The fourth lesson from last week’s World Trade Organization’s ruling against Argentina’s anti-tax haven policies is:
Use your defenses; that’s what they are there for.
One of the key issues litigated in the case was the meaning of a defense for prudential measures under the WTO’s General Agreement on Trade in Services (GATS).
The clause appears to be more broadly worded than other defenses that countries have against violating their WTO commitments. It reads:
Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.
I had long warned that this prudential measures defense (PMD) language could be problematic from a regulatory perspective: does the second sentence cancel out the first?
From the US’ oral statements to the recent WTO panel, it is clear the US did NOT want an answer to the question…
The United States … considers that the context of this dispute warrants a cautious approach and that the panel should consider whether it can resolve Panama’s claims without issuing findings on the prudential exception…
The Panel therefore should first determine whether there is a prima facie inconsistency and, if it were to find such an inconsistency, then decide whether the measure would fall within the prudential exception. Where the Panel finds no inconsistency, it should not address the prudential exception, as the Appellate Body has recognized that “nothing anywhere in the DSU . . . requires panels” to “consider and decid[e] issues that [a]re not absolutely necessary to dispose of the particular dispute .”
…And then hinted at one anyway:
This is especially relevant in a dispute such as here where the alleged inconsistencies may have already been addressed and there would be no existing measure that would require interpretation of the exception. (italics added)
By this reading, the PMD is potentially self-cancelling in the way I warned. A measure ruled to violate the GATS in the first instance might not be able to use the PMD. USTR took their argument a bit further:
By its terms and unlike the general exceptions, the prudential exception provides that a measure must be taken “ for prudential reasons.” That text neither requires nor permits an assessment of “the extent to which the measure contributes to the realization of the end pursued,” whether under a test related to “necessity,” or whether the measure is “relating to” a particular end (e.g., “rational relationship” or “reasonableness” test).
Some of the general exceptions in GATT and GATS, for example, expressly require a measure to be “necessary” to achieve a purpose, such as : “necessary” to protect public morals or to maintain public order; “necessary” to protect human, animal or plant life or health; or “necessary” to ensure compliance with laws or regulations that are not inconsistent with the agreement. the anti – abuse provision of the prudential exception states only that measures “shall not be used as a means of avoiding” GATS commitments. Together with the first sentence of the exception, which requires only that a measure be “tak[en] . . . for prudential reasons,” this provision does not permit the “taking” of a measure in order to circumvent a Member’s GATS commitments. Nothing in the text of the prudential exception requires or permits the Panel to apply a different standard and determine whether the measures were “applied in a manner” constituting “unjustifiable discrimination , ” “arbitrary discrimination , ” or a “disguised restriction on trade.”
It’s rare to see the US have so little to say on an important interpretive issue. Basically, “it’s not the GATS general exception, but we are not going to tell you what it is”. And it’s unclear what emphasis USTR is placing on the word “taking”. In essence, what USTR urged was: “Don’t consider the law. Do not go into the political dead zone where law needn’t tread. We have a gentleman’s agreement to not talk financial policy in the space of the WTO.”
If USTR’s interpretation were correct, it is unclear why Argentina would not have claimed the PMD for each and every one of its eight challenged tax haven measures. (The panel ended up saying that almost any policy related to financial services could be argued to be prudential – a pretty wide opening.) Instead, Argentina defended two of the eight under the PMD, and six of the eight as being necessary for law enforcement purposes (and, in the alternative, as being necessary for tax collection) – defenses which are more onerous to meet.
Well, at least they seemed more onerous. In the end, not only did the panel reject USTR’s desperate plea to “not go there” with the PMD, but it interpreted the PMD as being similarly onerous to GATS’ general exceptions. Also contra USTR, the panel attached a reasonableness test to the PMD – one that was particularly demanding. Essentially, a policy was deemed not reasonable if it did not meet its objectives 100% of the time.
Despite the way the panel ruling came out, Argentina missed an opportunity to stake out more defenses. If the case is appealed, the country will be locked into a primarily GATS general exception-based defense. In the past, the Appellate Body has shown itself generally unwilling to let countries use such exceptions. Indeed, a few years ago, I crunched the numbers, and found that the WTO disallows such defenses 96 percent of the time. If Argentina had used a more thoroughgoing PMD-based defense, it might have found itself in front of an Appellate Body more responsive to USTR telegraphing.
will never have trouble understand governments’ unwillingness to use every defense available to them. My feeling is, they’re there – make the best possible case under every remotely plausible exception provision. Ask the panel to find under each defense for each measure, rather than structuring defenses so that- if a panel makes a finding on one – the panel needn’t find under each of them.
Clearly, I am in the minority. The US, for example, did not use every line of defense when its beef labeling regime was challenged. I don’t know if the transaction costs to putting the legal arguments together are too high. Maybe there is some sort of lawyer-to-lawyer sociological pressure to not argue too many points.
All of this may be moot as a practical point. As the panel determined that Panama was not harmed in any way under the anti-tax haven regime, the country would be unlikely to ever be authorized to retaliate. If the government is smart, they will cut their losses and allow some of the panel’s questionable analysis to stand for future litigants to take advantage of.