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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Comments on “How Corporate Sovereignty Threatens The Power Of Governments To Collect And Set Taxes”

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David says:


Established corporations in developed countries with depleted natural resources need to be able to assert their control over off-country resources. That only works with dependent economies. If every company needs to employ its own militia in order to assume control over the local resources, this is a waste of effort, also it does not look pretty.

It’s much more elegant to create frameworks where the governments of the developed countries are responsible for breaking a few kneecaps rather than every corporation having to do it on their own. Even better if the governments of the developing countries are responsible for breaking a few kneecaps because of having a few officials sign a few dumb things in the interest of personal gains.

That’s why there is only one solution to the many problems of ISDS: to drop it altogether, and let national courts resolve disputes.

I think you are confusing “problems of ISDS” with “missive of the ISDS”. Your proposals are tantamount to improving the effectiveness of a gun silencer by removing the hole in the middle.

That One Guy (profile) says:

Assume the worst or deal with the core problem

Any country with corporate sovereignty clauses in any of their treaties basically needs to assume that any tax-breaks they give foreign companies are not temporary but permanent, and act accordingly. They were willing to sign to an agreement that set up a ‘court’ higher than the top government one(s), they shouldn’t be surprised when it’s used against them.

Anonymous Coward says:

Re: Assume the worst or deal with the core problem

The politicians shouldn’t be surprised when the trans-national corporations stop donating to political parties as they no longer need a country’s politicians to make laws in their favour as they have their own overriding ISDS tribunal stacked with their own staff making decisions in the interests of the corporations instead of the country.

Ninja (profile) says:

Honestly, it’s that Governments own fault for getting into treaties with isds clauses so the population and the power branches (or similar structures) should demand explanations, punishment for the ones that got them in. That said, each country is free to simply ignore these disputes when they come. Because honestly, if these disputes will cause so much damage then why fear any embargo or whatever the punishment is? Assets can be frozen bilaterally and such corporate disputes are unlike to lead to any armed escalation nowadays so just lift the middle finger if you are not the ones that actually signed the treaty. Sure there’s the trust issue but I’d say that the other party trying to tamper with your own sovereignty shouldn’t be worthy of trust anyway.

Anonymous Coward says:

“companies have used this system to successfully challenge — and lower — their tax bills.”

… obviously at the expense of the local tax paying citizenry. I’m sure the locals will be thrilled.

And what do the butthurt corporations do when the locals revolt? Hasn’t this has been tried before? Didn’t it fail?

David says:

Re: Re:

Well, public education and healthcare are prime responsibilities of an operative state government. People in the U.S. are protesting in the streets in order not to get them so that the corporations may pay less taxes in order to benefit from the education levels American are financing out of their own pockets and out of trade deficiting.

And what do the butthurt corporations do when the locals revolt?

They tell fibs, control the media and bribe politicians.

Hasn’t this has been tried before? Didn’t it fail?

It works just like Orwell predicted it would.

Anonymous Coward says:

who actually introduced ISDS and what were the circumstances that brought it into being? which company/industry wanted it in place??
i hazard a guess that it was a US company/industry that invented it, so what was going to be lost and what was being taken as more important than the profits of what? health and safety of miners, perhaps? what about the local environment surrounding a chemical factory? whatever it was, it was putting people before profits and in the planet we have, just over the horizon, run by a multitude of Conservative (leaning) governments nothing is more important than ‘THE FEW, MAKING THE MOST, REGARDLESS OF THE EFFECT ON THE MANY!!’

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