How Corporate Sovereignty Threatens The Power Of Governments To Collect And Set Taxes

from the undermining-the-rule-of-law dept

The dangers of corporate sovereignty chapters in so-called "free trade" agreements are increasingly well-known. That's especially the case for Techdirt readers, since we've been warning about this parallel legal system, which puts corporations above national laws, for well over three years. Now that the general issues of these investor-state dispute settlement (ISDS) mechanisms are widely understood, people are starting to explore more specific problems. Here, for example, is a new report from the Transnational Institute (TNI) looking at how ISDS cases limit the ability of governments to collect and even set taxes in their own lands: Analysis of data and documents on hundreds of ISDS cases filed so far 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. There's a particular issue faced by developing nations: Eager to attract foreign investment, many developing countries have offered huge tax breaks to multinational companies. Governments must be able to review and reconsider their tax laws and any tax incentives they may have granted to foreign investors in the past. Tax breaks cost developing countries as much as $138bn a year, and repealing these could release much needed funding for healthcare and other critical public services. Corporate sovereignty means that national sovereignty suffers: governments that want to remove tax breaks run the risk of punitive ISDS cases being brought against them, so often daren't try. Many nations are fully aware of this risk, and try to mitigate it with "carve-outs": Though some of these carve-out clauses are stronger and clearer than others, they have not prevented lawyers from filing tax-related ISDS cases, and they have not prevented arbitrators from agreeing to consider them. The language in these treaties is often convoluted and sometimes contradictory, with exceptions within exceptions -- giving lawyers a lot to argue about but making it difficult for policymakers to know what actions could risk a treaty claim. This exposes one of the fundamental flaws of corporate sovereignty. No matter how much new treaties may claim to "solve" the problems of traditional ISDS through the use of carve-out clauses, or by tweaking some of its features, arbitrators always have the last say, and can override or just ignore whatever changes have been made.

That's why there is only one solution to the many problems of ISDS: to drop it altogether, and let national courts resolve disputes. If domestic courts aren't fair or reliable enough, investors should refuse to put money into the country until they are. That will give governments a powerful incentive to fix any weaknesses in their legal systems. Corporate sovereignty clauses actually remove that pressure to improve traditional court systems, since investors won't use them and local people don't have any choice. In other words, despite frequent claims that ISDS is simply about strengthening the rule of law in countries that sign up to it, in reality, it does the opposite.

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Filed Under: corporate sovereignty, isds, taxes, tpp, ttip