diana (2019, Mar 08)An economic reality check on SNC-Lavalin: Are 9,000 jobs really at stake? Retrieved from
https://www.cbc.ca/news/business/snc-lavalin-scandal-economics-jobs-risk-1.5047248

Thurton, David (2019, Mar 12)Four questions without answers about the SNC-Lavalin scandal. Retrieved from
https://www.cbc.ca/news/politics/snc-lavalin-wilson-raybould-trudeau-1.5051909

Khanna, P., & Francis, D. (2016, March 15). These 25 Companies Are More Powerful Than Many Countries. Retrieved from https://foreignpolicy.com/2016/03/15/these-25-companies-are-more-powerful-than-many-countries-multinational-corporate-wealth-power/