TWN Info Service on WTO and Trade Issues (Apr16/12)
22 April 2016
Third World Network

AB rules in Argentina's favour over financial, tax measures
Published in SUNS #8223 dated 18 April 2016

Geneva, 15 Apr (Kanaga Raja) - The Appellate Body (AB) of the World Trade Organisation on 14 April has handed down a ruling that may have wide implications in terms of how countries can deal with or attack tax evasion and/or avoidance by using jurisdictions that do not cooperate in sharing tax information of individuals hiding behind trusts or corporations.

In an important ruling on what is viewed as the escape clause provision in the Financial Services Annex (FSA) to GATS, namely Para 2 (a) titled 'Domestic Regulation', commonly called 'prudential measures', the AB also said that this provision is an over-riding provision and enables violations of any of the provisions of GATS or FSA in formulating domestic regulations for 'prudential reasons', and covered all types of measures affecting supply of services.

Nor, said the AB, does the paragraph impose specific restrictions on the types of measures affecting the supply of financial services.

In a comment, Mr. Chakravarthi Raghavan, trade analyst and Editor-Emeritus of the SUNS, suggests that viewed in the context of recent disclosures about so-called 'Panama papers', governments of developing countries who have long been victims of tax evasion and dubious avoidance tactics through transfer pricing, if they have the will, may be able to adopt measures to force disclosures by enterprises as well as countries or entities providing such tax shelters.

The AB ruling in the dispute between Panama and Argentina reversed a key finding of the dispute panel ruling that all eight financial, taxation, foreign exchange and registration measures imposed by Argentina on services and service suppliers from countries "not cooperating for tax transparency purposes" are inconsistent with Article II:1 of the General Agreement on Trade in Services (GATS).

In the ruling, the AB found that the Panel erred in its analysis of the term "like services and service suppliers", and therefore reversed the Panel's finding that services and service suppliers of cooperative countries are like services and service suppliers of non-cooperative countries.

[On this issue of applying the "likeness" test in GATS, both in terms of the most favourable national treatment as well as non-discriminatory treatment provisions, the AB made a distinction between goods treatment in GATT and trade in services under GATS, by linking need to apply likeness and equality of competitive conditions not only to services, but also to service suppliers and the four modes of supply of trade in services in GATS.]

The AB also found that the Panel erred in finding that an assessment of "treatment no less favourable" in this dispute "has to take into account regulatory aspects relating to services and service suppliers that may affect the conditions of competition; in particular, whether Argentina is able to have access to tax information on foreign suppliers".

The AB reversed the Panel's conclusion that measures 1 to 8, adopted by Argentina in this regard, are inconsistent with Article II:1 of the GATS.

"Given that we have reversed the Panel's conclusion that measures 1 to 8 are inconsistent with the GATS and have not ruled in this Report on the consistency of these measures with Argentina's obligations under the covered agreements, we make no recommendation pursuant to Article 19.1 of the DSU," the AB said.

The AB emphasised that while it has reversed the Panel's findings of "likeness" under Articles II:1 and XVII of the GATS, "we have taken no view on whether the services and service suppliers of cooperative countries are 'like' the services and service suppliers of non-cooperative countries, or 'like' Argentine services and service suppliers."

In other findings, the AB reversed the Panel's conclusion that measures 2, 3, and 4 are not inconsistent with Article XVII of the GATS.

BACKGROUND

Panama had brought the dispute against Argentina with respect to certain financial, taxation, foreign exchange, and registration (of branches of foreign companies) measures adopted by Argentina, each distinguishing between "countries cooperating for tax transparency purposes" (cooperative countries) and "countries not cooperating for tax transparency purposes" (non-cooperative countries) in accordance with Decree No. 589/20133 of Argentina's Federal Administration of Public Revenue (AFIP).

When Panama initiated the dispute in December 2012, it had been classified by Argentina as being a "non-cooperative" country, but since 1 January 2014, Argentina considered Panama to be a "cooperative" country (even as Panama is yet to negotiate or reach an agreement with Argentina on a double taxation avoidance agreement or tax information-sharing agreement).

Panama had challenged the following eight measures adopted by Argentina under its tax laws:

Measure 1: An irrebuttable presumption that payments made by Argentine consumers to creditors located in non-cooperative countries in certain transactions represent a net gain of 100% for the purpose of determining the tax base for gains tax, applied pursuant to Article 93(c) of the Gains Tax Law (withholding tax on payments of interest or remuneration);

Measure 2: A rebuttable presumption of unjustified increase in wealth applicable to any entry of funds - for the benefit of Argentine taxpayers - from non-cooperative countries in the context of an ex officio determination of the taxable subject matter by the AFIP for the purpose of gains tax, applied pursuant to the unnumbered provision added after Article 18 of the Law on Tax Procedure (presumption of unjustified increase in wealth);

Measure 3: The obligation to apply valuation methods based on transfer pricing to transactions between Argentine taxpayers and persons of non-cooperative countries for the purpose of determining the tax base for gains tax, applied pursuant to Article 8, fifth paragraph, and Article 15, second paragraph, of the Gains Tax Law (transaction valuation based on transfer pricing);

Measure 4: The allocation of expenditure for transactions between Argentine taxpayers and persons of non- cooperative countries to the fiscal years in which payment for the transactions actually takes place for the purpose of determining the tax base for gains tax, applied pursuant to the last paragraph of Article 18 of the Gains Tax Law (rule on the allocation of expenditure);

Measure 5: Certain requirements that service suppliers of non-cooperative countries must meet in order to gain access to Argentina's reinsurance services market, applied pursuant to SSN Resolution No. 35.615/20117, as amended by Article 4 of SSN Resolution No. 35.794/ 20118 and SSN Resolution No. 38.284/20149 (requirements relating to reinsurance services);

Measure 6: Certain requirements that stock market intermediaries must fulfil in order to engage in transactions ordered by persons of non-cooperative countries, applied pursuant to Title XI ("Prevention of money laundering and financing of terrorism"), Section III, Article 5 of the Rules of the National Securities Commission (requirements for access to the Argentine capital market);

Measure 7: Certain requirements with which companies of non-cooperative countries must comply in order to register branches in the Public Trade Register of the Autonomous City of Buenos Aires, applied pursuant to Article 192 of the Resolution on Companies Incorporated Abroad (requirements for the registration of branches);

Measure 8: A requirement to obtain prior authorization from the Central Bank of the Argentine Republic (Argentine Central Bank) to access the Single Free Foreign Exchange Market in order to purchase foreign currency for the repatriation of direct and portfolio investments when the beneficiary abroad is residing, incorporated, or domiciled in a non-cooperative country, applied pursuant to Communication "A" No. 494013, Section I, of the Argentine Central Bank (foreign exchange authorization requirement).

According to the AB report, Argentina maintained that the measures at issue are defensive tax measures that are in line with the recommendations of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum), and that they serve to protect Argentina's tax base by preventing tax evasion, tax avoidance, and fraud.

Argentina further contended that these measures serve to prevent concealment and laundering of money of criminal origin, that they are in line with the framework of the Financial Action Task Force (FATF), and that they serve to protect investors and the soundness of the Argentine financial system.

In its ruling issued on 30 September 2015, with respect to Panama's claims under the GATS, the Panel had found that:

(a) the GATS is applicable to all eight measures because there is trade in services, and the eight measures at issue are measures affecting trade in services within the meaning of Article I:1 of the GATS;

(b) all eight measures are inconsistent with Article II:1 of the GATS because they do not accord, immediately and unconditionally, to services and service suppliers of non-cooperative countries treatment no less favourable than that which they accord to like services and service suppliers of cooperative countries;

(c) measures 2, 3, and 4 are not inconsistent with Article XVII of the GATS because they accord to services and service suppliers of non-cooperative countries treatment no less favourable than that which they accord to like Argentine services and service suppliers, in the relevant services and modes of supply in which Argentina has undertaken specific commitments;

(d) measures 1, 2, 3, 4, 7, and 8 "are not covered under the exception of Article XIV(c) of the GATS because their application constitutes arbitrary and unjustifiable discrimination within the meaning of the chapeau of Article XIV of the GATS"; and

(e) measures 5 and 6 "are not covered by paragraph 2(a) of the Annex on Financial Services because they were not taken for prudential reasons within the meaning of that provision".

Further, with respect to measure 5, the Panel rejected Panama's claims under Article XVI:2(a) and Article XVI:1 of the GATS, finding, respectively, that this measure is not covered by Article XVI:2(a) and that Panama had failed to establish a prima facie case of inconsistency in this respect.

With respect to measures 2, 3, and 4, as the Panel had found that these measures are not inconsistent with Article XVII of the GATS, the Panel refrained from ruling on whether these measures are covered under the exception provided for in Article XIV(d) of the GATS.

Regarding Panama's claims under the GATT 1994 with respect to measures 2 and 3, the Panel rejected Panama's claims under Article I:1.

The Panel found that Panama had failed to demonstrate that measure 2 constitutes a rule and formality in connection with exportation or a charge imposed on the international transfer of payments for exports, within the meaning of Article I:1 of the GATT 1994.

The Panel also found that Panama had failed to demonstrate that measure 3 constitutes a matter referred to in Article III:4 or a rule and formality in connection with exportation or importation, within the meaning of Article I:1 of the GATT 1994.

With respect to measure 3, the Panel rejected Panama's claims under Article III:4 and Article XI:1 of the GATT 1994 because, respectively, Panama had failed to demonstrate that the measure is a matter referred to in Article III:4 of the GATT 1994, and the measure, being fiscal in nature, is not covered by Article XI:1 of the GATT 1994.

Finally, having rejected Panama's claims under Articles I:1, III:4, and XI:1 of the GATT 1994, the Panel refrained from ruling on whether these measures are covered by the exception provided for in Article XX(d) of the GATT 1994. (See SUNS #8104 dated 2 October 2015 for details of the Panel ruling.)

OVERALL FINDINGS AND CONCLUSIONS OF THE APPELLATE BODY

With respect to Article II:1 of the GATS, the AB found that the Panel erred in its analysis of the term "like services and service suppliers", and therefore reversed the Panel's finding that services and service suppliers of cooperative countries are like services and service suppliers of non-cooperative countries.

The AB found that the Panel erred in finding that an assessment of "treatment no less favourable" in this dispute "has to take into account regulatory aspects relating to services and service suppliers that may affect the conditions of competition; in particular, whether Argentina is able to have access to tax information on foreign suppliers."

The AB reversed the Panel's conclusion that measures 1 to 8 are inconsistent with Article II:1 of the GATS.

With respect to Article XVII of the GATS, the AB found that the Panel erred in its analysis of the term "like services and service suppliers", and therefore reversed the Panel's finding that Argentine services and service suppliers are like services and service suppliers of non-cooperative countries.

The AB found that the Panel erred in finding that an assessment of "treatment no less favourable" under Article XVII of the GATS in this dispute "has to take into account regulatory aspects concerning the services and service suppliers that might affect the conditions of competition ... in particular ... the possibility for Argentina to access tax information on the relevant service suppliers."

The AB reversed the Panel's conclusion that measures 2, 3, and 4 are not inconsistent with Article XVII of the GATS.

With respect to the Panel's application of Article XIV(c) of the GATS to measures 1, 2, 3, 4, 7, and 8, the AB found that Panama has not demonstrated that the Panel failed to focus its analysis on the relevant aspects of the measures that gave rise to the findings of inconsistency with Article II:1 of the GATS.

The AB found that Panama has not demonstrated that the Panel erred in finding that these measures are designed to secure compliance with the relevant Argentine laws or regulations.

The AB also found that Panama has not demonstrated that the Panel erred in finding that these measures are "necessary" to secure compliance with the relevant Argentine laws or regulations.

With respect to paragraph 2(a) of the Annex on Financial Services, the AB noted that this is the first dispute in which a WTO Member has invoked paragraph 2(a) of the Annex on Financial Services.

As the Panel had noted, paragraph 2(a) contains three requirements that must be fulfilled for a measure to be justified under this provision.

First, there is the threshold, or preliminary, question of what types of measures may potentially fall within the scope of paragraph 2(a).

Second, a measure must have been taken "for prudential reasons".

Finally, under the second sentence of paragraph 2(a), the measure "shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement".

Only when a measure falls within the scope of paragraph 2(a) will there be a need to evaluate whether it was taken "for prudential reasons" and whether it fulfils the requirement in the second sentence of paragraph 2(a), said the AB, noting that Panama's appeal is limited to the threshold question identified above.

"We have found that an interpretation of paragraph 2(a) of the Annex on Financial Services on the basis of its text, read in the light of its context and the object and purpose of the GATS, supports the view that paragraph 2(a) does not impose specific restrictions on the types of 'measures affecting the supply of financial services' that fall within its scope, provided that such measures fulfil all of the requirements of paragraph 2(a)," the AB said.

"We have also reviewed, and disagreed with, Panama's arguments concerning the alleged errors in the Panel's interpretation of paragraph 2(a)."

In light of the above, the AB found that the Panel did not err in finding that "paragraph 2(a) of the Annex on Financial Services covers all types of measures affecting the supply of financial services within the meaning of paragraph 1(a)" of the Annex.