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Fix Panama’s tax regime before signing FTA, trade committee hears

Canada’s international trade committee is currently in Europe talking to politicians, business groups and others about the Canada-EU free trade negotiations. When the group returns to Ottawa next week, hearings will continue into the Canada-Panama free trade agreement. Last week, the committee heard from a U.S. trade expert about the threats a Panama FTA would pose to Canada’s prudential financial regime.

Todd Tucker, research director at Public Citizen’s Global Trade Watch, was invited to testify before Canada’s standing committee on international trade (CIIT) about the Canada-Panama free trade agreement. The FTA has passed second reading in the House and is now before committee. The deal is controversial for all the same reasons Canada’s recently signed FTAs with Peru and Colombia faced major criticism from human rights, labour and environmental groups. That is, the FTA would prioritize the rights of investors while relegating labour and environmental protections to toothless side agreements.

But according to Tucker, the Panama FTA could have a drastic impact on Canada’s ability to set tax and financial policy to protect the integrity of our often praised financial regime.

“The pact would give new rights to the government of Panama and the hundreds of thousands of offshore corporations to challenge Canadian anti-tax haven measures outside of the Canadian judicial system,” he told the trade committee last week.

Tucker explained that Panama is a notorious tax haven offering foreign banks and other firms tax-free licenses with few reporting requirements. The U.S. government predicts it could save $210 billion over the next decade by eliminating tax havens globally while Homeland Security predicts the number is five times larger. Panama is also a major site of money laundering, as well as logistics and trans-shipment for illegal drugs. The country has few tax information-sharing agreements with its trading partners, said Tucker.

“The Canada-Panama trade deal would worsen the tax haven problem,” he told committee. “As the OECD has noted, having a trade agreement without first tackling Panama’s financial secrecy would incentivize even more offshore tax dodging.”

INVESTOR-STATE AND CANADIAN TAX RULES

Canada is careful to sign separate financial services chapters in its free trade agreements, but according to Tucker certain of the investment protections in the Panama FTA apply to financial services, making them vulnerable to investor-state challenges by any one of the over 400,000 U.S., European and other foreign banks and firms currently benefiting from Panama’s unaccountable, tax-free system. Tucker explained one scenario:

Let’s say that, after the Canada-Panama trade deal is ratified, Panama continues to be a bad actor on the tax haven front, and Parliament puts in place legislation to give Panama a deadline to clean up its act, or face sanctions. Under this plan of action, banks operating in Canada would be restricted from transferring money to their counterparts or business partners operating in Panama. Transfers to and from non-tax haven countries would not be affected. The Canada-operating banks that would be affected by the anti-tax haven measure could be owned by Canadians, Panamanians, and investors from third countries operating in Canada and Panama (including some Chinese investors that structured their Canadian subsidiary operations through a Panama-registered corporation).

But Article 9.10 of the Canada-Panama trade pact says “Each Party shall permit transfers related to a covered investment to be made freely and without delay, into and out of its territory.” Either the government of Panama or an investor registered there could challenge the Canadian anti-tax haven measure as a violation of the transfer guarantees under the trade deal. And, if a Canadian anti-tax haven measure wiped out the value of a Panama-registered corporation’s investment in Canada, then Article 9.11 and Section C would allow that investor to challenge the Canadian measure as an indirect expropriation.

Tucker highlighted that Panama has already threatened WTO challenges to other countries’ anti-tax haven measures. Defences in the Panama-Canada FTA for prudential measures (to protect the Canadian banking system, for example) are “largely weak,” he said, adding that national treatment and expropriations provisions in the investment chapter apply to taxation measures. Faced with a challenge to Canadian tax policy, the government could argue that the new tax measure was not discriminatory against Panama-registered companies and “aimed at ensuring the equitable and effective imposition or collection of taxes,” but the final decision would be made by a private tribunal outside Canada’s borders,” said Tucker in his presentation.

Canada’s track record on investment claims is poor and the system of investment arbitration is highly suspect if not corrupt. I’d risk my salary on a gamble that a tribunal would rule in favour of a Wall Street firm registered in Panama over a Canadian tax policy any day.

Tucker concluded not by asking the trade committee not to pass the FTA with Panama (he was there as a U.S. citizen offering friendly advice, after all), but with a warning that free trade deals should leave a large amount of room to apply non-discriminatory domestic regulations, especially in an areas as fundamental as finance:

…there is widespread agreement that trade agreements should not discipline non-discriminatory regulations, even though, in fact, many non-discriminatory financial services regulations are disciplined by the World Trade Organization and other trade deals. But there are some instances where policymakers will want to make principles-based distinctions between countries on the basis of their non-trade policies. Such is the case with anti-tax haven policies. Yet these policies would be open to attack by the Panamanian government or Panama-registered investors under the Canada-Panama trade deal’s investment and financial services text.

TAKE ACTION

Tucker’s presentation will be up on the Public Citizen website soon and is not yet posted to the Canadian trade committee website. If you are concerned about the possible impact of the Canada-Panama FTA, please let our trade committee members know, even in a brief email to them. I’ve included their names, party affiliations, and email addresses below. To read more on Public Citizen’s campaign against the U.S.-Panama FTA, which is stalled in Congress, click here.

CIIT Members

Lee Richardson, Chair (CPC): Richardson.L@parl.gc.ca
John Cannis, vice-chair (LPC): Cannis.J@parl.gc.ca
Jean-Yves Laforest, vice-chair (BLOC): LaforJ@parl.gc.ca
Dean Allison (CPC): Allison.D@parl.gc.ca
Martha Hall Findlay (LPC): HallFindlay.M@parl.gc.ca
Gerald Keddy (CPC): Keddy.G@parl.gc.ca
Ron Cannan (CPC): Cannan.R@parl.gc.ca
Ed Holder (CPC): Holder.E@parl.gc.ca
Mario Silva (LPC): Silva.M@parl.gc.ca
Claude Guimond (BLOC): Guimond.C@parl.gc.ca
Peter Julian (NDP): Julian.P@parl.gc.ca
Brad Trost (CPC): Trost.B@parl.gc.ca