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Troubling Signs for Panama NAFTA Deal from Judge in U.S.-Panama investment dispute

The Obama administration has made some indications that it plans to eventually take up a NAFTA-style trade agreement that the Bush administration negotiated with the tax-haven nation of Panama.

As we’ve pointed out, that agreement is riddled with problems, not least of which it would allow investors to challenge U.S. anti-tax haven measures as violations of the pact for cash compensation. While the U.S. and Panama already have a bilateral investment treaty (BIT) which contains some of these provisions, the trade deal’s investment provisions would make these worse.

Late last year, a World Bank tribunal at the International Center for the Settlement of Investment Disputes (ICSID) issued the first known decision under the U.S.-Panama BIT. While a majority of the tribunal sided with the Government of Panama and against the U.S. investor, the award contained several troubling conclusions that are likely to undermine support for the U.S.-Panama trade deal. Read more after the jump.


In 1995, Panama passed a law giving tax credits of up to 25 percent of net income for certain investors, up to 100 percent of the value of their investment. In 2005, the credit was reduced to five percent of net income, and a declaration of the credits was required within 180 days.

In 1997-98, a group of Tuscon- and Tampa-based investors (Nations Energy Corporation, Inc.; Electric Machinery Enterprises, Inc.; and EME’s head Jaime Jurado, a Panamanian-cum-U.S. citizen) helped constitute a Panamanian corporation, COPESA, which was to provide electricity generation services. These three persons own approximately 70 percent of COPESA’s shares.

In 1998, COPESA took out financing from a General Electric affiliate and Banco Disa, which then transferred part of its claims to two other Panamanian banks. But COPESA had financing difficulties and ended up not meeting its financing terms. COPESA looked for ways to stay afloat, but one of the only compelling reasons for outside investors to help out was (apparently) the tax credits associated with the COPESA operations under the 1995 law. So, in 2004, they wrote to Panama’s tax authorities, asking if these credits would transfer in the event of a bond or share sale. Panamanian authorities sent conflicting signals, but (apparently due to the new 2005 legislation) ultimately said in a January 2005 letter that the ability to transfer the credits would be fairly restricted.

In October 2005, the three investors initiated an investor-state claim under the BIT. Their central claim was that the January 2005 letter (and related statements) constituted an indirect expropriation of their investment under the BIT’s Article IV, and a violation of their right under BIT Articles II(2) and XI to so-called “fair and equitable treatment” (FET). In the merits phase of the hearings, they stated that the 1995 law “created and confirmed the claimants’ legitimate expectations as to the value and transferability of the tax credits.” (para 258)

The good news is that regulators prevailed over corporations in the case. But there was a very troubling dissent that reflects poorly on the pro-corporate biases of investor-state tribunalists.

José María Chillón Medina, the tribunalist picked by the claimants, cited a certain provision of the BIT that says “With respect to its tax policies, each Party should strive to accord fairness and equity in the treatment of investment of nationals and companies of the other Party.” While the words “should strive” would seem to make this provision less binding, Chillón said that tribunalists should be able to enforce “should strive” obligations. He found that an expropriation could well have occurred in the case:

“The BIT’s broad definition of investment does not allow one to limit indirect expropriation to cases involving property. The formula also covers instances of associated economic rights related to an investment, as in the case of the tax credits… they have been denied a right that constitutes an enormously significant loss in terms of the overall value of the investment. ” (dissent, paragraph 61-62)

Chillón clearly subscribes to a fairly extreme version of takings theory, under which partial deprivation of even one stick in a bundle of economic assets can constitute a taking.

Moreover, Chillón found that “the right or the reasonable expectation that the juridical order will not be changed, altered, poorly interpreted or poorly applied, or changing the rules or application criteria, constitutes the central element of the fair and equitable treatment [FET] standard…” cited in the article above. He goes on to say that Panama was in violation of the standard by introducing a new law, in particular one that reduced the amount of the tax credit.

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What are the implications of any of this for the U.S.-Panama FTA?

Say the U.S. institutes a new anti-tax haven measure. The Nations v. Panama case shows that tribunals will bend over backwards to find that they have jurisdiction, even when the nationality of an investor is contested, or a taxation measure is at issue. Moreover, the Chillón dissent shows the willingness of some arbitrators to see mere changes in regulation (as would be a new tax haven policy) as amounting to violations of the FET standard. 

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