Regulatory Risks Burdensome for U.S. Firms Abroad, Aon Experts Say

March 10, 2006

What impact will DP World’s decision to drop its plans to enter into an agreement to run several U.S. ports have on American businesses located in countries with strong cultural and business ties to Dubai? Perhaps none. But Aon Trade Credit experts say there is increasing evidence of countries selectively imposing burdensome and arbitrary regulations on western multinational corporations.

Bryan Squibb, managing director, Aon Trade Credit U.S., says that in the 70s and early 80s there was a trend toward governments’ privatizing a company’s assets. In those years, he says there were so many radical changes in leadership throughout the world that it was fashionable for the incoming government to blame the outgoing administration for that country’s problems. So the previous government’s business deals often came under fire. Oil and gas companies from the US and UK were frequent targets.

Squibb says there’s evidence that a variation of that trend from 20 years ago is now threatening some North American and European companies.

“When countries arbitrarily impose these discriminatory taxes it’s a form of international blackmail. Multinationals have no recourse,” Squibb says.

“We’ve seen arbitrary taxes imposed amounting to anywhere from 3-25 percent of a company’s revenues from that particular country. The taxes appear out of nowhere and the shareholder ultimately pays. It erodes the predictability of a company’s earnings.”

Squibb describes one instance when after a multinational corporation had built its facility in a country and amassed 2-3 years of earnings, the local government suddenly and arbitrarily declared the land beneath the company’s local offices property of the state. The company had the option of absorbing the cost of dismantling and relocating its operations, or paying the locally imposed regulatory tax. “Most companies,” Squibb says, ” pay the tax.”

This is more insidious than the government confiscation that took place years ago, Squibb says. “Confiscation gets press coverage,” he says, “but if a local government sticks on a tax it doesn’t get much attention.”

Squibb says political risk insurance may cover these occurrences, but it’s still unsettling for the company on the receiving end of these arbitrary rulings.

“It’s a bluff game, a balancing act,” he says, ” the last thing you want in year five of your country business plan is the imposition of a tax that takes down your margin.”

Aon Corporation is a provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. The company employs approximately 47,000 professionals in its 500 offices in more than 120 countries.

Source: Aon Corp.

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