Tax justice and diplomacy were pitted against one another in today’s World Trade Organization ruling. Diplomacy was a clear loser, but tax justice was not an unambiguous winner.
The bad news first. For years, the Kirchner administration had been gradually expanding its efforts to go after offshore jurisdictions that entice Argentine customers with low or no tax. The government argued that these countries cost the treasury, upset financial stability, and facilitate criminal and terrorist money laundering. In 2012, Panama – a leading tax haven and target of these policies – complained to the WTO. The three WTO panelists assigned to the case (Pierre Pettigrew of Canada, Gonzalo de las Casas of Peru, and Rodrigo Valenzuela of Chile) sided with Panama, finding that Argentina’s policies violated the WTO’s most-favored nation (MFN) rules.
The good news: the panelists found that – at least in theory – defenses in the WTO’s rules allow a country to go after tax havens even when these violate MFN. Some of these defenses – like one covering prudential policies in financial services markets – had seemed to be worded so as to be useless. Pettigrew and company brought some welcome clarity and strength to those vaguely worded provisions.
The mixed news is that Argentina did not qualify for these defenses.The reason? In an effort to improve diplomatic relations and defuse the trade fight, Argentina launched negotiations with Panama in November 2013 to sign a tax cooperation agreement. Under Argentine law, countries that make these good faith efforts are removed from the sanction list. The WTO panel concluded that Argentina’s lenience with Panama had weakened the sanction regime, meaning it couldn’t qualify for the defense. I guess nice guys do always lose!
This is just the latest in a string of WTO cases that try to balance trade promotion and regulatory sovereignty, and come up with a weird mix. In 2012, the US lost a case over anti-smoking policies because it both hampered trade too much and protected health too little. These rulings gives regulators hope that trade law won’t interfere with their work. But they also cause headaches. WTO panels – perhaps to find a way to give complaining countries a win – have found something to dislike in the specific way a country regulated. The result is legal and policy-making uncertainty.
I’ll have more things to say about the case in the coming days.
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