Alex Cobham ■ Could the World Trade Organisation see a challenge to tax havenry?


The Open Society Justice Initiative, part of the Open Society Foundations, focuses on strategic litigation possibilities that can have catalytic impact on achieving human rights around the world. Recently, they’ve been looking at the idea of a World Trade Organisation challenge, in the name of tax justice.

Ben Batros is a consultant on international law, accountability, and human rights who previously managed strategic litigation as a legal officer with the Open Society Justice Initiative.  He has been working with the Justice Initiative to consider new legal arguments that could be applied to states that assist large corporations in avoiding tax in third states, including how these states distort the international economic system and may be violating their obligations under WTO agreements. A related piece looks at the impact of ‘tax havens’ on inequality; here, Ben considers the opportunities for a WTO challenge.

Why the World Trade Organisation should take a hard look at tax havens

Despite recent efforts, tax havens remain a problem, prompting some advocates to look for new legal tools to address them.  Given that the use of tax havens by corporations to shift profits and avoid taxes is enabled by the global free trade system, shouldn’t we look at whether that system contains the tools to address it?

“Tax haven” may be a contentious label – there is no single definition or list.  But it does bring together countries that encourage and enable powerful economic actors to avoid taxation elsewhere, mainly of their capital.  And it is this role of allowing mobile capital to avoid taxation which makes the need for new thinking on tax havens urgent, when seen in light of the collision of three trends.

First, the decline in nominal and effective corporate tax rates, as difficulties in taxing (mobile) capital (together with tax “competition”) increasingly forces governments to shift the tax burden onto (immobile) labor and consumption.  Second, this shift of the tax burden from capital to labor and consumption is happening while the share of national income going to capital is rising (and going to labor is falling).  As if that was not bad enough, the conflict inherent in these two trends will be exacerbated in coming years by a third, as increased automation of work shifts the balance of power and return more steeply towards capital over labour.

Different countries considered tax havens use different means to help those powerful economic actors avoid taxation at home, or wherever their wealth was really generated.  Secrecy is often an integral part of this – hence TJN’s use of “secrecy jurisdictions”.  But secrecy is often more important for high-net-worth individuals hiding their fortunes through trusts, secret bank accounts or other off-shore vehicles.  The tax havens that serve multinational corporations by facilitating profit shifting from operations in other countries, offering minimal taxation in return (either across the board or a la carte), rely on different features.

So Oxfam’s list of the top 15 corporate tax havens is different from the leaderboard of the Financial Secrecy Index (although there is certainly overlap – Switzerland, the Cayman Islands, Singapore and Luxembourg are real all-rounders).  And with international tax avoidance by multinationals through base erosion and profit shifting, which often involves tax havens, costing governments as much as $500bn a year in lost revenues, there is good reason to address the corporate tax havens as well.

So why the WTO?  The link between international trade law obligations and the role tax havens play in promoting tax avoidance may seem a stretch.  But the massive scale of international tax avoidance by corporations is in large part due to the rise in global trade, including the integration of developing countries and reduction in barriers which has enabled an explosion in trade between related parties (two subsidiaries of the same corporate group, and therefore in reality two parts of the same company) to around 40% of international trade, with some estimates as high as 60%.  And it is often these related-party transactions that multinationals use to shift profits from one country to another.

International tax avoidance is thus a function of globalized free trade.  For the most part, we are no longer in a world of explicit tariffs (at least we weren’t until recently), or national champions and colonial monopolies.  The way that trade is distorted, and that wealth is extracted from developing countries, now relies on complex corporate structures and this massive rise in intra-party transactions.

There are a range of potential benefits to looking at the activities of tax havens through the lens of WTO obligations.  It would undermine tax havens’ claims that they are neutral actors and highlight the way that they distort the international economic system.  Dispelling the myth of tax havens as mere conduits and facilitators of laissez faire trade could weaken their support in multilateral forums.

WTO obligations are also a body of international law that states take seriously:  domestic tax justice advocates have used the threat that a proposed tax incentive or change to tax law may violate WTO agreements to change government behavior in the past.  Framing the argument in WTO law also shows that tax avoidance, and the role that tax havens play, are not outside of the purview of international law and are governed by rules of universal origin (not simply the dictates of the OECD).

Are tax havens really violating their WTO obligations?  It won’t be easy to show it.  But there are solid bases for making the argument.  The principle that the tax laws and policies of a state can violate WTO obligations is well established.  The WTO itself recognizes that where states allow related parties to manipulate prices between themselves (i.e. use transfer prices that are not at arm’s length), this can violate the Customs Valuation Agreement or constitute an export subsidy.  The prohibition of subsidies in the WTO is also similar in scope to the prohibition of state aid in the EU, and the European Commission has repeatedly found that where a country allows transfer prices that are not at arm’s length or which do not reflect economic reality, or where a tax system is designed to give preferential treatment to one class of companies (whether multinational groups or the off-shore sector), this is a violation.

The WTO also allows countries to raise a claim where the benefits they expected from participating in the global free trade system are being nullified or impaired by another country.  This hasn’t been used to cover the ability to tax economic activity associated with trade; typically it is linked with market access and tariff concessions.  But the language is broad (“any benefit accruing to it directly or indirectly under this Agreement”), and has been found to include the principle of good faith.

The WTO Agreement preamble and declarations are replete with references to developing countries’ trade being “commensurate with the needs of their economic development”, “a fairer and more open multilateral trading system for the benefit and welfare of their peoples”, “a more balanced and integrated global trade partnership”, and the “beneficial …integration [of developing countries] into the multilateral trading system and the global economy”.

Looking at the activities of tax havens through the lens of WTO law is not at attempt to subvert the mission of the WTO.  Rather, it is giving the WTO system a chance to show that it is capable of dealing with the challenges of today.  Will it show the flexibility and resilience to do so?  Will it put its (or tax havens’ and multinationals’) money where its mouth is?  Or will it abdicate responsibility?  If the arguments are made and lost, this should be seen as a loss not just for tax justice advocates but for the WTO system itself, and a signal of the need for even deeper change.

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