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International Business and Law



Abstract

Operations of Multinational Corporations MNCs were criticised by proponents holding that the companies provide numerous benefits in the countries of operation such as employment, technology transfer, and infrastructure development. On the other hand, opposing groups hold that these companies grossly violate operations in the host nations covering various economic, social and environmental crimes. As such, recent research has shown that the disadvantages of MNCs appear to outweigh the accrued benefits and any benefit extended to these countries is an externality MNCs cannot avoid. MNCs operate to maximise their costs regardless of boundary. The current research has established that there is weak legal international and national framework hence failure to curb wrongdoings by MNCs. The most vulnerable groups are developing nations. Various cases have been presented as well as failures of World Trade Organisation in curbing mal-practises against poor nations since arbitration costs are very expensive. MNCs also have the ability of manoeuvring through existing legal provisions within a domestic system as shown in cases presented therein.

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Introduction

Multinational companies popularly known as multinational corporations (MNC) are big global firms operating in more than one country. The firms are large and offer employment to numerous people, while their annual turnovers are even bigger than the gross domestic product of some of the countries in which they are located. The companies operate within the precincts of international and domestic laws of the country of operation. In recent times, a trend shows a shift meaning that MNCs are shifting production plants from parent countries to developing nations due to strict legislation on production. The companies only base their headquarters in their parent country and produce goods offshore attesting to discrepancies in regulations within the global framework. The legislative variables include economic laws, environmental regulation, social standards and ethical consideration which can change the economic landscape in which the business is operating. The laws, if followed strictly, increase the cost of business with respect to the social and physical environments.

The legality of operations, therefore, questions the relevance of international law in guiding and protecting foreign investors doing business locally and protecting the local business environment from large corporations with financial muscle bigger than the local economy. In this pattern, a pace has been set and argued in global platforms that foreign companies originated in the developed countries exploit local economies of the developing nations. If this is the case, the relevance of laws from the parent country, international law and ethical responsibility of companies show failures of the global market. The failures are expressed in pollution, dumping of substandard goods, corruption, fuelling violence and political destabilisation. Therefore, the current paper will review the operations of MNCs in the domestic system.

Background

In most developing countries, the domestic legal systems are weak so that powerful international investors have the ability to manipulate the weaker judicial systems to benefit economically from their investments at greater economic, social and environmental costs. The vulnerability of these countries grows and at the same time leaves them with no choice but to accept the offers of the international investors for the partial benefits expressed in the deals. The international investors often have multiple shareholders with conflicting interests. Based on the financial muscle, the interests cause even greater thirst for profits that put pressure on the management teams of MNCs. This pressure minimises the chance for the developing countries to lay out their rules and expectations in relation to the MNCs which also include opting out for the nearest destination. As a result, third world countries are closely guided by the principles of foreign investors.

There are various terms and conditions held by MNCs when negotiating with developing countries. In some instances, international investors consider the need to come and use their own labourers and professionals. This reduces the chances of the hosting country to gain control of the investment, creating employment for locals and in the end the hosting nation is marginalised by the investors. Since international investors have vast resources, they also have the ability of manipulating the domestic systems as well as threatening to withdraw the investment to gain control. MNCs enjoy greater economies of scale that build an advanced infrastructure that enables them to produce more specialised products superior to local products. Apart from the competitive advantage already established in the line of business, these companies bank on their parent nation’s geopolitical and economic muscle to advance their agenda in developing countries.

To assert authority in the economy, MNCs also introduce their own infrastructure in the local countries such as communications and security tools and services. This practice discredits the existing business framework established by the host nation since the MNCs prefer using their own infrastructure services. Further, their economic muscle allows the companies to make such investments and further make public resources private and otherwise introduce items such as levies and taxes on public utilities initially enjoyed by citizens. Thus, MNCs challenge host nations on the basis of financial power, economic advantage, technological advancement, country of origin, political yield, blackmail and unethical negotiation skills.

Literature Review

According to Kema (2013), MNCs are major players of geopolitics. The companies are located in parent country with headquarters and subsidiaries in other countries. The MNCs see the world as one and yield power capable of defeating any obstacles on their way. Therefore, decisions are made based on the business strategy. The author downplays any exploitation noting that any economy is viable for exploitation so that the drive for profits supersedes any national interest. Nonetheless, there is consensus that developing countries are the most vulnerable countries in business environment. Social factors such as poverty are envisaged as natural factors. Therefore, MNCs have been threatening the independence of countries since the mid 20th century. The advantages of MNCs to the host nation including technology transfer, job creation and improved product development have been proved empirically to be fallacies against profits of the firms. More critically, the MNCs weaken the sovereignty of host nations, engage in pollution, and exploit local and international laws to their benefit.

MNCs often engage in depositing counterfeits in developing nations resulting in big economic losses. This is because the losses are borne by the nations. The MNCs complain about counterfeits on a face value without empirical evidence of the said losses. Even though such losses are presented unverifiable to downplay the real impact, fake goods continue to enter into markets of developing nations. In instances where the MNCs are not liable, their businesses are affected by counterfeits which also harm the economies of host nations. Apart from counterfeits, MNCs register technological and intellectual property claims that benefit corrupt people. The regulations of the land are arm-twisted together with counterfeiting through corruption in developing nations. In most cases, the activities thwart the rule of law and promote violation of human rights, transparency and mistrust between the governments. The real cost of these counterfeits fall on hosting nations while MNCs hold on intellectual property and diversify into new markets.

The International Court of Justice has no jurisdiction for hearing cases of individuals, nations and MNCs since MNCs are not parties to the court. The court only deals with nations which are parties on matters of treaties, international law, international obligations and conventions. At the same time, the laws between nations suggest that there is a major difference between business, torts and case laws and functions and procedures of courts, judges and legislation.

With this respect, there is no single international law that governs or applies to the operations of MNCs. MNCs operate with weak International Labour Organisation (ILO), Organisation for Economic Co-operation and Development (OECD) and European Union guidelines. It is necessary to expand the mandate of International Criminal Court to cover the MNCs. With the reference to the Niger Delta, it is established that Shell in Ogoni overexploits oil and engages in environmental pollution through oil spills further destroying agricultural land. Water is also polluted and the local communities have no option but to use the waters from these sources.

Equally, Shell in cooperation with the government had soldier kill members of Ogoni land to stamp their authorities in the mining fields. The author notes that environmental laws were weak placing the mandate of environment protection on the hands of the Minster of Nigeria. This continued until 2007 when the environmental standards and body was established. Afterwards, Nigeria established health and oil spill law and environmental impact assessment laws. Even with these developments, the pollution and other malpractices continued in the Niger Delta. This is due to total disregard to the law of oil mining companies and lack of enforcement as well.

Further, human rights laws were developed to protect people from abusive actions of the state and not MNCs. In the world, it is only the United States of America that has a law governing against MNCs. The Alien Tort Act allows convictions against MNCs though they are greatly affected by jurisdictions. Other laws such as the United Nations norms of Multinational Corporations are grossly ineffective.

Another economic malpractice is evasion of taxes by MNCs. MNCs can also evade taxes in both host and parent countries by establishing base in Tax Haven countries. These countries have lessened grip on tax regulation providing loopholes for MNCs to capitalise their gains. In the tax evasion strategy, the companies choose not to repatriate some profits in the context of reinvestment and so forth. For instance, Microsoft chose to reinvest $92.9 billion that was part of its profits in 2004. In some cases, the companies just hold on their profits until parent economies announce tax holidays after which a decision is made to repatriate the profits.

The tax collecting units of hosting are, therefore, unable to recover the monies and are legally challenged since tax is charged on declared profits. At the same time, certain countries such as Hong Kong and the Bahamas offer private banking services for wealthy individuals that are legal for persons unable to reach high banking service in host nations. The accounts have a publicly known upper limit. However, values transacted are enormous and dubious so that there are chances of tax evasion. The operation framework of the act fuels shell companies that benefit the banking sectors and registrars of companies in developing and developed countries. The motive is aimed to reduce MNCs profits through un-rendered and difficult to prove services.

There are two trends in tax relations for MNCs. First is that the amount of tax on capital is continuously reducing in developed and emerging economies unlike developing nations. Second is the ease with which companies can be registered and capital shifted allowing companies to evade tax responsibilities. MNCs have the potential of identifying such opportunities due to the gaps in the policies and weakness in the law. In the end, the legality of the actions is questionable but not chargeable in a court of law. The most vulnerable group in this case is developing countries who have a poor capital and saving structure and losses of tax remissions from MNCs severely harms their economies.

The situation is more critical on the basis of legislation that creates tax havens for MNCs. This in a way shows that countries are competing for capital and savings. Tax Haven promise to hide the identity of clients and value of monies held therein reducing financial transparency. This opens a window for crime and hides all the evidence. Tax evasion is one of the crimes that affect both developed and developing economies. MNCs, therefore, affirm their interest in increasing profits at greater social and environmental costs by exploiting loopholes and weakness in legislation.

From the review, it is clear that MNCs are involved in human rights violation, social and environmental crimes, corruption and tax evasion in developing countries. They also engage in tax evasion in developed or host nations. It is, therefore, important to evaluate the legal framework within which MNCs operate.

Analysis

In the absence of an International Court where MNCs cannot be punished for crimes mentioned above, a theoretical analysis puts in perspective principles and conventions guiding international trade and the activities of MNCs. The World Trade Organisation (WTO) is the leading international trade organisation governing commerce in the global arena. The organisation attempts to promote free and fair trade within a myriad of interests from developed and developing nations. WTO is the organisation capable of controlling commercial interests. However, developed nations and MNCs yield more power over it, making it difficult for WTO to achieve its goals. Within the frameworks of operations, any contract adopted by WTO binds its members. In the event of a commercial conflict, WTO dispute resolution process is effective. Steier notes that WTO is more effective in implementing its principles than political undertones; thus, it is effective in managing international trade. However, the dispute resolution does not pass judgement to end the conflict but attempts to mitigate the conflict so as to enhance future trade.

There is a conflict between the United States that pro genetically modified foods and European Union that anti-genetically modified foods. In the dispute, MNCs producing GM foods successfully rallied WTO to enter the EU market. Subsequently, the companies achieved the same objectives in Canada and Argentina. The decision was made even though it violated certain components of the Cartagena Protocol on bio-safety. Thus, the decision was based on profitability of MNCs rather than aspects of consumer protection. The promotion of GM food is based on the philosophy that the foods were healthy until proved unhealthy. One of the promoters of GM foods is Monsanto.

In a different matter faced by WTO dispute resolution panel, the European Union challenged the decision of the United States to provide special tax consideration on sales of foreign countries in contravention of Articles 3.1a and b of XVI of GATT 1994. The European Union argued that the tax provision was also against the U.S Internal Revenue code Article III:4 and, as a result, a panel was to be set to hear out the case. In the resolutions, WTO established that U.S had created export subsidy that affected markets and was against the principles of agricultural products. At the same time, the panel could influence U.S to change the law since the WTO did not have the obligation to promote a given tax system in any member state. The case was eventually settled after U.S congress repealed the legislations known as the ETI Act and American Jobs Act. It took 7 years for the Congress to settle from 1999 to 2006.

The resolved case reflects the creation of tax havens leading business people and MNCs noting that U.S is a leading exporter of GM foods. The law was an advanced attempt to make GM products look even more lucrative in the international market. However, there is an indication of violation of home country laws in a bid to attract capital gains. According to Lida Keisuke, WTO dispute resolution panel is not a cheap venture for a small company or developing nation. As a result, these parties shy away from the activity. Between 1995 and 2000, developing countries filed independently or jointly only 41 of the 149 cases reported. The cases further showed low appearance with only Egypt and South Africa each appearing twice. This occurs when three quarters of members come from Africa. It explains why the gross violation committed by Shell in Niger Delta went unnoticed. Within the period Nigeria did not report about the issue.

There are also other legal frameworks within which MNCs are liable such as the International Law that includes UN Norms on Responsibilities of Transnational Corporation and Other Enterprise to Human Rights, OECD guidelines for Multinational Companies and Global Compact. The UN Norms attempt to promote human rights for MNCs giving them similar status as the national status. Therefore, UN empowers MNCs to promote human rights in countries of operations. OECD guidelines are non-binding responsibilities governing how nations relate to countries in MNCs operating within their borders. The goal of the guidelines is to improve the atmosphere of foreign investment.

In the guidelines, MNCs are expected to promote human rights in their operations. The Global Compact also promotes a series of soft law that should be observed by companies in their operations with respect to human rights, labour and environment amongst others. International Environmental Laws are often addressed at the state level and govern responsibilities of MNCs. The United States have the responsibility of enforcing the laws. International Criminal Law also operates like the environmental law. However, the law applies to persons rather than corporate organisations and as such MNCs are not covered within such jurisdictions.

International Criminal Law, International Environmental Law and UN regulation are toothless regulations that cannot affect the operations of MNCs. Hence, to some extent the most extensive legal framework lies with the WTO than any other international organisation. The regulations mentioned above rely on the goodwill of the company. It is thus important to access the ethical responsibility of companies. Ethical considerations extend to norms and values of the society that firms should serve. Companies are, therefore, expected to be above the board in their operations. Ethical consideration which is a corporate social responsibility pillar advocates for self-regulation on environmental and ethical grounds.

Legal Review

The analysis of court cases between the United States and MNCs is accomplished using the IRAC method. The IRAC method provides an efficient way for synchronising legal information into a format that enables one mark analysis for a case in isolation or otherwise comparative analysis. It is applicable for both learning and legal practice. The method provides key elements of a case. IRAC is an acronym for Issue, Rule, Analysis and Conclusion. The issues explain the matter in front of the court, while the rule indicates the applicable laws relevant to that particular issue, and the analysis shows the relationship between the law and facts of the case and finally; finally, the conclusion is the verdict of the court. IRAC represents the most logical way of presenting cases already handled in court or cases to be handled. The section includes previous cases involving MNCs and Kenya as a domestic system in terms of major corruption used in the latter case construction stage involving another MNC.

In Income Tax Unilever Kenya Limited v Commissioner of Income Tax at the High Court of Kenya, Unilever Kenya appeals a decision of income taxation on its part. The issue is that Unilever Kenya is part of the Unilever MNC headquartered in United Kingdom. Unilever Kenya entered into an agreement with Unilever Uganda to manufacture products for the latter. At the same time, Unilever Kenya maintained its market. In committing sales, Unilever Kenya sold products at lower prices to Unilever Uganda and exported those to the Kenyan market. As a result, the Commission of Income Tax deemed it not appropriate.

The Rule for the case was Income Tax Act Cap 470 section 18 where intentional reduction of profits and transfer of benefits to another producer is deemed as malpractice to the national law. Thus, Unilever Kenya reduced its profits to benefit Unilever Uganda and lowered its tax burden in Kenya. The analysis of the report by Commissioner of Income Tax reveals that Unilever reduced its taxable income. On the other hand, the Unilever notes that such practices between subsidiaries and affiliates are in line with MNCs goals for profits expected for each country under the transfer pricing policies. The Court concluded that Unilever Kenya committed no Tax evasion malpractice and that its pricing strategy to Unilever Uganda is sufficient.

In a different tax matter Barclays Bank of Kenya faces the Large Tax Payers’ Office. Based on an audit, the Tax office demands withheld taxes on the payments which the Bank found illegal. The duration involved business transactions between 2003 and 2006 with an interest of 2% per annum. The rule in question was section 35 of the Income Tax Act on withholding tax. In the analysis, it is questionable whether tax claim can be made on interchange fee which the Bank paid to Credit card companies on the basis of management and professional fees. The Tax office argued the case on the matter of evidence and technicality of tax application. In the conclusion, the court ordered that the Tax withdraws its tax demand on Bank since the law, as it was, had not exclusively defined what management and professional fee was. As such, the body was limited to transactions that bore tax liability under section 35 (1)(a) of the income Tax Act meaning that such transactions under liability ought to be stated with clarity.

In the issue of Republic of Kenya v Public Procurement Administrative Board, Kenya Revenue Authority, De La Rue Company and Security initiated a civil case. The UK based MNC with a branch in Kenya through a Notice of Motion seeks Judicial precedence on missing out a government tender based on procedural misconduct which the board fails to review. As a result, the company argues that the Board should be ordered to review its decision on the non-allocation of the tender by Kenya Revenue Authority and allocate the tender to it. The rule contested is the Public Procurement and Disposal Regulation 46 on the date of notification of non-award of the tender.

In the analysis, the company noted that it was notified 8 days late without prior notice for lateness like is expected by the law. As such, section 38(b) of the law was violated as well as paragraph 2.25 of tender documents that correctly guided submission of the documents. On the other hand, the Board held that under section 39(8), the Board could exert preference if the business value was less than 50 million and if such preference was derived from the Export Processing Zones that is outside customs territory. The tender application from the company also indicated that another subsidiary of the company outside Kenya could benefit from the business. The conclusion was that the MNC had a case. The Board was ordered to review its decision in line with the plights raised by the company. However, the court found it hard to find out how jurisdiction applies in determining the result of the Board in favour of any party.

In the cases mentioned, a pattern is established. In all of these cases, MNCs fought against the State. The cases were selected randomly without bias though the sample is very small to establish a trend between MNCs and investment patterns in a country. Arguably, two theories can be put forth; either the State has its cases compromised and or MNCs put strong applications. However, it is an oversight to declare any wrong doing of MNCs’ victory and without empirical evidence. Thus, it is a complete new package to this investment destination warranting a completely new research. Nonetheless, with MNCs being documented as malicious and exploitative, there is justification to believe that such victories are questionable especially within the African context. It is because in Africa, judicial systems are yet to mature and issue only rulings. In the first case, Tax evasion claims are put forth. The Court rules in favour of the pricing strategy.

Income Tax laws are placed on profits gained as a result; any act of reducing the profits is in itself malicious especially with insertion of “group profits” when production is done within a country’s borders. The law and the ruling fail to capture the economic sense to the disadvantage of the State. This is one aspect of tax evasion since the final benefit ends with the MNC. In the second case, payment of professional fee that forms the foundation of Tax evasion is also tested and fails to meet the threshold of taxation. Whereas this is company to company transaction, its legality remains elusive. It, therefore, explains why tax evasion in Tax Havens remains even a bigger mystery. Finally, the last case shows disrespect to procedures of a host nation in the last count where the MNCs seeks reversal of Boards Decision. Luckily, the court declined it. Noting that it might have been a legal strategy, the MNC had a right to build a case on any wrong doing.

Case Construction

The following section attempts to build a case between an MNC from the United Kingdom and the chosen country as an investment decision. It is noted that the MNC is accused of bribing two State parastatals to win government contracts. The case which is ongoing in the United Kingdom has gone without notice in Kenya even though the crime was committed there.

Another case is an issue of Smith and Ouzman, the director of a printing firm from the United Kingdom, and citizens of United Kingdom who have been charged with corruption. It was by the Serious Fraud Office of United Kingdom in Southwark Crown Court. The offense that happened between 2006 and 2010 occurred in Mauritania, Kenya, Somalia and Ghana and a total of 413,552. The Rule of the case is set before the Bribery Act though the jury is yet to establish whether the suspects have a case to answer. If a case is established, the suspects are likely to be charged under section 2 (2) and (5) and section (3) of the Bribery Act of the United Kingdom. In section 2 (2), when there is reception or acceptance of a financial or other advantage, an activity is performed improperly and (5) anticipation of bribing is performed by another person. Section 3 (2b) notes that if such activities relate to business and 6 (a) where the activity does not relate to the United Kingdom. In analysing the case, there is jurisdiction in the United Kingdom since the law shows it.

The burden of prove is pegged on the payment of professional service to local contact in the mentioned countries and application of those payments is in contravention of Section 3 (3), (4) and (5). The subsection with the suspect could argue the local contact expressed professional fees and the company acted in good faith, with impartiality and based on trust on the local contact on coordination of business. Therefore, the benefit mentioned therein is an aspect of business that translates to profits. The conclusion will therefore depend on the strength of legal representations.

This is a case of corruption charges committed outside the United Kingdom. The local countries, where the crimes were committed, are yet to establish the crime and initiate legal proceedings against any suspect. It shows the extent MNCs exploit third world countries to realise profits by colluding with a few government employees and private citizens.

Conclusion

It is, therefore, evident that MNC engage in mal-practices in their line of businesses. The practices, which cut across natural boundaries, are geared towards gaining profits for the firms. However, the magnitude of crimes in developing countries with weak judicial and legislative systems can be compared to developed countries. Tax evasion is a dormant act that affects both sets of countries. However, developing countries suffer from other problems such as human rights violation and environmental degradation as it is evident in the case of Nigeria and a test of systems and corruption as shown in the case of Kenya. Further, there is a slow trend in pursuing these cases from developing countries due to weak legislation and high expenses associated with international platforms such as WTO. With WTO accused of influence from MNCs, other soft regulations from UN, OECD and EU would show patched framework to laws to guide MNCs that are ineffective since they rely on the goodwill of the companies. Further, the scope of these laws does not cover developing countries except for UN and WTO agreements where applicable.

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