WTO Panel Grants Panama Victory in Argentine Financial Services Case

8 October 2015

A WTO dispute panel has found that various financial services-related measures taken by Argentina violate certain global trade rules, in response to a complaint by Panama.

While these measures were found to violate the most-favoured nation (MFN) obligations under the WTO’s General Agreement on Trade in Services (GATS), other claims put forward by Panama (DS 453) under both this agreement and the General Agreement on Tariffs and Trade (GATT 1994) were dismissed or subject to judicial economy.

The panel also ruled against Argentina’s defence under the exceptions provided by the GATS and its Annex on Financial Services.

Cooperative countries

The various measures were imposed by Argentina on services and service suppliers from countries which Buenos Aires classifies as “countries not cooperating for tax transparency purposes.” Panama claimed these measures also marginally affected goods trade,

This country classification comes from a 2013 Argentine Decree, which says that a cooperative country must have an agreement with Argentina for effective exchange of information practice, or fulfil necessary requirements for initiating talks on this.

By signing such agreements, which “shall as far as possible comply with the international standards on transparency adopted by the Global Forum on Transparency and Exchange of Information for Tax Purposes,” countries cannot invoke banking, stock market, or any other form of secrecy in response to specific information requests from Argentina. 

In the list published by Argentine authorities in January 2014, more than 100 countries, including Panama, were considered cooperative countries.

MFN claims under the GATS

Under the GATS, members must give most-favoured nation treatment to all “like” foreign services or services suppliers. The panel said that services and service suppliers of cooperative and non-cooperative countries are “like” under the GATS, given that the difference in treatment inherent in these measures is due to origin, not “other factor[s].”

The panel found that the eight measures each establish different treatment according to whether the services and services suppliers are from cooperative or non-cooperative countries. This difference is not due to whether Argentina has access to tax information. For the panel, the measures’ design and operation adversely affect competition conditions for services and service suppliers of non-cooperative countries.

Access to tax information, competition conditions

Panama also claimed that three of the measures violate GATS national treatment rules. The panel considered that Argentine services and service suppliers are comparable to those of cooperative countries, as in both cases Buenos Aires can access tax information relating to the suppliers concerned as well as provide the same treatment for transactions by Argentine taxpayers with both types of service suppliers.

The panel found that Argentine services and services suppliers are “like” – in other words, effectively equivalent to – the services and service suppliers of non-cooperative countries. After finding that each of the three measures treats services and service suppliers of non-cooperative countries differently from domestic ones, the panel deemed that those measures do not modify the competition conditions in favour of domestic industry.

For the panel, the three challenged measures are intended to “level a playing field” due to lack of tax transparency, and aim to guarantee that the competitive relationship between Argentine services and service suppliers and foreign ones are on equal footing.

GATS defences, prudential exception

Regarding six of the measures, Argentina argued that these were justified by the GATS general exceptions, which allows members in specified circumstances to use measures that run against GATS obligations, such as preventing deceptive or fraudulent practices.

The panel found that the protection of its tax collection system and the fight against harmful tax practices and money laundering are of the utmost importance for Buenos Aires. The panel also concluded that Argentine measures contribute to achieving these chosen objectives, with limited restrictive effect on international trade in services.

The panel also said that Panama has not identified any alternative measure reasonably available to Argentina and less trade-restrictive while achieving the same objectives. Nonetheless, the panel said that Argentina is applying its measures in a manner that is counterproductive given the objective used to justify distinguishing between cooperative and non-cooperative countries. According to the panel, Argentina’s measures constitute arbitrary or unjustifiable discrimination under the general exceptions clause of the GATS.

Argentina also argued that the other two measures cited in the case are justifiable under paragraph 2(a) of the GATS Annex on Financial Services, which contains the so-called “prudential exception.” This allows WTO members to take certain members for reasons such as protecting investors or ensuring the integrity and stability of the financial system, regardless of other GATS provisions.

In interpreting the concept of “prudential reasons,” the panel emphasised that the exception is about the reason behind the measure, not about the specific type of measures themselves. The panel also considered that the list of prudential reasons outlined in the Annex on Financial Services is only indicative and therefore could include other reasons beyond those explicitly cited.

For the panel, prudential reasons refers to those causes or reasons that motivate financial sector regulators to act to prevent a risk, injury, or danger, which does not necessarily have to be imminent. For a measure to be justified by this exception, its design, structure, or architecture should have a cause and effect relationship with this prudential reason.

The panel said that the reasons identified by Argentina as justification for such measures do qualify as prudential.  However, the panel deemed that the measures do not have a cause and effect relationship with the alleged prudential reasons.

Under WTO rules, the panel report shall be adopted by the Dispute Settlement Body (DSB) within 20 to 60 days of circulation, unless the DSB decides by consensus not to adopt the report or either party notifies its decision to appeal.

ICTSD reporting.

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