Comments Guidelines

All comments are pre-moderated. No spam, slurs, personal attacks, or foul language will be allowed.

Sunday, July 1, 2018

Great new Tax Justice Network podcast on how "Bean Counters...Broke Capitalism"

The June 28 Taxcast is out with a focus on the Big Four accounting firms. Richard Brooks is the author of Bean Counters: The triumph of the accountants and how they broke capitalism (order here in the UK and here in the US) which documents accountants' involvement in some of the world's worst financial scandals, not least of which is the promotion of tax havens. The new segment also features U.S. investigative journalist James Henry and Tax Justice Network Chair John Christensen. Additional stories include fraud at the Trump Foundation and why infamous US tax haven Delaware is supporting a financial transparency bill.

You can find the podcast and further reading here. Enjoy!

Thursday, June 28, 2018

Shock EU Court Decision Strikes Blow Against Investment Arbitration

With all the dreary news we've seen this week, could you stand some good news? The battle against investor-state dispute settlement (ISDS) got a huge boost in March when the Court of Justice of the European Union (CJEU) ruled in Slovak Republic v. Achmea B.V. ("Achmea") that ISDS is contrary to EU law. The decision was something of a surprise because the preliminary analysis ("opinion," in EU-speak) of Advocate General* Melchior Wathelet had suggested that the CJEU rule that ISDS is consistent with EU law.

As you may recall from the Trans-Pacific Partnership negotiations, ISDS is private arbitration of investment disputes between governments and foreign investors. Completely untethered from precedent and with no appeal, arbiters decide if a government has "expropriated" an investment, complied with its duties under a bilateral investment treaty (BIT) or "trade agreement" such as NAFTA, while these establishing mechanisms place no requirements on the investor. The imbalance of requirements under ISDS as well as its actual procedures present numerous opportunities for corporate abuse and, as Professor Susan Sell laid out in her guest post here in 2015, there is no shortage of examples of such abuse.

In Achmea, the Dutch insurer Achmea B.V. took the Slovak government to arbitration under the Dutch-Slovak bilateral investment treaty after the government decided to reverse liberalization of its health care system, ultimately deciding to create a single national health insurance program. The arbitrators ruled in favor of Achmea and awarded 22.1 million to the company Three other cases were filed against the Slovak Republic's action, including a second case from Achmea B.V. (Achmea II), but their respective tribunals all ruled they did not have jurisdiction. In Achmea, the government sought annulment of the award first from the Higher Regional Court of Frankfurt, which ruled against it, and then from the German Federal Court of Justice, which referred the case to the CJEU for a ruling on the relevant EU law (this is standard procedure in EU law).


A number of EU Member States, as well as the European Commission, filed briefs in this case. According to Reuters, "The Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland, Romania and the European Commission submitted observations in support of Slovakia’s arguments.Germany, France, the Netherlands, Austria and Finland contended that such clauses were valid."

The CJEU ruled, contrary to the Advocate General's opinion, that ISDS tribunals are not part of the EU legal system, not national courts, and yet might be called on to apply EU law. Moreover, since no appeal is possible, there is nothing to ensure that EU law is applied properly by these tribunals. Given that EU law supersedes all national law, ISDS threatens to undermine the autonomy of EU law. Therefore, the Court ruled that ISDS is not compatible with EU law.

In the first instance, this ruling applies to bilateral investment treaties between two EU Member States. These BITs all involve former Communist states that started becoming EU members only in 2004. As Lucia Bizikova noted on the Kluwer Arbitration blog, all these new Member States signed BITs immediately after the fall of Communism, and the requirements placed on them were much more demanding than under EU investment law. As she puts it, Achmea is "finally bringing justice to the most recent members of the EU." There are at present 196 intra-EU BITs, and ISDS has now been knocked out of all of them.

Moreover, the ruling may well affect ISDS that was contemplated in treaties between the EU and other countries, such as the Comprehensive Economic and Trade Agreement with Canada. As the authors state, this fits with European Commission action against intra-EU BITs. As Bizikova points out, one prominent example of the Commission's view on this is the Micula case, in which the Commission essentially forbade Romania from paying the  arbitral award, by finding that to do so would be to give an illegal state aid.

In the wake of the ruling, the Dutch government (paywalled; I was able to read the first two sentences) announced in May that it would terminate its bilateral investment treaties with other EU Member States. Presumably, without an enforcement mechanism, there was no point to maintaining the agreements.

Of course, one swallow does not bring a spring and all that, but having a such a landmark decision in the world's second-largest economic entity after China is something to celebrate.

You hadn't heard this news, you say? Despite happening over three months ago, the reporting is restricted almost exclusively to legal and arbitration blogs, almost all European, with nary a peep from the mass media. According to my searches of their websites, there was nothing at the NYT, CNN, the Washington Post, the BBC (!), the Financial Times (!!), Associated Press, and other sources. The only major news source I am sure picked it up is Reuters (European, of course). Let's hope a few more people hear about it now.



* In the CJEU, one Advocate General may be assigned to a case to write a preliminary analysis after the Court concludes oral arguments. The CJEU has a total of 11 Advocates General as well as 28 Justices, one from each Member State. The Advocate General's Opinion is often adopted by the Court, but there is no requirement that it do so.

Tuesday, January 23, 2018

Amazon scores two more $5+ billion bids

A non-blogging friend points me to the announcement today of Maryland's subsidy bid that puts Montgomery County into one of the 20 finalist slots. Shockingly, Governor Larry Hogan (R-MD) put in a bid that would pay Amazon almost the entire cost of its facility, depending on what you think a proper discount rate should be now (hint: low).

"HQ2," which Amazon has stated will amount to an eventual $5 billion in investment, will receive a subsidy package worth over $5 billion in nominal value (but not necessarily present value) from Maryland. The largest element in this package is a jobs tax credit of 5.75% of wages for up to 17 years, on salaries averaging $100,000 per year (minimum $60,000, maximum $500,000). According to the story linked above, Amazon would max out this incentive with just 40,000 jobs. To simplify the math, this element would pay up to $5750 per year to Amazon X 40,000 employees X 17 years, or $3.91 billion.

Other elements of the package include state and local property tax credits (local governments would be 50% reimbursed by the state for their share), a sales tax exemption on construction materials, and an unspecified amount of infrastructure. According to the linked story, there would be "billions of dollars" in transportation upgrades in the state, though the article does not indicate how much would be Amazon-specific and how much would go elsewhere in the area.

Why do I say this offer is shocking? 1) It normalizes not just billion-dollar incentive packages, but multi-billion subsidy awards. Foxconn got $4 billion last year from Wisconsin, according to the Good Jobs First Megadeals spreadsheet, October 2017 update. Now, Amazon has received at least three (see below for St. Louis) offers of over $5 billion. In the European Union, a $1 billion incentive is virtually impossible even in the poorest EU regions, and absolutely impossible in cities as wealthy as the 20 finalists here. Indeed, few if any of the 20 would be allowed to offer any subsidy whatsoever. 2) What is possibly even worse, it normalizes paying subsidies greater than the cost of the investment (100+ % aid intensity, in terms of European Union state aid rules). Seriously, if a government is going to pay more than the entire cost of the investment, it should have a legitimate, large ownership stake, rather than using "investment" as a euphemism for "subsidy." 3) Have none of these cities noticed that unemployment is at historically low levels? That's precisely a reason not to give away the store. Let's look at the state unemployment rate for the 20 qualifiers in November 2017:

Colorado:           2.9%
Tennessee:         3.1%
Florida:              3.6%
Massachusetts:  3.6%
Indiana:             3.7%
Virginia:            3.7%
Texas:                3.8%   (two finalists)
Maryland:          3.9%
Georgia:            4.3%
North Carolina: 4.3%
California:         4.5%
Pennsylvania:    4.6%   (two finalists)
New York:         4.7%
Ohio:                 4.8%
Illinois:              4.9%
New Jersey:       5.1%
Ontario:              5.5%  (December 2017)
Washington DC  6.4%

Source: For U.S. states and DC, Bureau of Labor Statistics, Local Area Unemployment Statistics. For Ontario, Alberta Government Economic Dashboard, published 5 January 2018.

I'm not the only person who is shocked. Greg LeRoy, executive director of Good Jobs First, told Middle Class Political Economist: "As a Maryland taxpayer, I am aghast that Gov. Hogan would propose to subsidize Amazon's new headquarters 100 percent with public dollars. I refuse to pay higher taxes for a company one-sixth owned by the richest person on earth."

LeRoy also pointed out that the St. Louis bid was released to the public last week after the city failed to be named a finalist. According to the St. Louis Business Journal, a partnership of the state of Missouri, the city of St. Louis, St. Louis County, the state of Illinois, and Illinois' St. Clair County offered Amazon $7.1 billion in subsidies, edging out Newark's $7 billion bid as the largest offering known so far. As with the Maryland bid, this is shocking for all the same reasons. Indeed, Missouri had one of the lower unemployment rates in November 2017, a mere 3.4%.

The Maryland and Missouri subsidy packages are simply horrifying. I wrote over six years ago that state and local subsidies were "more out of control than ever." In these six years, we have already seen five $2+ billion incentive packages, with at least one more on the way, and companies emboldened to request not millions, but billions of dollars of subsidies. I fear we are looking at a new ratcheting up of the investment attraction wars.

Friday, January 19, 2018

Amazon moves closer to breaking the bank with "HQ2"

Yesterday (Jan. 18), Amazon announced the 20 finalists for its "HQ2" project, that will supposedly create a second headquarters (why?) for the company somewhere in North America, most likely in the United States. With an alleged 50,000 jobs and $5 billion in investment, this development attracted 238 bids from cities and counties in the United States, Canada, and Mexico.

The finalists: Atlanta, Austin, Boston, Chicago, Columbus, Dallas, Denver, Indianapolis, Los Angeles, Miami, Montgomery County (MD), Nashville, New York, Newark, northern Virginia, Philadelphia, Pittsburgh, Raleigh, Toronto, and Washington.

The finalists will now be subject to months of unremitting pressure to give up as much as possible. It will not be pretty. Information asymmetry, capital mobility, and rent-seeking are the hallmarks of the site selection process. In the European Union a set of rules on subsidies limits this competition, whereas in the United States, it's the Wild West. This leads to much higher investment incentives being given in the United States than are given by EU Member States for similar projects even by the same company (AMD/Global Foundries, for example).

Interestingly enough, both the highest-known bid ($7 billion in Newark) and the lowest (0 in Toronto) are still under consideration. (Unfortunately, the other known 0 bid, by San Jose, was rejected.) I can think of scenarios where either might be chosen, but I can't get inside the mind of Jeff Bezos and other Amazon decision-makers. This is the heart of information asymmetry. So again, we have to wait and see what Amazon does. Will the company subject a smaller group of cities to still more torture? Stay tuned!