In “The Hidden Wealth of Nations”, Gabriel Zucman writes: “(w)e can no longer continue to liberalize trade while completely ignoring the problems of fiscal dissimulation.”
In the World Investment Report 2015, we read: “Ongoing anti-avoidance discussions in the international community pay limited attention to investment policy. The role of investment in building the corporate structures that enable tax avoidance is fundamental. Therefore, investment policy should form an integral part of any solution to tax avoidance.” (See * below)
Michele Fletcher, writing on the Global Transparency website, also argued that “(f)ree trade without transparency is a dangerous conduit for illicit financial flows.”
The problem of illicit financial flows affects all countries, but is particularly detrimental in least developed countries. Proponents of trade and investment agreements such as TTIP or CETA claim that these are model agreements which could help shape global rules for trade and investment. If that were to be the case, it would be essential that they promote the highest standards of transparency and accountability. They cannot do this unless they incorporate issues of tax transparency.
We know that “(f)iscal policies are key in putting a state’s human rights commitment into effect, particularly those on economic, social and cultural rights, as it gives the state the leeway to generate and redirect resources towards the progressive realisation of these rights.”
In his keynote address at Christian Aid’s Dublin conference on the Human Rights impact of tax and tax policy, on 12 February 2015, Philip Alston, UN Special Rapporteur on extreme poverty and human rights also had this to say: “We need to acknowledge that social policy is a matter of human rights and that extreme poverty is a negation of all human rights… The deep pockets of poverty that persist in Ireland are the result of a series of deliberate and conscious decisions by key actors who have chosen to prioritise other goals. Those living in poverty have been largely disempowered and their economic position reflects that political marginality. There are always reasons why poverty can’t be eliminated and why alternative projects need to take priority. The sanctity of tax policy is too often invoked as though there are no choices to be made.”
Philip Alston went on to highlight how Ireland’s choices in the area of tax were detrimental not only to its own citizens, but to the citizens of other, poorer countries of the developing world.

Yet governments’ ability “to change tax laws and pursue progressive tax policies is limited, thanks to trade and investments agreements” The joint report of February 2016 by the Transnational Institute and Global Justice Now, “Taxes on Trial”, reveals that “foreign investors have already sued at least 24 countries from India to Romania over tax-related disputes, including several cases where companies have used this system to successfully challenge – and lower – their tax bills.”

In the Addis Ababa Action Agenda, “(t)he Heads of state and government and High Representatives gathered in Addis Ababa from 13-16 July 2015, affirm(ed) (their) strong political commitment to address the challenge of financing and creating an enabling environment at all levels for sustainable development in the spirit of global partnership and solidarity.”

They further specified: “We commit to scaling up international tax cooperation. We encourage countries, in accordance with their national capacities and circumstances, to work together to strengthen transparency and adopt appropriate policies, including multinational enterprises reporting country-by-country to tax authorities where they operate; access to beneficial ownership information for competent authorities; and progressively advancing towards automatic exchange of tax information among tax authorities as appropriate, with assistance to developing countries, especially the least developed, as needed. Tax incentives can be an appropriate policy tool. However, to end harmful tax practises, countries can engage in voluntary discussions on tax incentives in regional and international forum.”

Given this commitment, TTIP and CETA, being agreements between countries with well-developed fiscal capacities, should have made it a condition for investor protection that the Parties to the agreement put in place:

– The automatic exchange of banking information via the OECD’s Common Reporting Standard.

– Public registries of the ultimate beneficial owners of legal structures such as companies and trusts.

– Public country by country reporting by multinational corporations.

– Publication of tax rulings.

There is nothing revolutionary in this suggestion. Already, in her article of June 2014, Michele Fletcher wrote: “The UK and EU have already begun work on beneficial ownership legislation, and the TTIP could provide a platform for the U.S. to follow suit. Transparency will ensure that the UK and EU remain committed to this legislation and aren’t negatively influenced by large company’s agendas behind closed doors. Transparency, by giving a spot for lobbyists, shareholders, and policymakers to voice their concerns on equal footing, may also help push automatic exchange of financial information between the EU and U.S.

Since this article was written, and partly as a result of various leaks of documents which revealed massive tax avoidance and tax evasion by wealthy individuals and multinational corporations, measures have been taken in the EU towards more transparency in tax matters.

• The fourth Anti-Money Laundering Directive was adopted on 20 May 2015 and introduced centralised national registers of beneficial ownership.
• On 6 October 2015, following the LuxLeaks scandal, EU ministers agreed on a mandatory system for national authorities to automatically exchange information on secret tax deals with multinationals.
• Since the first of January 2016, financial institutions already have to report to their local tax authorities the financial details of account holders resident in countries that have signed up to the OECD’s Common Reporting Standard.

On 14 April 2016, following the publication of the Panama Papers, the Ministers for Finance of the UK, Germany, France, Italy and Spain wrote to their EU colleagues, with copy to their G20 Finance Minister colleagues: “We commit to establishing as soon as possible registers or other mechanisms requiring that beneficial owners of companies, trusts, foundations, shell companies and other relevant entities and arrangements are identified and available for tax administration and law enforcement authorities. In addition, as a first step we are launching a pilot initiative for automatic exchange of such information on beneficial ownership.”

The Tax Justice Network took them to task for not making these registries accessible to all. It argued that data on beneficial ownership is vital for democracy and accountability and should be public, as should country by country reports and hitherto secret tax rulings. Furthermore, public registries would facilitate the task of fiscal authorities: “Such registries — public registries — are the best way to ensure access not only by authorities that need the information, but also by regulated entities (such as banks) which use this for their customer due diligence (to ensure there is no money laundering), and finally by society at large (NGOs, journalists, etc.). Not only is this the best option to ease access, but it is also the cheapest option, and it ensures government accountability. Otherwise, authorities will need more budgets, not just to run the processes but also to verify the information that might otherwise rest with the eyes of all of society.”

It is however another step in the right direction, and many countries, from Afghanistan to the United Arab Emirates, have now committed to support the initiative for the automatic exchange of information on beneficial ownership. Neither the U.S. nor Canada have done so. Will TTIP and CETA bind EU member states to protect the investments of anonymous companies?

We are, rightly, inexorably, moving towards even more transparency than that advocated by the Addis Ababa Action Agenda. Obviously, this depends on countries’ national capacity and circumstances, but it is essential for countries that have the capacity to show the way forward.

“There is a growing consensus that the current international legal system that governs international investment flows no longer serves its purpose and needs to be changed profoundly. Not only is it questionable whether International Investment Agreements (IIAs) encourage international investment flows, the current generation of IIAs has also failed to address the uneven balance of rights and responsibilities between foreign investors and host governments.” (See *3 below)

As a result, all countries around the world are considering options for terminating, renegotiating or amending their International Investment Agreements. For instance, India has developed a new model bilateral investment treaty on the basis that “(f)rom an Indian perspective, investment treaties are not just instruments of investor protection, but also a valid tool to promote development goals, transparency in corporate dealings and to prevent unethical business practices.” (See *4 below)

In particular, India’s new model bilateral investment treaty defines investors in such a way as to deny protection to mail-box companies. This is very important, as UNCTAD’s World Investment Report 2015 highlighted the huge damage caused by such structures.

“Tax avoidance practices by MNEs are a global issue relevant to all countries: the exposure to investments from offshore hubs is broadly similar for developing and developed countries. However, profit shifting out of developing countries can have a significant negative impact on their prospects for sustainable development…An estimated $100 billion of annual tax revenue losses for developing countries is related to inward investment stocks directly linked to offshore hubs. There is a clear relationship between the share of offshore-hub investment in host countries’ inward FDI stock and the reported (taxable) rate of return on FDI. The more investment is routed through offshore hubs, the less taxable profits accrue.” (See *5 below)

What the Indian Model Bilateral Investment Treaty shows, once again, is that there are alternatives, but we should also bear in mind that “(t)ax avoidance and the lack of transparency in international financial transactions are global issues that require a multilateral approach, with adequate developing country participation.” (See *6 below)

When faced with the power of multinational corporations, only international cooperation can prevent a race to the bottom.

Part III – Human rights

Trade and investment agreements are portrayed by their proponents as necessary for economic growth, from which they seem to take for granted that all will benefit. We know that this is not the case.

Trade and investment agreements are centred on the protection of investment, and this is often at the expense of the promotion of sustainable development and of states’ duties to fulfil their human rights obligations.

Ample evidence of human rights violations by transnational corporations has led to the following initiative at the 26^th session of the UN Human Rights Council, held in Geneva in June 2014:

“A resolution drafted by Ecuador and South Africa and signed by Bolivia, Cuba and the Bolivarian Republic of Venezuela – and supported by 20 countries – called for the Council to “establish an open-ended intergovernmental working group with the mandate to elaborate an international legally binding instrument on Transnational Corporations and Other Business Enterprises with respect to human rights.’ The Human Rights Council adopted the resolution (by majority) on 26 June 2014 and decided that the working group should hold its first session in 2015.” (See *7 below)

This first session was held from 6 to 10 July 2015 and a report issued on 5 February 2016. Not only were direct violations of human rights by multinationals discussed at this session, but issues relating to the ISDS regime were also raised.

“It was noted that while transnational corporations benefited from strong enforcement mechanisms, such as investor-to-State arbitration tribunals in international investment treaties, no international mechanism existed to ensure access to justice for the victims of those abuses. The need to redress this asymmetry in international law was highlighted.”

Panel VII of the working group looked at the legal liability of transnational corporations and other business enterprises. “The final panellist analysed the implications of international trade and investment agreements on State policies to comply with human rights obligations. It was noted that, in several cases, transnational corporations had effectively used investment treaties or investment chapters of trade agreements to bring claims against host States for actions taken to protect human rights or comply with national legislation. These cases had resulted in Governments having to pay large compensation to such corporations. Likewise, the disadvantage of States in investor-State dispute settlement procedures was also evident with respect to the payment of legal fees. If companies win a case, their legal fees should be covered by the State, but typically the latter is not compensated if the award is in its favour. Often, foreign investors do not have to pay legal fees at all.”

Large compensation and legal fees having to be paid by the state does not only represent an imposition on the country’s tax payers (or a reduction in the provision of public services by the state) but it is also a signal to the country that taking action to protect human rights is not in its best interest. It is the so-called “regulatory chill”.

In a statement he made at the Human Rights Council 30^th session, in Geneva, on 16 September 2015, Mr. Alfred-Maurice de Zayas, Independent Expert on the promotion of a democratic and equitable international order, stated: “In this report, I address the challenge to the international order posed by certain activities of investors and transnational corporations that entail much more than interference in the regulatory space of States but actually constitute an attack on the very essence of sovereignty and self-determination, which are founding principles of the United Nations.” And he added: “The paradox must be confronted and resolved that whereas States have ratified human rights treaties with immediate application such as the International Covenant on Civil and Political Rights and agreed on the progressive implementation of economic and social rights, they have also entered into trade and investment agreements that hinder, delay or render impossible the fulfilment of their human rights treaty obligations, thus violating the rule pacta sunt servanda.”

As a result, in his recommendations, Mr. de Zayas suggested that States had a right, and even a duty to modify or terminate bilateral or multilateral investment treaties which lead to violations of Human Rights because, whatever their desire may be to facilitate the operations of multinational companies, States have the primary responsibility to promote, protect and secure the fulfilment of human rights recognized in international law.

Conclusion

Issues of trade and investment, taxation and human rights are very closely connected. The present trade and investment regime overlooks issues of human rights, and issues of taxation which are themselves important for the fulfilment of human rights obligations.

Radical changes are needed in the design of trade and investment agreements to achieve greater coherence between trade, investment, tax and human rights policies. States must reclaim their power to regulate and, faced with the global threat of climate change, they should also acknowledge that cooperation is likely to be more effective than competition.

In February 2013, Karel De Gucht, then EU Trade Commissioner, said of TTIP: “This is about the weight of the western, free world in world economic and political affairs. Once we have started, failing is not an option. It would be very detrimental for both the European Union and the United States if we were not to succeed.”

In 1995 already, the elites of the west, free world had dreamt of binding the people of the whole world through a grand Multilateral Agreement on Investment (MAI). The monster, conceived in secrecy, could not stand the light of day. When details were leaked, it led to huge popular protests. Eventually, MAI returned to the shadows, but TTIP and CETA are new expressions of this dark dream of domination.

TTIP and CETA will fail, just as the MAI did before them, and the western, free world will have to review its rules on investment protection. In any case, were they to be signed, these agreements would be outdated even before they were ratified. In fact, they are already obsolete, as they try to enshrine investment policies which the rest of the world is turning away from.

*- UNCTAD World Investment Report, Page XIV

*2 – Taxes on Trial – How trade deals threaten tax justice, a joint report by Transnational Institute and Global Justice Now, February 2016

*3 – Rethinking Bilateral Investment Treaties, Critical Issues and Policy choices, edited by Kavaljit Singh and Burghard Ilge, 2016, page 155.

*4 – As above, page 79

*5 – UNCTAD, World Investment Report, page XIII

*6 – As above, page 210

*7 – As above, pp. 107-108