The ever-increasing set of international economic problems has renewed the debate over corporate responsibility in the global economy. At the heart of this revived debate are complex issues of risk-taking investment, management-oriented corporate governance, and extraterritorial U.S. regulation of foreign source income and bank-secrecy of foreign banks.
One of the most intricate areas of international economic regulation and corporate responsibility is drafting the regulations implementing the new Foreign Account Tax Compliance Act (FACTA).
This act was enacted after the long and successful efforts by the U.S. Dept. of Justice, and eventually the Department of State and the Department of the Treasury, to get UBS to turn over data concerning U.S. citizens and their secret bank accounts used to avoid U.S. taxation.
The new act requires foreign financial firms to register with the IRS and to certify annually the existence of accounts held by Americans or U.S. residents in their institutions. If this is done they would be “compliant.” If they are not compliant then any transfer of funds from the U.S. to them are subject to 30% withholding on their income and capital transfers.
This new law raises significant issues of unilateral and extraterritorial application of U.S. economic legislation to foreign entities in their international transactions. What if foreign countries such as China, Russia, Japan, Brazil or Mexico impose similar requirements on U.S. financial institutions? This certainly seems to be an increasing possibility. At the minimum foreign institutions might well stop taking Americans as clients in order to avoid U.S. regulatory oversight. Thus, this new foreign bank practice would place American firms in an uncompetitive position in their foreign transactions.
The long-range solution to this slice of the global corporate responsibility issue seems to be greater international cooperation and more multilateral efforts among governments. More negotiations and development of a global architecture is necessary to take into account the growing economic interdependence of multiple centers of global finance and trade. This approach would promote better corporate practices, sound public policy and makes good legal sense.