Check out ABC News' Jake Tapper's question from yesterday's press briefing:
GIBBS: Let me check with USTR and folks here on what's in the trade agreement and some of the statements that have been made. I don't have any of that with me, but I'll check on it.*
* UPDATE: Carol Guthrie, a spokeswoman for US Trade Representative Ron Kirk, tells ABC News that "Ambassador Kirk has been always been very clear that it will be necessary to address outstanding issues on labor and tax policies, and we continue to work on those tax issues. Our refusal to tolerate tax havens is precisely why we’re working with the Panamanian government to address concerns regarding its international tax policies. We can work to improve international tax practices and open markets for entrepreneurs and workers at the same time."
Guthrie adds that the free trade agreement "actually does specifically include exceptions that would allow us to restrict or limit capital transfers in various circumstances, including to protect against tax evasion and money laundering."
Our new report goes through these so-called exceptions. Here's what we found:
- They do not provide a defense for policies that treat an entire country and all business activities related to it differently based on that country’s general tax-haven policies.
- Foreign tribunals get to determine if the exceptions are allowed to defend a challenged policy.
- If a policy is challenged, and even if the exceptions are allowed, these tribunals get to decide whether the policy is "necessary" to fight tax havens, regulate finance, etc. To put this into perspective, WTO panels have ruled that national policies did not meet the “necessary” test in nearly 90 percent of the cases where this defense was raised. Thus, the United States would bear the burden of showing that the specific “financial reporting or record keeping of transfer” rules were the least trade restrictive way to stop money laundering or tax evasion.
- In sum, were the Panama FTA to go into effect, the U.S. government could lose its most effective tools for dealing with countries, such as Panama, that are widely recognized as tax havens and venues for money laundering. And, this is not a speculative concern. Already Panama has spoken out at the WTO about how various policies aimed at tax haven countries could violate WTO rules.
But perhaps most worrying is the so-called investor-state system in the Panama FTA. Not only Panamanian nationals and their firms would be empowered under the FTA to use this private enforcement system. Rather, it applies to the 350,000 foreign subsidiaries operating in Panama – including U.S. subsidiaries that have “substantial business activities” there.
This is extremely problematic, because an array of financial service regulation and tax-haven elimination goals of Congress and the Obama administration fall within the limits on regulation and rights for foreign banks and investors included in the Panama FTA. Perhaps Panama’s government might hesitate to drag the United States before an international tribunal if we limited certain risky transactions or conditioned access to U.S. financial services on banking transparency in Panama. Although, given Panama’s main comparative advantage is its bad bank and tax practices (and it has already complained to the WTO about such measures), who can predict?
However, a private investor or institution would not have to make such diplomatic considerations, and under the FTA would be empowered to enforce the pact’s investor rights terms. The Panama FTA investor-state private enforcement system (like those in NAFTA and CAFTA) would empower Panama-based subsidiaries of U.S., Chinese, European and other multinationals to privately enforce this right of compensation by circumventing domestic courts and domestic law to bring cases based on FTA law directly against signatory governments in foreign tribunals.
This “investor-state dispute settlement” system uniquely empowers foreign investors to privately enforce the terms of a public contract between governments (i.e. private enforcement of a government-government agreement). Cases under this FTA provision are submitted to tribunals that operate in the United Nations (United Nations Commission on International Trade Law, i.e. UNCITRAL) or World Bank (International Center on Settlement of Investment Disputes, i.e. ICSID). These tribunals operate outside of the signatory countries’ court systems and enforce FTA (not domestic) property rights law. There is no limit placed on the awards that these foreign tribunals can order governments to pay foreign investors.
So, while it's refreshing to know that some in government are paying close attention to Panama's tax practices, the deeper problem, as we have pointed out, is that the FTA's rules actually take us in the wrong direction on tax, financial and investment matters.
And (FWIW), Panama's incoming administration had this to say (from Bloomberg's Eric Sabo, not linkable):
Panama’s President-elect Ricardo Martinelli will refuse to give in to pressure from the U.S. to change the country’s banking secrecy laws, economic adviser Frank de Lima said.