Multinationals are facing a new era of globalization characterized by the polarized forces of cooperation and competition — a duality that makes for a messy business landscape. On the one hand, the global economic system is becoming increasingly integrated through trade and investment flows and digitization. On the other hand, the global political system is becoming more fragmented amid a backlash against the downside of globalization.
So how are these forces shaping policies in the key areas of trade and investment, tax, data privacy and security, and labor and human rights? And how can companies prepare for the next era of globalization?
International trade and investment gets harder
The trade and investment policy landscape is becoming more complex as nations respond to the effects of globalization, cybersecurity threats, state development strategies and geopolitical risks. The status of various trade agreements is shifting rapidly, and governments are using non-tariff measures like technology transfer obligations, standards requirements, and foreign investment review rules to protect their industries and workers.
As a result, companies need to reevaluate their business strategies, including investment decisions, supply partnerships, and preferential duty access. In addition, as governments in key economies like Germany, the US and Australia place greater scrutiny on foreign investment, it will be imperative for acquirers to develop regulatory strategies early in the deal process to minimize delays, last-minute changes to the deal structure, and even failed transactions.
Managing tax risk becomes trickier
Changing business models, the rise of the digital economy, BEPS implementation, and national tax reform are just a few of the forces dramatically reshaping the global tax system. Even though countries like the US have enacted tax reform, they will need to implement it in ways to encourage investment while at the same time addressing perceived base erosion. This will likely mean that countries will continue to tweak their tax legislation, creating more tax uncertainty.
Cross-border cooperation among tax authorities is also making it more difficult for companies to manage tax and reputational risk. To adapt, companies need to revisit their structure and operations, including existing supply chains, IP ownership models, transfer pricing method selection, permanent establishment exposure, as well as the tax function itself. While regional tax managers have typically overseen local audit activity, a global view is imperative.
Data privacy moves up the compliance agenda
Nearly every company in the world is struggling to manage the broad range of legal and operational risks associated with data. Heightened regulatory scrutiny and more protectionist measures, such as the EU’s General Data Protection Regulation that takes effect in May 2018, are making this even more challenging.
To get ready for what lies ahead, companies need to ensure they have an internal governance structure that fosters a culture of data privacy from the top down. This requires having adequate program controls to address key areas such as personal data inventories / records of processing activities, tailored privacy policies and notices, data breach handling procedures, and security and retention policies.
Transparency requirements put the spotlight on labor and human rights
The rapid development of business and human rights standards that companies must uphold under the UN Guiding Principles shows no signs of slowing. Passing laws that require companies to be transparent about their practices related to human rights and gender pay is the latest tool legislators are using to place social expectations on corporations.
To minimize legal and reputational risk in the area of human rights, corporations must first conduct a risk analysis of their current activities and operations, review or implement human rights policies and supplier codes of conduct based on the assessment, and take swift action to investigate and remedy problem areas.