How to Disappear a Panel Report

The World Trade Organization ruled against Panama’s pro-tax haven advocacy in a decision dropped earlier this month.

As I wrote about here, here, here, here, here, here, and here, a 2015 WTO panel had ruled partially in favor of Panama’s challenge of Argentine anti-tax haven policies.

Those posts show that there was a lot of wacky aspects to the case and the panel’s reasoning.

First, Panama was actually benefiting from the aspects of of Argentine law deemed WTO-illegal. The only harm was to tax havens other than Panama. This raised the largely untested question of whether a WTO member can bring legal challenges to relieve damages felt only by other members. It also raised the issue of the WTO compatibility of Argentina’s generous diplomacy-motivated exemptions from its law for certain tax havens (like Panama) that had signaled a willingness to cooperate.

Second, the panel seemed to mix up which provisions of the WTO’s General Agreement on Trade in Services (GATS) represent trade expansion obligations and which provisions provide defenses against those obligations. Their interpretations would have raised the bar considerably for how effective a trade-limiting policy would need to be to survive a GATS compatibility examination.

Finally, the panel seemed to break a “gentlemens’ agreement”that financial stability policies are to be left outside of WTO remit.

Had these decisions been allowed to stand, countries could argue that anti-tax haven policy needs to be 100% effective if it’s going to interfere with trade. Since no policy is 100% perfect, this is an invitation to litigation.

In a decision released on April 14, the WTO’s Appellate Body indicated it was having none of the panel’s approach. The section consisting of Ujal Singh Bhatia (India), Yuejiao Zhang (China), and Seung Wha Chang (Korea) ruled that Panama had not made its case that Argentina violated its WTO obligations.

By ruling against all of the panel’s major findings, they showed how to make a panel report disappear.

While there would have been a number of ways to do so, the Appellate Body went through the needle of “likeness.” When a WTO member is accused of discriminating against foreign products or services, panels are supposed to be first convinced that the foreign products or services are “like” the ones getting the favorable treatment, i.e. that they are in a competitive relationship with each other. If not, then there is no need to proceed to an examination of the question of discrimination.

The parties predictably differed over this threshold question of likeness. Panama said that Argentina was drawing distinctions between financial services of tax haven and non-tax haven countries exclusively on the basis of national origin. The panel seemed to agree (para. 6.56 of the AB report), but left the door open to regulatory context also being behind part of the basis of Argentina’s anti-tax haven policies.

Argentina had forcefully argued that banks in tax havens were not “like” Argentine banks. The service that the former are providing is banking secrecy, while Argentine banks provide a more legitimate service that is highly regulated.

The AB sided with Argentina on procedural grounds:

Because Argentina had argued that access to tax information on foreign suppliers affected the competitive relationship between services and service suppliers and had presented evidence to that effect, the Panel was required to examine this evidence and assess whether Argentina had indeed met its burden of showing that the possibility of access to tax information on foreign suppliers had an impact on the competitive relationship. The Panel did not do so. Moreover, if Argentina had met its burden, then the Panel should have conducted a “likeness” analysis on the basis of the relevant criteria [laid out in previous WTO cases].

The AB then took issue with the way that the lower panel had examined the discrimination prong of the analysis (i.e. the obligation to provide “treatment no less favorable” to foreign services). As I had suggested here, the lower panel intermixed the analysis of whether Argentina’s measures were discriminatory and whether they were defensible on regulatory grounds. The AB agreed, and argued that these should have been separate parts of the analysis.

It was not all roses for Argentina. The AB indicated that – had the lower panel not muddied the likeness and “no less favorable” analyses – the outcome would have come out in Panama’s favor:

…the Panel reached the preliminary findings that [Argentina’s] measures modify the conditions of competition to the detriment of services and service suppliers of non-cooperative countries. These preliminary findings are consistent with a correct interpretation of the term “treatment no less favourable”. Thus, had “likeness” between services and service suppliers of cooperative and non-cooperative countries been established in this dispute, the preliminary findings … would, in themselves, be sufficient to sustain the Panel’s conclusion that the measures at issue are inconsistent with … the GATS.

Moreover, Argentina did not appeal all aspects of the panel’s conclusions. In particular, it did not ask for a full review of whether all parts of the GATS’ general exceptions and prudential measures defenses shielded Argentina’s policies. Meanwhile, Panama made broad but odd appeals on these points, and failed to convince the AB. Without deciding who was right and who was wrong as to the law, the AB exercised judicial economy (paras. 6.241, 6/272).

So, we still don’t have answers to long simmering questions, such as whether the GATS’ prudential measures defense is self-cancelling or not. But we do know that the AB shows little appetite to question members’ policies in this regard – sending a clear signal to potential disputants and lower panel members. Maybe there’s still a gentlemens’ agreement after all.