Dr. Jan Yves Remy and Alicia Nicholls
Two Caribbean Community (CARICOM) countries, Barbados and Trinidad and Tobago, are among the twelve predominantly small states and dependencies included on the EU’s updated “blacklist” of October 6, 2020. The arbitrary inclusion of some CARICOM Member States (MS) on large countries’ national tax “blacklists” remains a vexing issue, especially in circumstances where not even the Organisation for Economic Cooperation and Development (OECD) – a body that considers itself the global regulator for tax matters – has taken such harsh action against them at this time. Although there have been numerous attempts – whether through CARICOM and Prime Ministerial statements, and most recently a TEDEx talk – to address the issue by complaining directly to the EU or through moral suasion, none of these strategies has to date proven effective or occasioned a change in practice.
At their wits end, CARICOM MS must think outside the box. In this SRC Trading Thoughts we offer a legal option to resolve this perennial problem: recourse to trade rules and, in particular, binding dispute settlement under the World Trade Organization (WTO).
WTO Dispute Settlement as a possible solution?
The dispute settlement system of the WTO, even with the ongoing political crisis, still represents the epitome of state-to-state dispute settlement at the international level, in no small part due to its relatively strong “enforcement” or compliance mechanism. By joining the WTO, countries commit to using the WTO’s dispute settlement system, as opposed to taking unilateral action, to peacefully settle any trade disputes arising under the WTO Agreements. The process starts with mandatory “consultations” between the disputing parties, failing which, a complaining party could then launch a formal complaint before a WTO panel. While there are less contentious options like good offices, arbitration and mediation at the WTO, without the power of compliance, they are unlikely to compel the EU to do anything more than it has done to date.
Were CARICOM MS to consider initiating a dispute against the EU, they would likely do so under the General Agreement on Trade in Services (GATS), which regulates government action that “affects” international trade in services. Without doubt, the practice of blacklisting “affects” the ability of affected CARICOM MS to deliver their tax and other related financial services globally through any of the “modes” for supplying services internationally, that is, whether remotely, in person, or by setting up a physical commercial presence in the EU. In their 2005 paper, Sharman & Rawlings noted the damage that blacklists incur on small countries’ economies, describing them as “one of the most important, if not the most important, barriers to the cross-border trade in financial services from IFCs”. Moreover, a jurisdiction’s inclusion on a blacklist has reputational implications which can adversely impact its ability to attract foreign direct investment (FDI) needed for foreign exchange generation, job creation and for financing attainment of the Sustainable Development Goals (SDGs). The implications of such actions are even more dire considering the COVID-19 pandemic’s economic pain wrought on debt-strapped Caribbean countries.
We could envisage an argument by CARICOM that “blacklisting” violates the Most-Favoured Nation Treatment (MFN) clause of the GATS, an anti-discrimination provision that obliges WTO Members not to treat “like” services or service suppliers of one WTO Member more favourably than another. Here, CARICOM could argue that the EU does not apply the same favourable treatment to all like WTO service suppliers, and that by targeting primarily small developing countries with international financial centres, it discriminates against some Members based on their “tax cooperation” status. If the EU uses lack of ‘international cooperation’ as a blacklisting criterion, it is unclear why, for instance, the US – which has not signed on to the Common Reporting Standard (CRS) on the ground that it has passed the Foreign Account Tax Compliance Act (FATCA) – was not also blacklisted.
Besides the non-discrimination claim, an argument could also be made that GATS transparency requirements oblige the EU to notify the blacklisting measures to the WTO’s Council for Trade in Services and inter alia, “respond promptly to all requests made to it regarding its measures”. This would, at the very least, afford CARICOM MS an opportunity to raise their concerns and have them addressed in a WTO forum.
The EU, of course, would likely raise defences to justify any violation found. Chief among them would be the “prudential carve-out” clause – contained in the GATS Annex on Financial Services – which allows governments to take measures “for prudential reasons” to ensure the integrity and stability of their financial systems. Given the global financial crises, Panama Papers leaks, and general push for increased transparency to protect tax bases, it is likely that a WTO panel would grant some leeway to financial regulators in the EU. But even so, the prudential carve-out is no “carte blanche”. EU regulators would still have to explain why “prudence” – whether judged through metrics such as risk profile or proportionality – dictates that some alleged tax jurisdictions are treated differently from others.
In at least one WTO case brought with a tax dimension, Argentina – Financial Services, the complainant, Panama, asked a WTO panel to adjudicate whether Argentina’s “defensive tax measures” designed to “protect Argentina’s tax base by preventing tax evasion, tax avoidance, and fraud” were WTO compliant. Although the case was ultimately won by Argentina – and therefore, Argentina was able to leave in place its eight measures classifying countries as “cooperative” or “non-cooperative” for tax purposes – the case left open key questions, such as whether non-cooperative and cooperative tax destinations are “like” service suppliers, as well as the meaning “prudential reasons” contained in the prudential carve-out.
Quite apart from the legal merits – or demerits – of bringing a case, there are at least three practical reasons why CARICOM MS – among the least litigious groupings of countries at the WTO – are unlikely to activate the WTO option. First, the cost of doing so is prohibitive. The middle-income status of most CARICOM MS means that they are denied favourable terms of access to utilize the services of the Geneva-based Advisory Centre on WTO Law (ACWL), a legal aid body that provides dispute settlement assistance to WTO developing countries at reduced rates. Second, there is the reality of the power dynamic between the EU and CARICOM, with the EU being not only an important trading partner for the region, but also the region’s main source of development assistance. This raises the spectre of possible reprisal should CARICOM decide to pursue this matter before the WTO. Third, as shown with the US – Gambling case, the allegedly strong “enforcement” mechanism of the WTO proves illusory where a small state, like Antigua and Barbuda, must compel compliance by a larger one, like the US, even where it actually wins a case.
An option under the CARIFORUM-EU Economic Partnership Agreement?
An alternative, but potentially less effective, approach could be to pursue legal avenues under the free trade agreement signed between CARICOM and the Dominican Republic (CARIFORUM), on the one hand, and the EU, on that other, under the CARIFORUM-EU Economic Partnership (CARIFORUM-EU EPA). The EPA provides for the settlement of disputes concerning the interpretation and application of the EPA through consultations and mediation, and as a last resort, arbitration. As the complaining parties in such a dispute, CARIFORUM countries would need to identify in their request for establishment of an arbitration panel the specific measures at issue and explain how such measures by the EU constitute a breach of the provisions of the EPA.
Recourse to dispute settlement under the EPA is “without prejudice to any action in the WTO framework”. That said, initiating a dispute under the EPA or the WTO operates to the exclusion of the other, until the first proceeding has ended.
Regarding substantive rules, the EPA’s services chapters contain MFN provisions, similar though not identical to the one under the GATS. Importantly, however, the EPA’s Article 226(2) provides that nothing in the EPA or any arrangement pursuant to it is to be construed as preventing the adoption or enforcement of any measure aimed at preventing tax avoidance or evasion under double taxation agreements, other tax agreements or domestic fiscal legislation. The EU could argue that this provision carves out or at least limits from dispute settlement its blacklisting practices, whose stated objectives include, inter alia, tackling tax evasion and avoidance. This could greatly circumscribe CARIFORUM’s ability to settle this matter through this forum.
Outside of the more ‘judicial’ options, CARIFORUM could also raise the issue through the institutional mechanisms established under the CARIFORUM-EU EPA including the inter-ministerial Joint CARIFORUM-EC Council as well as the CARIFORUM-EC Consultative Committee, which as a body involving civil society participation, can provide an avenue for the business community in affected CARIFORUM countries to complain about the tangible impact of the EU’s blacklisting actions.
In this piece, we have argued that trade agreements, buttressed by their dispute settlement and institutional mechanisms, provide viable avenues for CARICOM MS to address the longstanding problem of their inclusion on arbitrary national blacklists by the EU. Of course, in deciding whether to utilize these options, several important considerations would have to be weighed. But, unlike other options tried to date, legal solutions under trade agreements, in particular the WTO, provide access to an impartial body to decide the matter and which could recommend the EU withdraw the measures concerned if determined to be inconsistent with its WTO obligations. Moreover, and even if a full-blown dispute is not waged, the mere prospect of a dispute might lend some urgency to the negotiations and give CARICOM MS added leverage in engaging the EU.
Dr. Jan Yves Remy and Alicia Nicholls are, respectively, an international trade lawyer and Deputy Director; and trade researcher at the Shridath Ramphal Centre for International Trade Law, Policy & Services (SRC) at The University of the West Indies, Cave Hill, Barbados. Learn more about the SRC here: www.shridathramphalcentre.com.