WTaxO Lesson #1: Finance Not Special

There are five major legal/policy takeaways from yesterday’s World Trade Organization’s ruling against Argentina’s anti-tax haven policies. I am going to post them separately over the next few days. The first takeaway is:

Financial services defenses are not that different from other defenses.Old WTO hands know that countries with services trade commitments benefit from general exceptions and specific defenses. Argentina invoked both for different aspects of its anti-tax avoidance regime, to no success.

Examples of general exceptions include the right to break your WTO commitments if necessary for certain law enforcement or taxation purposes (WTO General Agreement on Trade in Services Article XIV(c) and XIV(d) respectively). Specific defenses include the hitherto uninterpreted prudential measures defense (PMD, in the GATS Annex on Financial Services).

From the plain text, the general exceptions seem to be much harder to use. For instance, a country invoking XIV(c) must show that:

1. The law they are trying to enforce is not itself GATS inconsistent;
2. The measure they are using to enforce the law is designed to do so;
3. The measure is “necessary” to enforce the law, which in turn requires showing that: a) the measure’s policy objective is important; b) the measure contributes to fulfilling the objective; and c) the measure reduces trade as little as possible. WTO panels “weigh and balance” these different factors. The second test involves a lot of discretion, as it involves assessing whether the measure does what it says it does and how much it helps (in the case law, it’s a gray area between more than marginally but not necessarily indispensably);
4. Any alternative measures the complainant suggests do not better achieve the objective in less trade restrictive fashion;
5. The “measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services”. Note the use of “or”, so any of the above could do the measure in. (See paragraphs 7,614-.764 for discussion.)

In contrast to this nine-hurdle ropes course, the PMD merely states that members “shall not be prevented from taking measures for prudential reasons”. This would seem to be an easier test to meet.

Not so, as it turns out. The panel (at paras 7.808-.949) was surprisingly willing to consider a very wide range of policies “prudential”, including long-term and short-term, responsive and preemptive.

Where Argentina got stuck was on the word “for”. As I mentioned in yesterday’s post, Argentina goes after tax havens through the stick of sanctions, coupled with the carrot of being removed from the list once the tax haven comes to the negotiating table. As a consequence, the world is divided up into non-tax havens (who aren’t sanctioned), tax havens (who are sanctioned) and tax havens in the process of cleaning up their act (who aren’t sanctioned). By implication, groups in the third category are treated better than the second – despite no difference in tax transparency.

The panel argued that the word “for” implied essentially the test at 3(b) above, namely that there had to be a “rational relationship of cause and effect” between the measure and the prudential objective (para. 7.942). Indeed, in some ways, the test is harsher than the standard GATS analysis, as the panel did not look at the degree of goal achievement. In their assessment, any inconsistency in a tax justice framework rendered the whole thing null.

(The panel did not even get to the PMD hurdle that myself and others had warned was the harsher hurdle, the requirement that prudential measures “not be used as a means of avoiding” WTO obligations.)

In short, while finance seems to benefit from additional protections at the WTO, it ain’t necessarily so.