the intertthe interh e i n t e r … · patricia s. heard beverly caro dureus ... justin han tyler...

AMERICAN BAR ASSOCIATION321 N. CLARK STREETCHICAGO, ILLINOIS 60610

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

VOLUME 50 • NUMBER 2 • 2017

ARTICLES

Increasing Host State Regulatory Flexibility in Defending Investor-State Disputes: The Evolution of U.S. Approaches from NAFTA to the TPP . . . . . . . . . . . . . . David A. Gantz

The Possible Impact of Legal Globalization on the ECJ Decision on Human Embryonic Stem Cell Patents and its Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . Amy Lai

Tax Avoidance, Revenue Starvation and the Age of the Multinational Corporation . . . . . . . . . . . . . . . . . . . . . . . . . Sara Dillon

Influence of the Arbitral Seat in the Outcome of an International Commercial Arbitration . . . . . . . . . . . . . . . . . . . Gonzalo Vial

Senkaku/Diaoyu: Are They Islands? . . . . . . . . . . . . . . Constantinos Yiallourides

A Comparative Study of U.S. and Chinese Environmental Law with a Focus on the Real Estate Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jihong Wang

and Paul Kossof

CASE NOTE

Cross-Border Insolvency in the U.S. and U.K.: Conflicting Approaches to Defining the Locus of a Debtor’s “Center of Main Interests” . . . . . . . . . . . . . . . . . . . Bryan Rochelle

PUBLISHED IN COOPERATION WITH

T H E I N T E RT H E I N T E R N A T I O NN A T I O N A L L A W Y EA L L A W Y E RT H E I N T E R N A T I O N A L L A W Y E R

VO

LU

ME

50

• NU

MB

ER

2 • 2

01

7T

HE

INT

ER

NA

TIO

NA

L L

AW

YE

R

inl50-2_cv_inl50-2_cv 4/21/2017 3:19 PM Page 2

SMU DEDMAN SCHOOL OF LAWPUBLISHED IN COOPERATION WITH

AN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAWTHE YEAR IN REVIEW

THE INTERNATIONAL LAWYERBOARD OF PROFESSIONAL EDITORS

MARC I. STEINBERGEditor-in-Chief, SMU Dedman School of Law

PATRICIA S. HEARD BEVERLY CARO DUREUSCo-Executive Editor Co-Executive Editor

SMU Dedman School of Law SMU Dedman School of Law

EXTERNAL ADVISORY BOARDWERNER F. EBKE

ChairMADS ANDENAS University of Heidelberg WILLIAM B.T. MOCK

Institute of Advanced Legal Studies John Marshall Law SchoolMICHAEL A. FAMMLER

RICHARD M. BUXBAUM Baker & McKenzie JOHN F. MURPHYUniversity of California at Berkeley Villanova University

HILARY K. JOSEPHSALBERT CHEN Syracuse University JOHN E. NOYES

Hong Kong University California WesternMARILYN J. KAMAN

DON S. DEAMICIS Senior Judge, Minnesota ROBERT RENDELLMember, District of Columbia Bar Member, Texas Bar

ROBERT E. LUTZPATRICK DEL DUCA Southwestern University LAUREL S. TERRYZuber Lawler & Del Duca Pennsylvania State University

Dickinson Law

SMU FACULTY ADVISORY BOARDCo-Chair Co-Chair

CHRISTOPHER H. HANNA JOSEPH J. NORTON

ANTHONY COLANGELO JOHN LOWE MEGHAN J. RYANJEFFREY GABA GEORGE MARTINEZ JOSHUA C. TATE

GRANT HAYDEN DANA NAHLEN* DAVID TAYLORCHRISTOPHER JENKS W. KEITH ROBINSON JENIA IONTCHEVA TURNER

JEFF KAHN PETER WINSHIP

*ADJUNCT FACULTY

THE INTERNATIONAL LAW REVIEW ASSOCIATIONAn Association of The International Lawyer, The Year in Review, and Law and Business Review of the Americas

SOUTHERN METHODIST UNIVERSITY DEDMAN SCHOOL OF LAW2016-2017 STUDENT EDITORIAL BOARD

ZACHARY TOBOLOWSKYPresident

THE INTERNATIONAL LAWYER LAW AND BUSINESS REVIEW OF THE AMERICASJENNIFER LITTLE TREVOR SPEARS MATT HORTENSTINE HANNA KIM

Editor-in-Chief Managing Editor Editor-in-Chief Managing Editor

Associate Managing EditorsJACOB BACH ZACH KLEIMAN COLLING QUIGLEY

REBEKAH DALL-ASEN LAUREN KRAMER MORGAN WELLSLAURA JACOBI AUSTIN MOORMAN GRACE ANN WHITESIDE

Senior Note & Comment Case Note & CommentEditor Editors Canada Reporter NAFTA Reporter

CAITLIN CONNOR CATHERINE CHLEBOWSKI BROOKE NEAL PHOUNG MINH TRANCARTER GANTZ

SAMANTHA GUGLIUZZAJON MOUL

BROOKE NEALCAROLINE SILEO

THE YEAR IN REVIEWAN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITHSMU DEDMAN SCHOOL OF LAW

Latin America Reporter Citations Editors Administrative Managing EditorKENNETH HAESLY VERONICA DIAZ-ARRESTIA KATHERINE GROSSKOPF

TAYLOR TENNISON

Articles EditorsTRAVIS COX GABY GUTIERREZ GARRETT ROBERTS

JONATHAN CREEK KENNETH HAESLY PHOUNG MINH TRANKRISTIN DICKHANER ASHLEY JONES MELANIE TROSTEL

REGAN DONNENFIELD EVAN KIRKHAM JACLYN WAHLBERGALEXANDRA FIGARI MICHAEL LAMAR SAMUEL WERNICK

TAYLOR GRAHAM SAM MURPHY ASHLEY YEN

Staff Editors

ALEX AILLS THOMAS LEONARDBRADEN ALLMAN LARISA MARTIROSOVA

DYLAN ANDERSON LUCIANA MILANODANIEL ATKINSON KRISTIN MILLERASHLEY BRANNAN MEGAN MOHLER

CHRISTOPHER RYAN CHILDRESS MATTHEW NIEGOSHAN JU CHO EMILY PRATT

ALEXANDER COCHRAN PARKE PRESNELLALY CONWELL KORNEL ‘KORI’ RADY

RYAN DEAN BRYAN ROCHELLEDALEY EPSTEIN KATHERINE L. SCHLINKE

ERIC ETHERIDGE AUSTIN SCHNELLELIZABETH FENNEY MARY ‘CAROLINE’ SHIVERS

ELICIA GREEN MATT SKIDMOREJUSTIN HAN TYLER SOMMERS

MONICA I. HARASIM RICHARD A. SPARKARA HARGROVE SHELBY TAYLOR

JUVIAN J. HERNANDEZ SHEM VINTONLAUREL HOISAGER TESS WAFELBAKKER

NIRVANA HOOLOOMANN DAVID WATSONCHRISTOPHER HOWARD LOGAN WEISSLER

JOHN HUNT AUSTIN WHATLEYGRACE LEE CAITLIN WILKINSON

SARAH LEHMAN SARAH WILLIAMSON

TALIBRA FERGUSONAdministrative Assistant



THE INTERNATIONAL LAWYERTHE INTERNATIONAL LAWYER (ISSN 0020-7810) is the triannual publication of the

American Bar Association’s Section of International Law (ABA/SIL) in cooperation with SMUDedman School of Law. It has a worldwide circulation. Prior to 2013, it was a quarterly publicationthat included a special Year in Review issue, which is now a separate annual publication known asTHE YEAR IN REVIEW.

Publication policy: The objectives of THE INTERNATIONAL LAWYER are to publish highquality articles on international subjects and to foster and record the activities of the ABA/SIL and itscommittees. The Journal focuses on practical issues facing lawyers engaged in international practice.Thus, the editors are interested primarily in topics concerning trade, licensing, direct investment,finance, taxation, litigation, and dispute resolution. They, however, also consider public internationallaw topics.

Article Submissions: Articles submitted for publication should not exceed 10,000 words (includingfootnotes). Internal citations and footnotes must conform to the most recent edition of The Bluebook:A Uniform System of Citation (Harvard Law Review Association). The Journal does not acceptunsolicited student-written submissions nor does it consider articles that have been or are to bepublished elsewhere.

All articles must be sent in an electronic Word format. Submit to [email protected] orsend a hard copy with an electronic Word-formatted copy to Editor-in-Chief, THEINTERNATIONAL LAWYER, SMU Dedman School of Law, P.O. Box 750116, Dallas, TX75275-0116 [phone: 214-768-2061; fax: 214-768-1633]. Manuscripts undergo peer review, whichusually takes three to four weeks. Publication is normally four to eight months after a manuscript isaccepted. The editors of THE INTERNATIONAL LAWYER reserve the right to move an acceptedmanuscript from the committed issue to a later issue.

Manuscripts are submitted at the sender’s risk. The editors do not return unsolicited material.Material accepted for publication becomes the property of the ABA/SIL, which pays no fee for anymanuscript.

Subscription Price: Section annual membership dues $55 (free for law students) include asubscription to THE INTERNATIONAL LAWYER. The current annual subscription rate fornonmembers is $60.00 ($75.00 if mailed outside the United States).

Reprint Permissions: Requests to reproduce any portion of this issue should be addressed toManager, Copyrights and Licensing, American Bar Association, 321 N. Clark Street, Chicago, IL60610 [phone: 312-988-6102; fax: 312-988-6030; e-mail: [email protected]].

Order Information: Most issues (other than THE YEAR IN REVIEW) may be purchased for $10per copy (plus shipping and handling) from the American Bar Association, ABA Service Center, 321N. Clark Street, Chicago, IL 60610 [phone: 800-285-2221; fax: 312-988-5568; e-mail:[email protected]]. Back issues, once available, may be purchased from William S. Hein &Co. Inc., 2350 North Forest Road, Getzville, NY 14068 [phone: 800-828-7571; fax: 716-883-8100; e-mail: [email protected] or [email protected]]. Back issues, once available, can be found inelectronic format on HeinOnline [http://heinonline.org/].

Address Changes: Send all address changes to THE INTERNATIONAL LAWYER, AmericanBar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60610.

Advertising: Address all advertising orders, contracts, and materials to: Manager, ABA PublishingAdvertising, 321 N. Clark Street, Chicago, IL 60610 [phone: 312-988-6051; fax: 312-988-6030].

Postal Information: Periodicals postage paid at Chicago, Illinois, and additional mailing offices.POSTMASTER: Send all address changes to THE INTERNATIONAL LAWYER, American BarAssociation, ABA Service Center, 321 N. Clark Street, Chicago, IL 60610 [phone: 312-988-5522; fax:312-988-5568; e-mail: [email protected]].Copyright 2017 American Bar Association. All rights reserved. Printed in the United States ofAmerica. Produced by Joe Christensen, Inc.

*Disclaimer: Nothing appearing in this journal necessarily represents the opinions, views or actionsof the American Bar Association unless the House of Delegates or the Board of Governors has firstapproved it. Nothing appearing in this journal necessarily represents the opinion, views, or actions ofthe ABA/SIL or its Council unless the ABA/SIL or its Council has approved it.

Visit the ABA Website at www.american.org and the Section of International Law homepageat www.americanbar.org/intlaw.

on acid-free paper.



SECTION OF INTERNATIONAL LAW2016-2017

Officers:Chair SARA P. SANDFORD

Chair-Elect STEVEN M. RICHMAN

Vice Chair ROBERT I. BROWN

Revenue Officer JOSEPH I. RAIA

Budget Officer WILLIAM B.T. MOCK JR.Liaison Officer LEILA MOONEY

Membership Officer MARCOS RIOS

Secretary/Operations Officer LISA RYAN

Programs Officer MARCELA B. STRAS

Rule of Law Officer NANCY KAYMAR STAFFORD

Policy/Government Affairs Officer DAVID SCHWARTZ

Publications Officer PATRICK DEL DUCA

Diversity Officer MARK E. WOJCIK

Technology Officer CARYL BEN BASAT

Communications Officer INGRID BUSSON-HALL

CLE Board Chair YEE WAH CHIN

Immediate Past Chair LISA J. SAVITT

Delegate/Member-At-Large JEFFREY B. GOLDEN

Delegate/Member-At-Large GLENN P. HENDRIX

Delegate/Member-At-Large GABRIELLE M. BUCKLEY

Senior Advisor MICHAEL H. BYOWITZ

ABA Board of Governors Liaison PAULETTE BROWN

Division ChairsAfrica/Eurasia Division ROBIN GEROFSKY KAPTZAN

Americas/Middle East Division EDUARDO BENAVIDES

Business Law Division I FLORIAN JORG

Business Law Division II SUSAN J. BRUSHABER

Business Regulation Division NANCY A. MATOS

Constituent Division ANA LUISA DERENUSSON

Disputes Division KENNETH RASHBAUM

Finance Division WALTER STUBER

Legal Practice Division MATTIA COLLONELLI DE GASPARIS

Public International Law Division I CLIFFORD SOSNOW

Public International Law Division II OLUFUNMI OLUYEDE

Tax Estate & Individuals Division HEDWIN SALMEN-NAVARRO

General Editor YEAR IN REVIEW JASON SCOTT PALMER



Members of the Council:Section Delegate JEFFREY B. GOLDEN

Section Delegate GLENN P. HENDRIX

Section Delegate GABRIELLE M. BUCKLEY

Editor-in-Chief THE INTERNATIONAL LAWYER MARC I. STEINBERG

Editor-in-Chief INTERNATIONAL LAW NEWS RENEE DOPPLICK

Former Section Chair LISA J. SAVITT

Former Section Chair MARCELO E. BOMBAU

Former Section Chair MICHAEL E. BURKE

Young Lawyer Division Representative KARTHIK NAGARAJAN

Law Student Division Liaison MARAYA BEST

Congressional Liaison MAXIMILIAN TRUJILLO

Non-Governmental Organization Liaison ANNA Y. CHYTLA

Public International Law Liaison JEFFREY D. KOVAR

Private International Law Liaison MICHAEL S. COFFEE

International Trade Law Liaison JOHN T. MASTERSON JR.Non-U.S. Lawyer Representative ANITA SCHLAPFER

Council Members-At-Large: Term Expires:MARK AGRAST 2017

RONALD J. BETTAUER 2017ROBERT CARLSON 2017RONALD A. CASS 2017

SANDRA MCCANDLESS 2017VED NANDA 2017

ISABELLA BUNN 2018YEE WAH CHIN 2018

ELI WHITNEY DEBEVOISE 2018JOSHUA MARKUS 2018

CARA LEE NEVILLE 2018BRUCE RASHKOW 2018

HANS CORELL 2019STEVEN HENDRIX 2019

MARGARET MCKEOWN 2019PATRICIA LEE REFO 2019

DELISSA A. RIDGWAY 2019JUAN CARLOS VELAZQUEZ DE LEON OBREGON 2019

RUTH WEDGWOOD 2019



THE INTERNATIONAL LAWYER2017 Volume 50 Number 2

CONTENTS

ARTICLESIncreasing Host State Regulatory Flexibility inDefending Investor-State Disputes: The Evolutionof U.S. Approaches from NAFTA to the TPP . . . . . . . . . David A. Gantz 231

The Possible Impact of Legal Globalization onthe ECJ Decision on Human Embryonic Stem CellPatents and its Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amy Lai 261

Tax Avoidance, Revenue Starvation and theAge of the Multinational Corporation . . . . . . . . . . . . . . . . . . . . Sara Dillon 275

Influence of the Arbitral Seat in the Outcome ofan International Commercial Arbitration . . . . . . . . . . . . . . . . Gonzalo Vial 329

Senkaku/Diaoyu: Are They Islands? . . . . . . . . . Constantinos Yiallourides 347

A Comparative Study of U.S. and ChineseEnvironmental Law with a Focus onthe Real Estate Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jihong Wang 367

and Paul Kossof

CASE NOTECross-Border Insolvency in the U.S. and U.K.:Conflicting Approaches to Defining theLocus of a Debtor’s “Center of Main Interests” . . . . . . . Bryan Rochelle 391



Increasing Host State Regulatory Flexibility inDefending Investor-State Disputes: TheEvolution of U.S. Approaches from NAFTAto the TPP

DAVID A. GANTZ*

Abstract

Building on the negotiation of U.S. bilateral investment treaties beginning in theearly 1980s, U.S. free trade agreements incorporating specific host-state obligationsto foreign investors and binding investor-state dispute settlement (ISDS) have beena feature of U.S. trade and investment policy since 1992 (when the NAFTAnegotiations were concluded). Presidents Ronald Reagan, George H.W. Bush, BillClinton, George W. Bush and Barack Obama have all endorsed ISDS, despiteopposition by many Democratic legislators, organized labor and environmentalgroups.

Yet the content of these investment chapters shows a significant evolution fromNAFTA to the Australia-United States FTA (“AUSFTA,” without ISDS), theUnited States-Chile FTA and the Singapore-United States FTA (2003) to theTrans-Pacific Partnership (TPP) (2015). The changes have been driven largely bythe concerns of civil society and government officials over the dozens of NAFTAinvestment claims filed against the NAFTA Parties. They also reflect the perceivedneed for the United States and other host governments to maintain a higher level ofregulatory flexibility and discretion, particularly in such areas as protecting theenvironment and maintaining public health. The United States’ Trade PromotionAuthority (TPA) legislation enacted in 2002 and 2015 also mirrors these post-NAFTA changes. The newest iteration of the mechanism (Chapter 9 of the TPP),should it eventually enter into force for all or most of the signatories or beincorporated in other U.S. trade agreements such as a renegotiated NAFTA, wouldthus afford host governments far more regulatory discretion than earlier agreementssuch as NAFTA, along with increased transparency, making it more difficult forforeign investors to prevail against host governments with claims of denial of “fairand equitable treatment” and “regulatory takings.” The evolution of U.S.sponsored investment protection provisions into a significantly more host governmentfriendly, regulatory friendly, process, is the principal theme of this paper.

* Samuel M. Fegtly Professor of Law, Rogers College of Law, University of Arizona;Visiting Professor of Law, Georgetown University Law Center, Fall 2016. This article drawsextensively on a paper written for a conference in Ottawa in September 2015, sponsored by theCenter for International Governance Innovation (CIGI) in Ontario, “Investor-State DisputeSettlement in U.S. Law, Politics and Practice: The Debate Continues.”



232 THE INTERNATIONAL LAWYER [VOL. 50, NO. 2

I. Introduction and Historical Background

The United States was a latecomer to the negotiation and conclusion ofbilateral investment treaties (BIT). While Germany, the Netherlands, theUnited Kingdom and other European nations began concluding BITs twentyyears earlier,1 the United States did not sign the first BIT, with Panama,until 1982,2 with several others signed in 1983 following the completion ofthe first U.S. model BIT.3 But, unlike some of the early European BITs,which did not include investor state dispute settlement (ISDS),4 from theoutset the U.S. BITs incorporated (albeit in considerably different form frommore modern treaties) mandatory third party arbitration mechanisms toresolve disputes between foreign investors and host countries.5 Most U.S.BITs (some forty-seven) were concluded between 1983 and 2000 by theReagan, George H.W. Bush and Clinton Administrations.6 Only two, withUruguay and Rwanda, have been concluded since 2000.7 The ObamaAdministration has concluded none to date but is pursuing a BIT withChina.8

It was not an accident that all U.S. BITs contained ISDS provisions. Inaddition to the U.S. Government’s desire to afford greater protection forU.S. investors in developing countries; to encourage needed investment inthe developing world; and to strengthen U.S. views that takings aregoverned by international law, a significant driving force behind the UnitedStates’ decision to abandon the formal or informal espousal process that hadbeen followed in recent years, particularly in Latin America in the 1970s.

1. For example, the first German BIT was concluded with Greece in 1961, with other earlyBITs concluded in 1962 (Guinea), 1963 (Ceylon), 1964 (Ethiopia) and 1965 (Ecuador). SeeUNCTAD INVESTMENT HUB: GERMANY, http://investmentpolicyhub.unctad.org/IIA/CountryBits/78#iiaInnerMenu (last visited May 8, 2015). The Netherlands concluded agreementswith Cameroon and the Ivory Coast in 1965. See UNCTAD INVESTMENT HUB:NETHERLANDS, http://investmentpolicyhub.unctad.org/IIA/CountryBits/148#iiaInnerMenu.

2. U.S. Bilateral Investment Treaties, U.S. DEPT. OF STATE, http://www.state.gov/e/eb/ifd/bit/117402.htm [hereinafter “US BITS”].

3. See K. Scott Gudgeon, U.S. Bilateral Investment Treaties: Comments on their Origin, Purposes,and General Treatment Standards, 4 INT’L TAX & BUS. LAW. 105, 106 (1986) (discussing thedevelopment of the model BIT).

4. See e.g., Treaty for the Promotion and Reciprocal Protection of Investments, Ger.–Ceylon,Nov. 8, 1962 (since terminated), available at http://investmentpolicyhub.unctad.org/Download/TreatyFile/1419.

5. See, e.g., Treaty Concerning the Treatment and Protection of Investment, Pan. – U.S., art.VII(2), Oct. 27, 1982, available at http://www.state.gov/documents/organization/43582.pdf(providing for arbitration under the previously agreed arbitral procedures, before the Inter-American Arbitration Commission or other international arbitration mechanisms).

6. US BITS, supra note 2.7. Id.8. Toward a US-China Investment Treaty, PETERSEN INSTITUTE FOR IN’L ECON., at 3 (Feb.

2015), http://www.iie.com/publications/briefings/piieb15-1.pdf [hereinafter “Petersen-ChinaBIT”]; David A. Gantz, Challenges for the U.S. in Negotiating a Bit with China: ReconcilingReciprocal Investment Protection with Policy Concerns, 31 ARIZONA J. INT’L & COMP. L. 203, 204(2014) [hereinafter “Gantz–China BIT”].



2017] EVOLUTION OF U.S. APPROACHES FROM NAFTA TO TPP 233

The objective was to make available a third party process that would allowthe United States to avoid espousal in most circumstances. It was thoughtthat such a process would remove investment disputes from the forefront ofbilateral and regional relations (and significant inter-agency disputes),9 aswith Peru and other members of the Organization of American States duringthe 1968 to 1976 period.10

U.S. Government support of ISDS in free trade agreements (or in BITswith some FTA parties) has been consistent despite extensive public andCongressional opposition beginning with the negotiation and conclusion ofNAFTA11 by the George H.W. Bush Administration.12 The policy has beenconsistent despite the fact that there is little hard evidence that BITs, asdistinct from other factors creating a favorable investment climate,encourage foreign investment. The Clinton Administration negotiated onlyone FTA, with Jordan, and it contained no investment provisions because ofa recent separate BIT between the United States and Jordan.13 The GeorgeW. Bush Administration, however, proceeded to negotiate more than adozen FTAs, covering seventeen countries, which with one exception(Australia)14 contain investment chapters with ISDS, obligations except forthose FTAs with countries (e.g., Bahrain) with pre-existing BITs.15 TheObama Administration’s one and only FTA, the Trans-Pacific Partnership

9. See KENNETH A. RODMAN, SANCTITY VS. SOVEREIGNTY: THE U.S. AND THE

NATIONALIZATION OF NATURAL RESOURCE INVESTMENTS 45-51 (1988) (relating the strongdisagreements between the State Department and Treasury Department as to how best to dealwith Latin American expropriations).

10. See infra Part II.11. The earlier United States – Israel free trade agreement and the now-superseded United

States – Canada free trade agreement contain no ISDS provisions. See Agreement on theEstablishment of a Free Trade Area between the Gov’t of Isr. and the Gov’t of the U.S. of Am.,Isr. – U.S., Aug. 19, 1985, available at http://tcc.export.gov/trade_agreements/all_trade_agreements/exp_005439.asp; U.S. – Can. free trade agreement, Can. – U.S., Jan. 2, 1988, available athttp://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/cusfta-e.pdf.

12. North American Free Trade Agreement, U.S.-Can.-Mex., Dec. 17, 1992, 32 I.L.M. 289(1993), available at https://www.nafta-sec-alena.org/Home/Legal-Texts/North-American-Free-Trade-Agreement [hereinafter “NAFTA”].

13. The 1985 FTA with Israel, negotiated by the Reagan Administration, contains noinvestment provisions and no BIT exists between the United States and Israel. See Agreementon the Establishment of a Free Trade Area, Jordan–U.S., Oct. 24, 2000, available at https://ustr.gov/sites/default/files/Jordan%20FTA.pdf.

14. Chapter 11 of the FTA provides the usual investor protections but ISDS is absent otherthan with regard to a right of either Party to request consultations on ISDS (art. 11.16). Nopublic information suggests that such consultations have occurred, although the TPP couldpresumably supersede the investment provisions of the bilateral FTA in the event that Australiaconsents. See United States—Australia Free Trade Agreement, May 18, 2004, available athttps://ustr.gov/sites/default/files/uploads/agreements/fta/australia/asset_upload_file428_5167.pdf (hereinafter “AUSFTA”). See also Free Trade Agreements, USTR, https://ustr.gov/trade-agreements/free-trade-agreements.

15. U.S. BITs, supra note 2; See U.S.–Bahrain Free Trade Agreement, U.S.–Bahr., Sep. 14, 2004,available at https://ustr.gov/trade-agreements/free-trade-agreements/bahrain-fta/final-text.




(TPP) includes ISDS provisions applicable to all Parties including Australia,albeit with some exceptions.16

U.S. BITs for the most part have not been particularly controversial,presumably in large part because a) all to date have been concluded withdeveloping nations, mostly small ones, or the nations of Eastern Europewhich at the time were developing or emerging market nations; b) theobligations, including ISDS, are reciprocal but the likelihood of, forexample, a Uruguayan enterprise demanding arbitration of a claim againstthe United States Government, is small; and c) BITs are concluded astreaties with the advice and consent of two-thirds of the senators present andvoting.17 As the provisions of U.S. BITs are considered either self-executingor enforceable through existing legislation,18 the House of Representativestypically has no direct role in their approval. Controversy has arisenprimarily during the negotiation (or revision) of model BITs in 2004 and2012, where the disagreement between business interests on one side andorganized labor and environmentalists on the other has been predictable,and well after the first of the NAFTA Chapter 11 actions against the UnitedStates had made headlines and empowered opponents of ISDS who feared,inter alia, interference with regulatory actions.

Still, the most significant debates have been in the context of the TradePromotion Authority (TPA) legislation enacted in 2002 and re-enacted afteran eight year hiatus in 2015. The possible conclusion of BIT negotiationsbetween the United States in China, underway for more than five years butwith the negotiations progressing only recently,19 will likely raise the ISDScontroversy to a previously unknown level if and when a BIT text isconcluded and made public. Significantly, the defenders of ISDS,principally the U.S. Government and the U.S. business community, havefocused more extensively on the many modifications to the NAFTA modelincorporated in all U.S. FTAs and BITs concluded since 2003, while most ofthe opponents largely ignore the changes, directing their opposition instead

16. Trans-Pacific Partnership, art. 9.20, Feb. 4, 2016 (not in force), available at https://ustr.gov/sites/default/files/TPP-Final-Text-Investment.pdf [hereinafter “TPP Text”].

17. See U.S. CONST. art. II, § 2, cl. 2 (“[The President] shall have Power, by and with theAdvice and Consent of the Senate, to make Treaties, provided two thirds of the Senators presentconcur.”)

18. Investment Treaty with Rwanda (Treaty Doc. 110-23), S. Exec. Rep. No. 111-8, at Ch. VI(B) (2010), available at http://www.gpo.gov/fdsys/pkg/CRPT-111erpt8/html/CRPT-111erpt8.htm [hereinafter “Rwanda BIT”]. (The investor obligations are considered self-executing,while obligations such as the obligation of the United States Government to pay an awardagainst the government would be enforceable under “Convention on the Recognition andEnforcement of Foreign Arbitral Awards (TIAS 6697) and related provisions of the FederalArbitration Act (9 U.S.C. Sec. 201 et seq.), as well as the Convention on the Settlement ofInvestment Disputes Between States and Nationals of Other States (TIAS 6090) and relatedprovisions of the Convention on the Settlement of Investment Disputes Act of 1966 (22 U.S.C.Sec. 1650a).”).

19. See Gantz–China BIT, supra note 8.




toward the perceived undesirability of ISDS (and protection of U.S.investments abroad) more generally.

This paper is structured as follows: Part II discusses the NAFTA chapter11 as a reflection of 1980s and early 1990s BITs, and practical experienceunder NAFTA and concerns raised among civil society and governmentofficials. Part III considers the 2002 TPA and 2003 Australia, Chile, andSingapore FTAs, the first post-NAFTA investment chapters to reflect a newapproach to protecting foreign investment in FTAs, and briefly notes thechanges in the later Bush Administration FTAs. Part IV considers othermore recent developments relating to U.S. policy on investment in FTAsand BITS. Part V discusses the 2015 TPA, while Part VI summarizes thefurther refinements embodied in Chapter 9 of the TPP (many of whichreflect the more recent United States-Korea Free Trade Agreement(KORUS)).20 The final Part VII speculates on how the revised features ofTPP may affect ISDS among the twelve TPP Parties (assuming of coursethat the TPP eventually enters into force).

II. NAFTA’s Investment Provisions and Experience UnderChapter 11

A. NAFTA’S PRECURSORS

NAFTA Chapter 11 is based on U.S. BITs negotiated earlier, and on themodel BIT completed in 1984. It is beyond the scope of this article todiscuss BIT provisions in extensive detail.21 Rather, the analysis is focusedon the inclusion of ISDS and related BIT and investment chapter provisionsin such areas as fair and equitable treatment, expropriation and transparency.Critically, U.S. BITs and investment chapters have permitted individualforeign investors to bring actions against foreign government that wereparty to the agreements, without any requirement of approval orparticipation by the investor’s home government.

Among the innovations of the 1984 U.S. model BIT (first announced in1982 but later modified) and the many agreements negotiated using themodel as the basis for negotiations, was the inclusion of ISDS, which hadalready been made part of many of the BITs concluded by European nations.As one commentator noted,

The treaties are genuinely new in this regard. While the assumption ofcontinuing amicable relations between the protected investor and thehost State is implicit in the BITs, the treaties guarantee investors accessto a neutral arbitral forum in which to present any claims. To this end,the signatories consent to international arbitral jurisdiction in the BITs,

20. U.S.–Korea Free Trade Agreement, U.S.–S. Kor., June 30, 2007, available at https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text [hereinafter “KORUS”].

21. See e.g. JESWALD W. SALACUSE, THE LAW OF INVESTMENT TREATIES (2nd ed. 2015).




and the treaties establish mechanisms to ensure that arbitration mayproceed even if the host State refused to cooperate.22

That being said, the ISDS provisions in the early U.S. treaties, and in the1984 model BIT, were less explicit than in later agreements, althoughperhaps equally effective in requiring binding arbitration upon the demandof the foreign investor. In particular, where consultation and negotiationbetween the investor and the host government failed, arbitration wasmandatory, requiring that “the dispute shall be submitted for settlement inaccordance with previously agreed, applicable dispute-settlementprocedures.”23 Still, such “previously agreed” procedures are to a greatextent incorporated in the 1984 model BIT language, which provides thateach (government) Party consents to submission of such disputes to bindingarbitration at ICSID or, where the Centre is not available because the hostgovernment is not a party to ICSID, to the ICSID Additional Facility.24

Including Chapter 11 in NAFTA was thus not a radical move for theUnited States. The sources were the United States-Canada Free TradeAgreement (for the obligations to the investor), various U.S. BITs, and the1992 “model” BIT (for ISDS).25 The inclusion in NAFTA of internationallaw standards for the treatment of foreign investment along with acompulsory third-party arbitration procedure to settle investment disputesis, rightly, viewed as a major achievement for the Departments of State,Treasury, and the U.S. Trade Representative’s Office (USTR) as well as theU.S. business community, considering that it overcame many decades ofMexico’s adherence to the Calvo Clause26 and a long and troubled history of

22. Wayne Sachs, The New U.S. Bilateral Investment Treaties, 2 INT’L TAX & BUS. L. 192, 219(1984).

23. Text of the U.S. Model Treaty concerning the Reciprocal Encouragement and Protection ofInvestment of February 24, 1984, 4 BERKELEY J. INT’L L. 136, 140 art. VI(2) (1986).

24. Id. at art. VI(3).25. Daniel M. Price & P. Bryan Christy III, Overview of the NAFTA Investment Chapter:

Substantive Rules and Investor-State Dispute Settlement, in THE NORTH AMERICAN FREE TRADE

AGREEMENT: A NEW FRONTIER IN INTERNATIONAL TRADE AND INVESTMENT IN THE

AMERICAS 167, n. 6 (Judith H. Bello et al., eds. 1994).26. The Calvo Clause, named after the Argentine jurist, Carlos Calvo, who articulated it first,

posits that investors in the nation must agree to resolve disputes in the local courts and toforego seeking diplomatic protection by the home state in the event of difficulties. Article 27 ofthe Mexico Constitution reads:

Only Mexicans by birth or naturalization and Mexican companies have the right toacquire ownership of lands, waters and their appurtenances, or to obtainconcessions for the exploitation of mines or of waters. The State may grant the sameright to foreigners, provided they agree before the Ministry of Foreign Relations to considerthemselves as nationals in respect to such property, and bind themselves not to invoke theprotection of their governments in matters relating thereto; under penalty, in case ofnoncompliance with this agreement, of forfeiture of the property acquired to the Nation.

Constitution Polıtica de los Estados Unidos Mexicanos [Political Constitution of the UnitedMexican States] [C.P.], art. 27., Diario Oficial de la Federacion [DO], 55 de Febrero de 1919(Mex.). (Emphasis added.)




investment disputes between Mexico the United States, including thepetroleum industry expropriation in 1938.27 What was radical was theinclusion for the first time of ISDS in an agreement with another developednation (Canada).

B. THE NAFTA EXPERIENCE

Over twenty-two years NAFTA has generated more than 50 ISDS claims.Of the seventeen against the United States only seven have reached theaward stage, and the United States has yet to be required to pay an award toa foreign claimant.28 Still, the majority of the claims, some thirty-five(including notices of arbitration for cases that were never pursued), havebeen filed and in many instances litigated, not against Mexico but betweentwo developed nations, investors of the United States against Canada, andvice versa.29 (In contrast, as far as the author has been able to determine,only one case has been brought by a foreign investor under any BIT or anyother FTA investment chapter against the United States, and in three yearsthe latter proceeding, under CAFTA-DR, has not progressed beyond the“notice of intent to arbitrate” stage.)30 Also, only one case has been broughtby a Canadian investor against Mexico.31

The most frequently articulated government and NGO (and some stategovernment) concerns have centered on the preservation of governmentauthority to regulate without facing liability for such actions as regulationsto preserve the environment or to support public health and safety. Theyalso relate to the allegations that foreign investors in the United States havegreater rights to compensation than U.S. citizens under the FifthAmendment to the U.S. Constitution.

Because literature elsewhere extensively analyzes the NAFTA and post-NAFTA changes in investment chapters,32 this discussion is restricted to thehighlights in terms of changes in provisions relating to fair and equitabletreatment, expropriation, transparency in the arbitral proceedings and

27. RODMAN, supra note 9, at 110-22.28. See Cases Filed Against the Government of Canada, U.S. DEP’T OF STATE, http://www.state

.gov/s/l/c3740.htm, for cases against Canada; see Cases Filed Against the United States of America,U.S. DEP’T OF STATE, http://www.state.gov/s/l/c3741.htm, for cases against the U.S.

29. See id.30. Id.; A total of eight ISDS claims have been filed by U.S. nationals and/or corporations

against Costa Rica (1), the Dominican Republic (3), Guatemala (2) and El Salvador (2).Guatemalan, Costa Rican and Dominican Claimants (Stanford Ponzi Scheme) v. United States,Dec. 31, 2012, available at http://www.state.gov/s/l/c56919.htm (based on the alleged failure ofU.S. regulators to exercise the international standard of due diligence to stop the StanfordPonzi scheme and thus protect the claimant investors against fraud).

31. Cases Filed Against the United Mexican States, U.S. DEP’T OF STATE, https://www.state.gov/s/l/c3742.htm (last visited Jan. 14, 2017).

32. See e.g., PRICE & CHRISTY, supra note 25; David A. Gantz, Settlement of Disputes under theCentral American-Dominican Republic-United States Free Trade Agreement, 30 BOSTON COLLEGE

INT’L & COMP. L. REV. 331 (2007).




various procedural issues designed to eliminate frivolous claims from theoutset, particularly as reflected in the AUSFTA and TTP.

Judging from the cases litigated under NAFTA and the attacks on Chapter11, the most significant and controversial investors’ protections in Chapter11, Section A, are the rights to national treatment under Article 1102,33 “fairand equitable treatment” under Article 1105,34 and fair compensation in theevent of expropriation or nationalization, direct or indirect, under Article1110.35 (Many cases have turned on national treatment and non-discrimination under Article 1102 but the application of the requirement hasbeen more straight-forward despite some issues of interpretation, and thenational treatment language in subsequent agreements does not varymaterially from NAFTA.)36 Tribunals established under Chapter 11 “decidethe issues in accordance with this Agreement and applicable rules ofinternational law.”37

As with other FTAs and BITs, NAFTA, Chapter 11, Section B, provides adetailed mechanism designed to facilitate binding resolution of investmentdisputes through compulsory arbitration,38 normally through the WorldBank’s International Center for the Settlement of Investment Disputes(ICSID) “Additional Facility”39 or under the arbitral rules of the UnitedNations Commission on International Trade Law (UNCITRAL). TheICSID Additional Facility is available if only one, the host state or theinvestor’s home state, is a Party to the Convention.40 These mechanisms arenot mandatory for the foreign investor who may elect to submit disputes to

33. “1. Each Party shall accord to investors of another Party treatment no less favorable than itaccords, in like circumstances, to its own investors with respect to the establishment,acquisition, expansion, management, conduct, operation, and sale of or other disposition ofinvestments.” NAFTA, supra note 12, art. 1102.

34. “1. Each Party shall accord to investments of investors of another Party treatment inaccordance with international law, including fair and equitable treatment and full protectionand security.” Id., art. 1105.

35. “1. No Party may directly or indirectly nationalize or expropriate an investment of aninvestor of another Party in its territory or take a measure tantamount to nationalization orexpropriation of such an investment (“expropriation”), except: (a) for a public purpose; (b) on anon-discriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d)on payment of compensation in accordance with paragraphs 2 through 6 [fair market value].”Id., art. 1110.

36. See e.g., LUCY REED, JAN PAULSSON & NIGEL BLACKABY, GUIDE TO ICSIDARBITRATION 83 (2nd ed., Kluwer Law 2010).

37. NAFTA, supra note 12, art. 1131 § 1.38. Id., art. 1120, 1122.39. Convention on the Settlement of Investment Disputes Between States and Nationals of

Other States, Mar. 18, 1965, 17 U.S.T. 1270, 575 U.N.T.S. 159, available at https://treaties.un.org /doc /Publication/UNTS/Volume%20575/volume-575-I-8359-English.pdf; ICSIDAdditional Facility Rules, art. 2 (1), Apr. 2006, available at http://icsidfiles.worldbank.org/icsid/icsid/staticfiles/facility/partd-chap02.htm.

40. Mexico is not a party to ICSID and Canada became a party only in 2013; ICSCID properwas thus not available under Chapter 11 prior to 2013.




the local courts.41 NAFTA provisions include the essential elements of theISDS process, such as the investor’s choice of arbitration before ICSID, theICSID additional facility or under UNCITRAL Rules; the three year statuteof limitations; and the “choice in the road” between national court litigationand international arbitration, which have not changed markedly in U.S.FTAs since NAFTA.42

Among the possible constraints on arbitrators, the NAFTA Partiesreserved the right to issue interpretations of the provisions of the agreement,with the proviso that “[a]n interpretation by the Commission of a provisionof this Agreement shall be binding on a Tribunal established under thisSection.”43 One limitation in NAFTA that was changed in 2003 in theSingapore FTA, is reflected in the fact that NAFTA’s ISDS provisions makeno specific mention of investment authorizations or investment agreements,contracts with the governments as, for example, for governmentprocurement (excluded from coverage under Article 1108), although ISDSjurisdiction exists over monopolies and state enterprises where “themonopoly has acted in a manner inconsistent with the Party’s obligationsunder Section A [the investor protections] and that the investor has incurredloss or damage by reason, or rising out of, that breach.”44

In addition to the key provisions of NAFTA Chapter 11, additionalconcerns surfaced over the lack of transparency in “secret” ISDSproceedings and concerns that foreign investors through NAFTA andsubsequent agreements had acquired greater rights than U.S. investorsunder the U.S. Constitution, both as discussed below, as well as worries thatarbitral tribunal would join procedural issues with the substance of theclaims, resulting in a prolongation of the process (and the costs associatedtherewith) even where the claim is ultimately dismissed.

Explicit opposition to Chapter 11 did not spread until after the firstChapter 11 case was filed by the Ethyl Corporation, in April 1997.45 Theprocess was publicly attacked by a prominent anti-trade NGO, PublicCitizen:

Ethyl Corporation’s $251 million lawsuit against a new Canadianenvironmental law should set off alarm bells throughout the publicinterest world. The suit, brought under the terms of the NorthAmerican Free Trade Agreement, demonstrates the serious danger that

41. If the investor decides to bring a NAFTA claim for damages based on a NAFTAgovernment’s measure or measures, the investor must waive her right to initiate or continue aparallel action in a national administrative tribunal or court, except for certain injunctive relief.NAFTA, supra note 12, art. 1121 § 1(b).

42. Id., arts. 1116. § 2, 1120, 1121.43. Id., art. 1131 § 2.44. See id., art. 1116 § 2.45. Cases Filed Against Can. Ethly Corp. v. Gov’t of Can., GLOBAL AFFAIRS CAN., http://www

.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/ethyl

.aspx?lang=eng.




present and future international economic pacts could pose toenvironmental regulations and other laws that protect the public.46

While Ethyl was settled in the aftermath of a finding adverse to theCanadian government by a Canadian federal-provincial dispute settlementarbitration panel,47 the controversy generated and the concerns of opponentswere on-going, particularly with regard to the Methanex and Loewen casesagainst the United States (discussed infra) and the Pope and Talbot and S.D.Myers cases against Canada.

The ensuing NAFTA-based litigation changed many views. As one thensenior U.S. State Department official, Mark Clodfelter, commented sevenyears after NAFTA entered into force, the United States Government, andfor that matter Canada and Mexico,

took a very big step into the unknown when they signed onto Chapter11. The NAFTA Parties have waived sovereign immunity from claimsto an extent far greater than they have consented to the jurisdiction, forexample, of the International Court of Justice. They have agreed to beanswerable to private claimants before arbitral tribunals that are subjectto only very limited review. Even though the United States has beenparty to a fair number of BITs, which have arrangements resemblingChapter 11, we have never done so with states that has so muchinvestment in our territory.48

This was radical, because the United States had never concluded a BIT inthe past with another developed country, although that aspect of thecoverage of Chapter 11 does not appear to have received much U.S.government attention until well after the fact, when thoughtful officials suchas Mr. Clodfelter commented on it.49

The cases against the United States have inevitably involved not only theState Department and USTR, but also domestic agencies such as theDepartment of Justice and the Environmental Protection Agency (the latterparticularly for the Methanex claim that raised environmental issues arising

46. Michelle Sforza & Mark Vallianatos, Ethyl Corporation vs. Government of Canada: “NowInvestors Can Use NAFTA to Challenge Environmental Safeguards”, PUB. CITIZEN 1998, http://www.citizen.org/trade/article_redirect.cfm?ID=6221.

47. See NAFTA – Chapter 11 – Investment, Cases Filed Against the Government of Canada, EthylCorporation v. the Government of Canada, GLOBAL AFFAIRS CAN., http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/ethyl.aspx?lang=eng.

48. Mark Clodfelter, U.S. State Department Participation in International Economic DisputeResolution, 42 S. TEX. L. REV. 1273, 1283 (2001). Mr. Clodfelter was the Assistant LegalAdviser of the Office of International Claims and Investment Disputes.

49. The State Department’s guidance on the U.S. BIT program a few years ago listed as oneof the “basic aims” to “[p]rotect investment abroad in those countries where investors’ rights arenot already protected through existing agreements . . . .” Bilateral Investment Treaties, OFFICE OF

THE UNITED STATES TRADE REPRESENTATIVE, https://ustr.gov/trade-agreements/bilateral-investment-treaties (last visited Jan. 14, 2017). The guidance says nothing about reciprocalactions by foreign investors against the United States. See id.




out of California’s banning of a gasoline additive for environmental—orperhaps political—reasons). This created a potential for conflict between onthe one hand national agencies that are principally concerned withencouraging U.S. investment abroad and foreign trade (State and USTR)and, on the other hand, those that are more concerned with defendingfederal government and state actions50 allegedly inconsistent with Chapter11, such as the Department of Justice, the Department of Transportation,the Department of the Interior or the Environmental Protection Agency.

Most of the controversies that have led to at least some reevaluation ofU.S. government support of investment disputes fall into one of severalareas. First, there are differences arising from conflicts between trade and“legitimate” government regulatory action, including but not limited toactions protecting the environment. This is particularly true with regard tothe expropriation provision, Article 1110. Second, concerns exist, primarilyamong non-governmental organizations and some Members of Congress,regarding the appropriateness of having NAFTA tribunals effectively reviewdecisions of U.S. state and federal courts. Third, there exists an articulatedconcern, albeit probably unjustified, by the same NGOs and their supportersin Congress that foreign citizens may have achieved greater substantiverights regarding investment in U.S. territory under NAFTA than doAmerican citizens under the Takings Clause of the 5th Amendment of theU.S. Constitution.51 Fourth, broad dissatisfaction is expressed over the lackof transparency of the arbitral process, whereby under the original NAFTAChapter 11 (before modifications in 2001 and 2003), the proceedings,including the pleadings and hearings, were conducted largely in secret.

The Methanex case52 aptly illustrates the concerns by the NAFTAgovernments and civil society over “regulatory takings” that could requirecompensation. The Canadian firm Methanex challenged the action of theState of California in banning the gasoline additive methyl tert-butyl ether(MTBE) because of the perceived risk that it might pollute the undergroundwater supply. These measures were characterized by the claimant bothdirectly and indirectly as “tantamount to expropriation.” The arbitraltribunal did not ultimately reach the question of whether California’s actionconstituted a compensable taking under Article 1110. Rather, it determinedthat the connection between the California MTBE ban and Methanex’operations was not “legally significant” so as to satisfy the “relating to”language in NAFTA, Article 1101. (Methanex manufactured methanol, theprimary component of MTBE, not MTBE itself.) Ultimately, the tribunaldismissed all claims by Methanex against the United States on the merits,

50. Under Article 105 of NAFTA, state and local governments are bound by NAFTAprovisions, unless otherwise provided. NAFTA, supra note 12.

51. U.S. CONST. amend. V. (“[N]or shall private property be taken for public use, without justcompensation.”).

52. Methanex Corp. v. United States, 44 I.L.M. 1345 (2005).




rejecting as well Methanex’s claims of violations of national treatment andfair and equitable treatment.53

Anti-NAFTA groups in the United States had also seized on Loewen as “anall-out attack on democracy. If successful, it would undermine the jurysystem, which is fundamental to our system of justice.”54 In Loewen, aLouisiana state court trial, conducted in with obvious prejudice to theCanadian investor, rendered a state anti-trust verdict against Loewen (aCanadian operator of funeral homes in Louisiana). The jury found a fewmillion dollars worth of actual damages, plus approximately $400 million inpunitive damages.55 Because the claimant apparently could not meetbonding requirements for an appeal, set at $625 million under Louisianalaw, Loewen settled the case for $175 million “under conditions of extremeduress.” Eventually it brought a Chapter 11 claim against the United States.

Among Loewen’s contentions was that actions of the Louisiana trial court,the excessive monetary judgment and the bonding requirements amountedto a denial of justice and of fair and equitable treatment by the Louisianacourts in violation of NAFTA, Article 1105 and of customary internationallaw. The arbitral proceedings were initially dismissed on proceduralgrounds, with the Tribunal holding that availability of the Chapter 11mechanism had been lost when Loewen, in bankruptcy, transferred itsinterests to a U.S. firm. In extensive dicta, the Tribunal analyzed theLouisiana state court proceedings at considerable length, characterizingthem as a “disgrace.” But the tribunal nevertheless concluded in furtherdicta that the decision was not cognizable under NAFTA and internationallaw because Loewen had not received a final court verdict within the UnitedStates court system, and there had thus not been a denial of justice (inaddition to the loss of Canadian nationality of the corporate claimant).

A subsequent ruling by the arbitral tribunal, after Raymond Loewen, oneof the individual claimants, asserted his continuous Canadian citizenship,necessarily resulted in a decision on the merits, converting the earlier dictuminto a holding that the action of the Mississippi court did not meet theinternational law threshold of a denial of justice for lack of exhaustion ofnational judicial remedies by the Claimants.

A few years later, evidence surfaced that one of the arbitrators in Loewen,former Congressman and U.S. appellate court judge Abner Mikva, had beenimproperly influenced by the U.S. Department of Justice while serving on

53. See Howard Mann, The Final Decision in Methanex v. United States: Some New Wine in NewBottles, INT’L INSTITUTE FOR SUSTAINABLE DEVELOPMENT (Aug. 2005), http://www.iisd.org/pdf/2005/commentary_methanex.pdf.

54. David A. Gantz, The United States and Dispute Settlement under the North American FreeTrade Agreement: Ambivalence, Frustration, and Occasional Defiance in THE SWORD AND THE

SCALES: THE UNITED STATES AND INTERNATIONAL COURTS AND TRIBUNALS 356, 370(Cesare P.R. Romano ed., 1999).

55. Among other things, Loewen alleged that the court permitted repeated appeals to thejury’s anti-Canadian, racial and class biases. Loewen Group, Inc. v. United States, 42 I.L.M.811, 812-16 (2003).




the tribunal. As Judge Mikva related the incident at a conference in 2004, aJustice Department official had said to Mikva, “You know judge, if we losethis case we could lose NAFTA.” Mikva recounted his answer as, “Well, ifyou want to put pressure on me, then that does it.”56 This remarkableexchange confirms the extraordinary level of concern felt by U.S.government officials when the United States was a respondent incontroversial ISDS proceedings (and may explain a puzzling, pro-U.S.Government result in a case which many observers expected to be won byLoewen).

Of course, whether the regulatory actions such as those challenged inMethanex and attacks on state court decisions, as in Loewen, are “valid” is tobe determined by the adjudicatory process. But the mere possibility thatthey might do so was enough to lead the American private sector and U.S.government to the barricades. For example, environmental groups havebeen highly critical of the repeated use of investor protection provisions “tochallenge the host country’s environmental laws and administrativedecisions,” noting that, “the provisions designed to ensure security andpredictability for the investors have created uncertainty and unpredictabilityfor environmental regulators.”57 Similarly, one American official suggestedthat “[the] promise [of NAFTA as a model for the FTAA and otheragreements] . . . will only be fulfilled if Chapter 11 tribunals are successful indistinguishing valid claims under NAFTA and international law from claimsbeyond the bounds of what the Parties believed they were agreeing to whenthey entered into the NAFTA.”58

Certain changes in ISDS procedures that arguably did not requireamendment of NAFTA were made by the NAFTA Parties in response topublic criticism of the process. In July 2001, the Parties issued an“interpretation” as permitted under Chapter 11, declaring that NAFTA didnot require the confidentiality of arbitral proceedings and pledging with afew exceptions to make all arbitral documents “available to the public in atimely manner.”59 (Business confidential information and privilegedgovernmental information were to remain confidential, in both pleadingsand hearings.) Fully two years later, after the enactment of TPA in 2002(discussed below), the United States and Canada stated that they would

56. See Jan Paulsson, Michael R. Klein Distinguished Scholar Chair, University of Miami LawSchool, Inaugural Lecture: Moral Hazard in International Dispute Resolution (Apr. 29, 2010),available at http://www.arbitration-icca.org/media/0/12773749999020/paulsson_moral_hazard.pdf.

57. Howard Mann & Konrad von Moltke, NAFTA’s Chapter 11 and the Environment, INT’LINSTITUTE FOR SUSTAINABLE DEVELOPMENT (1999), http://www.iisd.org/pdf/nafta.pdf (lastvisited June 10, 2015).

58. Clodfelter, supra note 48, at 1283.59. Free Trade Commission, Notice of Interpretation of Certain Chapter 11 Provisions, July 31,

2001, para. A(1-2), available at http://www.sice.oas.org/tpd/nafta/Commission/CH11understanding_e.asp [hereinafter “NAFTA Interpretation”].




consent to opening hearings in Chapter 11 disputes.60 Such transparencyprovisions have been included with minor variations in all subsequent BITsand FTA investment provisions negotiated by the United States. Procedureswere also initiated to permit amicus curiae briefs, first accepted by a NAFTAtribunal in 2003.61 Each of the NAFTA governments maintains a websitewhere documents can be found.62

The NAFTA Parties also attempted in the Interpretation to limit thescope of the “minimum standard of treatment” under Article 1105 byemphasizing inter alia that “[t]he concepts of ‘fair and equitable treatment’and ‘full protection and security’ do not require treatment in addition to orbeyond that which is required by the customary international law minimumstandard of treatment of aliens.”63 (This was designed to deal in part withthe apparently inadvertent omission of “customary” before “internationallaw” in Article 1105.) This Interpretation language has also been included insubsequent U.S. FTAs and BITs as discussed below.

III. 2002 Trade Promotion Authority, U.S.-Australia FTA, U.S.-Chile FTA and the U.S.-Singapore FTA

The various pressures on the George W. Bush Administration andCongress to introduce changes led to new negotiating instructions in thePresident’s TPA for 2002, legislation which was effectively necessary for thePresident and his U.S. Trade Representative Robert Zoellick to undertaketheir ambitious plans for regional trade agreements. Without limitingCongress to up or down votes (preventing Congress from amending thetexts after the fact to favor U.S. interests) and without requiring specific timelimits for Congressional consideration, other countries simply have not beenwilling to give their last, best positions during the FTA negotiations.64 Thestatutory negotiating objectives in TPA, one of the benefits for Congress in

60. U.S. Dep’t of State, Statement on Open Hearings in NAFTA Chapter Eleven Arbitrations(Oct. 7, 2003), https://ustr.gov/archive/assets/Trade_Agreements/Regional/NAFTA/asset_upload_file143_3602.pdf (last visited May 21, 2015).

61. See Don McCrae, Amicus Curiae Submissions to the NAFTA Chapter 11 Tribunal: MethanexCorp. v. United States of America, INT’L INSTITUTE FOR SUSTAINABLE DEVELOPMENT (Mar. 12,2004), https://www.iisd.org/publications/amicus-curiae-submissions-nafta-chapter-11-tribunal-methanex-corp-v-united-states (discussing the IISD amicus submission).

62. See NAFTA Investor-State Arbitrations, U.S. DEP’T OF STATE, https://www.state.gov/s/l/c3439.htm; See also NAFTA – Chapter 11 – Investment: Cases Filed Against the Government ofCanada, GLOBAL AFFAIRS CAN., http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/gov.aspx?lang=eng.

63. NAFTA Interpretation, supra note 59, para. 1.2.64. See S. REP. NO. 93-1298, at 107 (1974) (“Our negotiators cannot be expected to

accomplish the negotiating goals of Title I if there are no reasonable assurances that thenegotiated agreements would be voted up-or-down on their merits. Our trading partners haveexpressed an unwillingness to negotiate without some assurances that the Congress willconsider the agreements within a definite time-frame.”); see also Ian. F. Fergusson, TradePromotion Authority (TPA) and the Role of Congress in Trade Policy, CONGRESSIONAL RESEARCH

SERVICE 1, 4 (June 15, 2015), https://fas.org/sgp/crs/misc/RL33743.pdf.




the TPA compromise, thus become critical since if they are not followed,Congress may well refuse to approve the resulting agreement (although todate this has not occurred under TPA). As the Congressional ResearchService describes the situation with TPA,

To take the fullest advantage of these benefits, Congress, drawing on itsconstitutional authority and historical precedent, defined the objectivesthat the President is to pursue in trade negotiations. Although theexecutive branch has some discretion over implementing these goals,they are definitive statements of U.S. trade policy that theAdministration is expected to honor if it expects trade agreementimplementing legislation to be considered under expedited rules. Forthis reason, trade negotiating objectives stand at the center of thecongressional debate on TPA.65

In the debate the pro-investment protection contingent of business andgovernment have generally prevailed on the basic principles needed toprotect American investors abroad, although groups advocating theinclusion of strong labor rights and environmental provisions also succeededto the extent of having them included in TPA,66 albeit without the right tobring labor and environmental actions directly against Parties to theagreements. Still, beginning with the 2002 TPA, the investment protectionpendulum has swung to a very significant degree toward host governmentsand away from unfettered investor rights. With regard to investment, manymajor changes from the NAFTA approach were ultimately adopted. Theseincluded inter alia provisions related to minimum standard of treatment;expropriation, particularly indirect expropriation; transparency, includingamicus briefs; procedures to deal with frivolous claims; and provision for anappellate mechanism to review arbitral decisions.67

Predictably, these changes did not satisfy the opponents of FTAs or ISDS.As Public Citizen argued when President George W. Bush proposed toinclude ISDS in TPA, “this extraordinary mechanism empowers privateinvestors and corporations to sue NAFTA-signatory governments in specialtribunals to obtain cash compensation for government policies or actionsthat investors believe violate their new rights under NAFTA.” Further, suchinvestor protections, claimed to be necessary to protect investors fromexpropriation, instead permit investors to “challenge environmental laws,regulations and government decisions at the state and local level . . . .”68 It is

65. Fergusson, supra note 64, at 11 (emphasis added).66. See Fergusson, supra note 64, at 7 (The 2002 TPA did not, however, mandate the inclusion

of minimal enforceable labor standards, a deficiency that was remedied only with the BipartisanTrade Deal in 2007, as discussed below.).

67. 19 U.S.C. § 3802(b)(3) (2002); see also Trade Act of 2002, Conference Report, Jul. 26,2002, 107th Cong., 2d Sess., Report 107-624, at 151, 156.

68. NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy, PUB. CITIZEN i, ii (Sept.2001), http://www.citizen.org/publications/publicationredirect.cfm?ID=7076.




significant that despite the changes TPA passed in late 2002 with only a onevote majority in the House of Representatives.69

Following the enactment of 2002 TPA, in the AUSFTA an annex wasincluded (which also appears as an annex in the Chile FTA and as anexchange of letters in the United States – Singapore Free Trade Agreement),designed to restrict significantly and legally the scope of the “indirect”expropriation provisions as they may apply to government regulatoryactivities.70

The focus was on protecting “legitimate” government regulatory actionsfrom being treated as compensable indirect expropriations, in part throughincorporating U.S. takings law, reflecting the TPA language that foreigninvestors not be “accorded greater substantive rights with respect toinvestment protections than United States investors in the United States.”Thus, subparagraphs 4 (a) (i) to (iii) were based on Penn Central, a U.S.Supreme Court case involving an unsuccessful action against New York Cityclaiming that restricting air rights above the terminal (where the claimanthad wanted to build a skyscraper) was not a compensable taking in partbecause it did not deprive Penn Central of reasonable economic use of itsproperty.71 The negotiators presumably looked as well at other SupremeCourt precedents, such as Lucas, where the Court found a compensable

69. See H.R. 3005 (107th): Bipartisan Trade Promotion Authority Act of 2002, GOVTRACK, https://www.govtrack.us/congress/bills/107/hr3005.

70. Stating:

The Parties confirm their shared understanding that Article 1.7.1 [expropriation] isintended to reflect customary international law concerning the obligation of Stateswith respect to expropriation. 2. An action or a series of actions by a Party cannotconstitute an expropriation unless it interferes with a tangible or intangible propertyright or property interest in an investment. 3. Article 11.7.1 addresses twosituations. The first is direct expropriation, where an investment is nationalized orotherwise directly expropriated through formal transfer of title or outright seizure.4. The second situation addressed by Article 11.7.1 is indirect expropriation, wherean action or series of actions by a Party has an effect equivalent to directexpropriation without formal transfer of title or outright seizure. (a) Thedetermination of whether an action or series of actions by a Party, in a specific factsituation, constitutes an indirect expropriation, requires a case-by-case, fact-basedinquiry that considers, among other factors: (i) the economic impact of thegovernment action, although the fact that an action or series of actions by a Partyhas an adverse effect on the economic value of an investment, standing alone, doesnot establish that an indirect expropriation has occurred; (ii) the extent to which thegovernment action interferes with distinct, reasonable investment-backedexpectations; and (iii) the character of the government action. (b) Except in rarecircumstances, nondiscriminatory regulatory actions by a Party that are designedand applied to protect legitimate public welfare objectives, such as public health,safety, and the environment, do not constitute indirect expropriation.

AUSFTA, supra note 14, Annex 11-B. See also United States—Chile Free Trade Agreement,Annex 10-D, Jan. 1, 2004, available at https://ustr.gov/trade-agreements/free-trade-agreements/chile-fta/final-text [hereinafter “U.S.–Chile FTA”].

71. Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 138 (1978).




taking when the government action deprived the claimant of alleconomically viable use of his land.72

The “except in rare circumstances” language was apparently intended tobe a clear statement, also reflecting U.S. Supreme Court jurisprudence, thatin the absence of discrimination a presumption exists that the listedregulatory actions will not be treated as compensable expropriations byarbitral tribunals. This language also reflects the requirement in the 2002TPA that foreign investors not be accorded greater substantive rights thanU.S. citizens litigating in U.S. courts.73 The assumption appears to havebeen that for many other countries, including Canada (which has noconstitutionally mandated Fourth Amendment equivalent to protect privateproperty), the protection offered by investment agreements in fact doesprovide broader substantive rights than local law and constitutions,particularly in nations where the rule of law is weak. The concept of“reasonable investment-backed expectations” also remains. Similarly, thetroublesome concept of fair and equitable treatment received additionallanguage in the Chile FTA (but not the AUSFTA) and in subsequent U.S.FTA investment chapters to define and limit its scope to the narrow standardof customary international law.74

The Singapore and similar FTAs, including the AUSFTA, also included aside letter or annex clarifying: “the Parties’ shared understanding thatcustomary international law results from a general and consistent practice ofStates that they follow from a sense of legal obligations. With regard toArticle 15.5 (Minimum Standard of Treatment), the customary internationallaw minimum standard of treatment of aliens refers to all customary

72. Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1032-33 (1992).73. See Parvan P. Parvanov & Mark Kantor, Comparing U.S. Law and Recent U.S. Investment

Agreements, in YEARBOOK ON INTERNATIONAL INVESTMENT LAW & POLICY 2010-2011 741,779 (Karl. P. Sauvant, ed., 2011).

74. Stating, in part:

For greater certainty, paragraph 1 prescribes the customary international lawminimum standard of treatment of aliens as the minimum standard of treatment tobe afforded to covered investments. The concepts of “fair and equitable treatment”and “full protection and security” do not require treatment in addition to or beyondthat which is required by that standard, and do not create additional substantiverights. The obligation in paragraph 1 to provide: (a) “fair and equitable treatment”includes the obligation not to deny justice in criminal, civil, or administrativeadjudicatory proceedings in accordance with the principle of due process embodiedin the principal legal systems of the world; and (b) “full protection and security”requires each Party to provide the level of police protection required undercustomary international law.

United States–Singapore Free Trade Agreement, U.S.-Sing., art. 15.5, May 6, 2003, 42 I.L.M.1026 (2003) [hereinafter “Singapore FTA”].But Cf. United States—Chile Free Trade Agreement, supra note 70, art. 10.4.2.




international law principles that protected the economic rights and interestsof aliens.”75

The Singapore and Chile FTAs and CAFTA-DR include treaty languageon transparency similar to that included in the NAFTA Interpretation andfollow-up statement, as reflected in the 2002 TPA negotiating objectives,providing for transparency of arbitral proceedings, including open hearings,publication on the Internet of all pleadings not containing businessconfidential or privileged information.76 The Singapore FTA also providesthat “[w]ithout prejudice to a tribunal’s authority to address other objectionsas a preliminary question, a tribunal shall address and decide as a preliminaryquestion any objection by the respondent that, as a matter of law, a claimsubmitted is not a claim for which an award in favor of the claimant may bemade,” in an attempt (likely reflecting the lengthy Methanex proceedings) toconvince arbitral tribunals to resolve procedural issues at the outset.77 Boththe Singapore and Chile FTAs also include new language in the ISDSprovisions that explicitly covers investment authorizations and investmentagreements.78 Such language has been consistently included in subsequentU.S. FTAs, such as the KORUS and TPP.79

IV. Other Precursors to TPP

The 2004 U.S. model BIT was designed in large part to incorporate the2002 TPA investment negotiating objectives into the BIT process.80 Thecryptic press release accurately states that “USTR and the State Departmentconsulted their respective advisory committees and relevant congressionalcommittees in the development of the new model.” The debates over thismultilateral process, and the results insofar as investment and ISDS areconcerned, did not differ significantly from those relating to the 2002 TPA.Even the “Bipartisan Trade Deal” (BTD) negotiated between the BushAdministration and the Democratic Congress focused on the unhappiness ofDemocratic Members with the Bush Administration’s refusal to include inits FTAs a level of labor and environmental protection that Democrats

75. Letter from George Yeo, Singapore Minister for Trade and Industry, to Robert Zoellick,U.S. Trade Representative (May 6, 2003) (on file with author).

76. Singapore FTA, supra note 74, art. 15.5; see also U.S.—Chile FTA, supra note 70, art.10.20.

77. Singapore FTA, supra note 74, art. 15.19.4; see also U.S.—Chile FTA, supra note 70, art.10.19.4.

78. Singapore FTA, supra note 74, 15.15.1(a)(i); U.S.—Chile FTA, supra note 70, art.10.15(a)(1).

79. See KORUS, supra note 20, art. 11.6.1(a).80. Treaty between the Government of the United States of America and the Government of

[Country] Concerning the Encouragement and Reciprocal Protection of Investment, U.S.DEP’T OF STATE (2004), https://www.state.gov/documents/organization/117601.pdf[hereinafter “2004 U.S. Model BIT”].




believed was contemplated under 2002 TPA negotiating authority.81 Theonly investment-related provision in the BTD stated that “[t]he preambleprovision [in the FTA] would recognize that foreign investors in the UnitedStates will not be accorded greater substantive rights with respect toinvestment protections than United States investors in the United States.”82

As a result of these BTD mandated changes, which were incorporated intoamendments to the pending FTAs with Peru, Colombia, Panama, and SouthKorea, the FTA with Peru was promptly approved in November 2007 andwent into force the following year. The other three were not approved byCongress until almost 2010 and entered into force in 2011. These FTAs,however, contained investment provisions that differed in only minorrespects from the Australia/Chile/Singapore genre of FTAs.

The 2012 Model BIT,83 despite its three years in gestation andresumption of the debate between pro and anti-ISDS contingents, madeonly relatively minor changes to the 2004 Model BIT.84 As the StateDepartment explained, “[t]he Administration made several importantchanges to the BIT text so as to enhance transparency and publicparticipation; sharpen the disciplines that address preferential treatment tostate-owned enterprises, including the distortions created by certainindigenous innovation policies; and strengthen protections relating to laborand the environment.”85

V. 2015 Trade Promotion Authority

The debate over TPA during the first half of 2015 was perhaps the mostvituperative and public in history; because of the timing, the TPA oppositionhas been difficult to separate from opposition to TPP, particularly whereinvestment issues and transparency have been at the forefront. This hasprobably been due to several factors. These include: a) the widespread useof the Internet and social media, which has facilitated the ease with whichcritics can make their views widely known; b) the decision of SenatorElizabeth Warren, Democrat of Massachusetts, a former Harvard lawprofessor and liberal voice with many admirers, to assume the leadership ofthe anti-trade, anti ISDS, anti-TPA, and anti-TPP forces among the public

81. Trade Facts: Bipartisan Trade Deal, UNITED STATES TRADE REPRESENTATIVE 1, 1-4 (May2007), https://ustr.gov/sites/default/files/uploads/factsheets/2007/asset_upload_file127_11319.pdf; see also Sunghoon Cho, The Bush Administration and Democrats Reach a Bipartisan Deal onTrade Policy, ASIL Insights (May 31, 2007), http://www.asil.org/insights/volume/11/issue/15/bush-administration-and-democrats-reach-bipartisan-deal-trade-policy (discussing variousaspects of the Bipartisan Trade Deal).

82. Trade Facts: Bipartisan Trade Deal, supra note 81, at 4.83. 2004 U.S. Model BIT, supra note 80.84. Id.85. United States Concludes Review of Model Bilateral Investment Treaty, U.S. DEP’T OF STATE

(Apr. 20, 2012), http://www.state.gov/r/pa/prs/ps/2012/04/188198.htm.




and in the Senate;86 and c) the unfortunate decision of the ObamaAdministration to wait until the beginning of 2014 before formallyrequesting TPA from the Congress. These factors virtually guaranteed thatthe TPA opponents would be able to join TPP opponents to present aunited front.87 The anti-TPA/anti-TPP/anti-trade agreement campaignmounted by the labor unions and the supporters in Congress was moreeffective (even though it ultimately failed) than at any time in the past ininitially blocking TPA, again in part because they had ample time toorganize their opposition, as well as because public concerns over thenegative effects of past FTAs on American workers, whether or not accurate,were probably more pronounced in 2015 than at any time in the past.

Opponents of ISDS (and of TPA, TPP, and trade agreements moregenerally) have had a new and highly articulate spokesperson in SenatorWarren, who has become “the national face of opposition to Mr. Obama onthe trade package.”88 In an op-ed piece for the Washington Post, SenatorWarren attacked ISDS: “Agreeing to ISDS in this enormous new treaty[TPP] would tilt the playing field in the United States further in favor of bigmultinational corporations. Worse, it would undermine U.S. sovereignty.”89

She denounced discrimination, whereby American labor unions seekingaction against Vietnamese violations of trade agreements would have tomake their case not in ISDS but only in Vietnamese courts.90 The latterassertion was a misrepresentation, innocent or otherwise. But theunderlying discrimination argument was valid. While the inclusion of laborprovisions in the TPP (and the TPA negotiating objectives) would subjectVietnam to dispute settlement under the state-to-state provisions of the TPPshould Vietnam fail to enforce effectively its labor laws and the core ILOlabor standards,91 unlike investors who can bring disputes directly againstforeign government under the investment chapters, labor disputes can only

86. Along with Senator Sherrod Brown of Ohio, a long-time opponent of international tradeagreements while serving in both the House and Senate. See Sen. Sherrod Brown, Fair Trade overFree Trade, NPR (Jan. 8, 2007), http://www.npr.org/templates/story/story.php?storyId=6740161.

87. By the beginning of 2014, President Obama was sufficiently unpopular for a variety ofreasons. The Majority leader of the Senate, Harry Reid (D, Nevada) and the minority leader inthe House of Representatives, Nancy Pelosi, successfully demanded that consideration of TPAlegislation be put off until after the November 2014 elections. See Eric Bradner & Manu Raju,Harry Reid Rejects President Obama’s Trade Push, POLITICO (Jan. 29, 2014), http://www.politico.com/story/2014/01/harry-reid-barack-obama-trade-deals-102819.html.

88. Jennifer Steinhauer, From Senate Sideline, Elizabeth Warren is Face of Attack on Trade Bill,N.Y. TIMES (May 15, 2015), https://www.nytimes.com/2015/05/16/us/politics/elizabeth-warren-emerges-as-trade-bills-detractor-in-chief.html?_r=0.

89. Elizabeth Warren, The Trans-Pacific Partnership Clause Everyone Should Oppose, WASH.POST (Feb. 25, 2015), http://www.washingtonpost.com/opinions/kill-the-dispute-settlement-language-in-the-trans-pacific-partnership/2015/02/25/ec7705a2-bd1e-11e4-b274-e5209a3bc9a9_story.html [hereinafter “Warren, TPP”]. Warren’s statement was included essentiallyverbatim in the CONGRESSIONAL RECORD, Feb. 26, 2015, at S1144-1145.

90. Id.91. Id.




be brought where the labor advocates in the United States convince the U.S.government to bring a case. Warren’s attack on ISDS also mentioned thecontroversial Vattenfall and Philip Morris ISDS proceedings, and complainedthat “[g]iving foreign corporations special rights to challenge our lawsoutside of our legal system would be a bad deal. If a final TPP agreementincludes Investor-State Dispute Settlement, the only winners will bemultinational corporations.”92

The director of the President’s National Economic Council, JeffreyZients, noted that foreign courts do not always respect U.S. Constitutionalprinciples or act in an unbiased or non-discriminatory manner, emphasizingthat “over the last 50 years, 180 countries have entered into more than 3,000agreements that provide investment protections.”93 Moreover, he stressedthat “TPP will make it absolutely clear that governments can regulate in thepublic interest, including with regard to health, safety and the environment,and narrowing the definition of what kinds of injuries investors can seekcompensation for.”94 He did not address the question of discrimination interms of standing between labor interests and private investors. GivenWarren’s well-articulated opposition to Wall Street and business interests ingeneral, like many other Democrats, she ultimately sees BITs and FTAinvestment provisions as making it easier for U.S. enterprises to move jobsabroad.95 Others, such as Gary Hufbauer, were less diplomatic, simplyaccusing Warren of relying on false information: “[Warren’s] claims, andsome other criticisms of the TPP, have no foundation in the long history ofISDS provisions that have been in existence for more than 50 years.”96

Despite the energetic and very public debate in the second quarter of2015, viewpoints do not seem to have changed, at least among a largemajority of Senators and Members of Congress. The TPA bill, after theacceptance of several amendments (none related to investment), and aByzantine six weeks of procedural skirmishes, was passed by the Senate thefirst time on May 22, 2015 (62-37) and again on June 24 (60-38),97 with

92. Warren, supra note 89.93. Jeffrey Zients, Investor-State Dispute Settlement (ISDI) Questions and Answers, WHITE

HOUSE BLOG (Feb. 26, 2015), https://www.whitehouse.gov/blog/2015/02/26/investor-state-dispute-settlement-isds-questions-and-answers.

94. Id.95. See e.g., CONG REC. S1,142 (daily ed. Feb. 26, 2015) (statement of Sen. Brown) (“Just look

at the impact of trade on U.S. manufacturing jobs. . . . Ever since NAFTA in 1993, taking effectin 1994, we have seen the acceleration of that decline in manufacturing jobs.”).

96. Gary Clyde Hufbauer, Senator Warren Distorts the Record on Investor-State DisputeSettlements, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS (Mar. 2, 2015), https://piie.com/blogs/trade-investment-policy-watch/senator-warren-distorts-record-investor-state-dispute.

97. H.R. 1314, 114th Cong., (2015) (enacted) available at https://www.congress.gov/bill/114th-congress/house-bill/1314 (last visited May 27, 2015) Ensuring Tax Exempt Organizationsthe Right to Appeal Act: The first vote, May 22, combined TPP and TPA. Because revenue billsmust originate in the House of Representatives (U.S. Const., Art. I, sec. 7, clause 1: “All Billsfor raising Revenue shall originate in the House of Representatives; but the Senate may proposeor concur with Amendments as on other Bills”), the Senate co-opted an earlier House bill and




strong cooperation among President Obama, a dozen pro-trade Democratsand the Republican leadership in the Senate. It passed the House as a stand-alone bill (after Trade Adjustment Assistance for displaced workers hadearlier been caused to fail by the Democratic leadership in the hope that itwould kill the TPA as well) by a vote 218-210, with a majority of theRepublicans in support but only about a twenty-eight Democrats voting infavor of their President’s most important second term legislative initiative.98

Ultimately, President Obama signed the TPA legislation on June 29, 2015,99

after the House had relented and provided broad bipartisan support to aseparate TAA bill that was signed as well.100

None of this debate changed the content of TPA negotiating objectives inmajor respects as they relate to ISDS and related investment issues. Thetreatment of key areas such as fair and equitable treatment; expropriation;transparency; procedures to eliminate frivolous claims; endorsement of anappellate body, as well as the continuing overarching desire to limit foreigninvestor rights in the United States to those enjoyed by U.S. citizens, alldiffer significantly from NAFTA. But the actual negotiating objectiveslanguage in this newest version of TPA reflects only relatively minorinnovations beyond the extensive shifts reflected in the 2002 TPA and in theU.S. FTAs with Chile, Australia, and Singapore, along with the singlemodification required in the Bipartisan Trade Deal of 2007, all as discussedearlier in this article.

VI. TPP’s Investment Provisions

This enactment of TPA gave the Obama Administration, at long last, theauthority it needed to conclude the TPP, without the need for any majorchanges, at least in the investment area. Ironically, the last issues to beresolved in TPP were largely unrelated to ISDS (dairy market access inCanada; rice, beef, and auto market access in Japan; sugar market access inthe United States and Mexico; Canada’s insistence on higher regional value

substituted TPA for the original language. The second bill, having been received from theHouse with only the TPA language, was designated H.R. 2146. See U.S. SENATE ROLL CALL

VOTES 114TH CONGRESS – 1ST SESSION (June 24, 2015) available at http://insidetrade.com/sites/insidetrade.com/files/documents/jun2015/wto2015_2018a.pdf (last visited June 25, 2015).

98. Cristina Marcos & Vicki Needham, House approves fast-track 218-208, sending bill to Senate,THE HILL (June 18, 2015, 12:27 PM), http://thehill.com/business-a-lobbying/245417-house-approves-fast-track-218-208-sending-bill-to-senate.

99. See Cheryl Bolen, Obama Signs Trade Bills Needed to Negotiate Trans-Pacific Partnership,INT’L TRADE DAILY (BNA) (June 29, 2016) (reporting the signature of the “Defending PublicSafety Employees’ Retirement Act (H.R. 2146)” to which the TPA was attached and the TradePreference Adjustment Act which provides an extension of TAA).100. The TAA bill passed the House the second time as a separate bill by a vote of 286-138,with strong backing this time from the Democrats. House Approves TAA-Preferences Bill 286-138, with Strong Democratic Support, WORLD TRADE ONLINE (June 25, 2015) (H.R. 1295renews TAA for six years, the African Growth and Opportunity Act for ten years, and theGeneralized System of Preferences until the end of 2017; the first two of these have receivedstrong support from Democrats in the past).




content for autos and small trucks to protect their auto and auto partsindustries’ preferred access to the U.S. and Canadian markets; and U.S.efforts to expand patent protection for biologic drugs.)101 With thenegotiations completed and the text public, the bitter debate among theAdministration, most Republicans in Congress, and business interests on onehand and most Democrats, organized labor, and various NGOs on theother102 as predicted has resumed.103 Even with the signing of TPP onFebruary 4, 2016, its ultimate fate was unclear given the ongoingdisagreements discussed earlier and the vagaries of the 2016 Presidentialelection. Thus, TPP as a practical matter could not have been transmittedto Congress at the earliest until after the November 2016 elections.104

Because the Congress did not act on TPP in the “lame duck” session,105

approval (or rejection) of the Agreement awaits a new Congress and aPresident Trump in 2017, and could be delayed for months or years, or evenabandoned entirely.

A series of exceptions to national treatment and non-discriminationremains in TPP, as in previous FTAs. In addition, there are a number ofimportant innovations beyond even the most recent U.S. FTA investmentchapters and the 2015 TPA. As one expert observed:

TPP’s chapter on Investment strengthens the rule of law in the Asia-Pacific region, deters foreign governments from imposingdiscriminatory or abusive requirements on American investors, andprotects the right to regulate in the, and building on U.S. experiencesince NAFTA, the innovations take investment agreements to a newlevel in terms of protecting host state discretion in such areas asguarding the government’s regulatory discretion in such areas as publichealth and the environment.106

101. See In Hill Briefing, USTR Official Signals TPP Ministerial Unlikely in August, WORLD

TRADE ONLINE (Aug. 7, 2015), https://insidetrade.com/daily-news/hill-briefing-ustr-official-signals-tpp-ministerial-unlikely-august?utm_source=dlvr.it&utm_medium=twitter.102. The divisions are less along party lines than at most times in the past, with the leadingcandidate for the Republican presidential nomination on record as opining that “TPP is ahorrible deal . . . .” See Donald Trump on Free Trade, ON THE ISSUES, available at http://www.ontheissues.org/2016/Donald_Trump_Free_Trade.htm (last visited Jan. 22, 2016).103. See Carter Dougherty & Angela Greiling Keane, Obama Victory on Trade Wins Him AnotherFight With Fellow Democrats, INT’L TRADE DAILY (BNA) (June 26, 2015).104. See Len Bracken, TPP Supporters Seek May-July Consideration of Trade Pact, INT’L TRADE

REP. (BNA) (Jan. 14, 2016) (noting that while some supporters are hoping for earlierconsideration others believe consideration is not likely before the post-election lame ducksession).105. Trade Deals Working For All Americans, WHITE HOUSE, https://www.whitehouse.gov/trade-deals-working-all-americans (last visited Jan. 22, 2017) (stating President Trump’s officialopposition to TPP).106. Investment – The Trans-Pacific Partnership, MEDIUM, https://medium.com/the-trans-pacific-partnership/investment-c76dbd892f3a#.nt04qy4sd (last visited Jan. 14, 2016).




Chapter 9 generally includes extensive language that is broadly similar tothat of earlier U.S. FTAs (such as Singapore and CAFTA-DR) providing forpreliminary consideration of procedural issues,107 and for transparency inrespect to arbitral pleadings and open hearings.108 (This result is reinforcedby the fact that at least two of the TPP parties have signed the U.N.Transparency Convention, an extension of the UNCITRAL TransparencyRules adopted in 2014.)109 TPP tribunals would retain the authority to“accept and consider” amicus curiae submissions, but with the caveat that thesubmission must be “regarding a matter of fact or law within the scope of thedispute that may assist the tribunal in evaluating the submissions andarguments of the disputing parties . . . .”110

The language found in U.S. FTA investment chapters since Australia,Chile, and Singapore defining “customary international law” as resultingfrom “a general and consistent practice of States that they follow from asense of legal obligation” remains in place,111 as does the now-traditionalexpropriation annex, including with minor changes in word order the key“[n]on-discriminatory regulatory actions by a Party that are designed andapplied to protect legitimate public welfare objectives, such as public health,safety, and the environment, do not constitute indirect expropriations,except in rare circumstances.”112 Also, the incorporation of the standardlanguage defining “fair and equitable treatment” as including “[t]heobligation not to deny justice in criminal, civil or administrative adjudicatoryproceedings in accordance with the principle of due process embodied in theprincipal legal systems of the world . . . .” remains.113

Still, the fact that this is a further swing of the pendulum is reflected in thePreamble to the TPP, where the Parties recognize:

their inherent right to regulate and resolve to preserve the flexibility ofthe Parties to set legislative and regulatory priorities, safeguard publicwelfare and protect legitimate public welfare objectives, such as publichealth, safety, the environment, the conservation of living or non-livingexhaustible natural resources, the integrity and stability of the financialsystem and public morals . . . .114

107. TPP Text, supra note 16, at art. 9.22.4.108. Id. at art. 9.23.109. U.N. Convention on Transparency in Treaty-Based Investor-State Arbitration (Mar. 17, 2015),available at http://www.uncitral.org/pdf/english/texts/arbitration/transparency-convention/Transparency-Convention-e.pdf; Esme Shirlow, A Step Toward Greater Transparency: The UNTransparency Convention, KLUWER ARBITRATION BLOG (Mar. 30, 2015), http://kluwerarbitrationblog.com/blog/2015/03/30/a-step-toward-greater-transparency-the-un-transparency-convention/.110. TPP Text, supra note 16, at art. 9.22.3111. TPP Text, supra note 16, at Annex 9-A; see AUSFTA, supra note 14, at Annex 11-A; seeU.S.-Chile FTA, at Annex 10-A.112. TPP Text, supra note 16, at Annex 9-B ¶ 3(b); see AUSFTA, supra note 14, at Annex 11-B¶ 4(b).113. TPP Text, supra note 16, at art. 9.6.2(a); AUSFTA, supra note 14, at art. 11.5.2(a).114. TPP Text, supra note 16, at Preamble, ¶ 9.




Other notable changes (some buried in footnotes) include:

1. The “in like circumstances” requirement in the national treatmentarticle is made somewhat more difficult for investors to satisfy,requiring the determination to depend “on the totality of thecircumstances, including whether the relevant treatment distinguishesbetween investors or investments on the basis of legitimate publicwelfare objectives.”115

2. Limiting the scope of investors’ “reasonable expectations” as a basisfor a finding of a denial of fair and equitable treatment by providingthat “the mere fact that a Party takes or fails to take an action that maybe inconsistent with an investor’s expectations does not constitute abreach of this Article [9.6], even if there is loss or damage to the coveredinvestment as a result.”116 This may be significant given that tribunalsoften give weight to an investor’s “legitimate expectations” whenfinding a denial of fair and equitable treatment.117 Similarly, the failureof the host government to issue, renew or maintain a subsidy, or toreduce a subsidy, is not a breach of fair and equitable treatment.118

3. Where the arbitration concerns an alleged breach of a Party’sobligation in an attempt to make an investment (pre-investmentviolations, which are covered), “the only damages that may be awardedare those that the claimant has proven were sustained in the attempt tomake the investment . . . .”119 This change also could be importantwhere a dispute arises over the state’s pre-investment conduct, as inBilcon v. Canada.120

4. Where the claimant submits a claim based on an investmentauthorization or investment agreement, the “respondent may make acounterclaim in connection with the factual or legal basis of the claimor rely on a claim for the purpose of a set off against the claimant.”121

This is the first agreement where to the author’s knowledgecounterclaims have been explicitly permitted.5. The chapter makes explicit what has been implicit (and universallyobserved) in the past; the “investor has the burden of proving allelements of its claims . . . .”122

115. Id. at art. 9.4, n.14.116. Id. at art. 9.6.4.117. See GARY B. BORN, INTERNATIONAL ARBITRATION: LAW AND PRACTICE 430 (TheNetherlands: Wolters Kluwer, 2012).118. TPP Text, supra note 16, at art. 9.6.5.119. Id. at art. 9.29.2-4.120. See Bilcon v. Canada, Award on Jurisdiction and Liability [Permanent Court of Arbitration](Mar. 17, 2015), available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/disp-diff/clayton-12.pdf (Can.); See also Bilcon v. Canada, available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/disp-diff/clayton-13.pdf (Prof. McCrae, dissenting) (Can.).121. TPP Text, supra note 16, art. 9.19.1-2.122. Id. art. 9.23.7.




6. While there is no explicit code of conduct for arbitrators in thechapter, the Parties have effectively agreed to apply the code of conductfor panelists in state-to-state dispute settlement proceedings to ISDarbitration, with “any necessary modifications to the Code of Conductto conform to the context of the investor-state dispute settlement.”123

Many will see this as long overdue.7. Certain tobacco control opt-outs are provided, permitting anyParty “to deny the benefits of Section B of Chapter 9 (Investment) withrespect to claims challenging a tobacco control measure of the Party.”That election can be made up to and including the period whenarbitration proceedings are underway,124 and has already beenprovisionally exercised by Australia.125

8. The TPP goes beyond some but not all U.S. investment chapters inextending coverage explicitly to state enterprises, to measures adoptedor maintained by “any person, including a state enterprise or any otherbody, when it exercises any governmental authority delegated to it bycentral, regional or local governments or authorities of that Party.”126

This language is important in part because of the existence of a separateTPP chapter purporting to regulate the activities of the Parties’ state-owned enterprises.127

9. While investment agreements and investment authorizations aregenerally within the coverage of the chapter, violations of an“investment authorization” explicitly do not include:

(i) actions taken by a Party to enforce laws of general application,such as competition, environmental, health or other regulatorylaws; (ii) non-discriminatory licensing regimes; and (iii) a Party’sdecision to grant to a covered investment or an investor of anotherParty a particular investment incentive or other benefit, that is notprovided by a foreign investment authority in an investmentauthorisation.128

10. Tribunals are encouraged to decide as a preliminary matter notonly situations where a claim is not one for which an award under thechapter can be granted, but explicitly an “objection that a dispute is notwithin the competence of the tribunal . . . .”129 In both situations thetribunal is also encouraged in “frivolous” cases to award attorneys’ fees

123. Id. art. 9.22.6.124. Id. at art. 29.5.125. Notification by Austl., Feb. 2016 (Pursuant to Article 29.5 of the Trans-Pacific PartnershipAgreement (TPP) signed in Auckland, New Zealand on 4 February 2016, Australia herebyelects to deny the benefits of Section B (Investor-State Dispute Settlement) of Chapter 9(Investment) of the TPP with respect to any claim in relation to its tobacco control measures.Accordingly, no claim can be submitted to arbitration under the TPP’s investor-state disputesettlement mechanism in respect of any tobacco control measure of Australia.).126. TPP Text, supra note 16, at art. 9.2.2(b).127. Id. at ch. 17.128. Id. at art. 9.1, n.10.129. Id. at art. 9.23.4.




to the respondent.130 These are modest expansions to similar provisionsfound in other recent agreements, such as the KORUS.131 The extentto which tribunals will heed such entreaties may vary from tribunal totribunal.11. If either disputing party (investor or host government) requests,the tribunal is required to provide its proposed award on liability to thedisputing parties for comment within a sixty day period. The tribunalmust then “consider any comments” but is not bound by them.132 Thisis similar to the “initial report” procedures found in both TPP andNAFTA,133 but nothing similar exists in NAFTA, Chapter 11.134 Thisright of comment could provide the disputing parties, particularly thehost government, an additional opportunity to sway (or pressure) thetribunal with regard to the tribunal’s proposed results and reasoning,with only a modest delay in the proceedings.

The only obvious retreat in the TPP investment chapter relates to anappellate mechanism for investment disputes. U.S. TPA negotiatingobjectives since 2002 provided for consideration of an appellate mechanismfor investment disputes, and such language has been included in all post-NAFTA FTAs, as in KORUS.135 (There is no publicly available evidencethat any such negotiations have ever occurred.) The TPP language providesonly that “[i]n the event that an appellate mechanism for reviewing awardsrendered by investor-State dispute settlement tribunals is developed in thefuture under other institutional arrangements, the Parties shall considerwhether awards rendered under Article 9.28 (Awards) should be subject tothat appellate mechanism.”136 This presumably reflects USTR AmbassadorFroman’s belief that an appellate body for investment disputes isunnecessary.137 Unless by some chance the TTIP Parties agree on anappellate mechanism,138 it is highly unlikely that such a tribunal withsignificant membership will be developed elsewhere, since amendment of

130. Id. at art. 9.29.4.131. KORUS, supra note 20, at arts. 11.20.6-8.132. TPP Text, supra note 16, at art. 9.23.10.133. Id. at art. 28.17; NAFTA, supra note 12, at art. 2016.134. See NAFTA, supra note 12, art. 1135 (providing only for a final award).135. KORUS, supra note 20, at Annex 11-D.136. TPP Text, supra note 16, at art. 9.23.11 (emphasis added).137. See Michael Scaturro, TTIP Talks Slow on EU’s Investor Court System, INT’L TRADE REP.(BNA), Feb. 25, 2016 (reporting that “U.S. Trade Representative Michael Froman, for his parthas said he does not think the use of an appellate body is necessary” in discussions with the EUCommission).138. See Commission draft text TTIP- Investment, art. 10 (Nov. 2015), available at http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf (last visited Mar. 28, 2016)(the EU Commission proposal for the TTIP Parties to agree on an appellate mechanism).




the ICSID Convention to provide for such mechanism is politically andpractical impossible.139

The extent to which these innovations will make a significant difference inthe results of investment arbitrations depends on their use in actual disputes,which is not likely to occur soon given that the TPP will almost surely notenter into force for several years. This makes the significance of this morehost country friendly approach to ISDS even more difficult to predict.

VII. Conclusions

Should the TPP ultimately go into force for many if not all of the TPPParties, it will establish a more host state friendly standard for ISDS,affording governments a new and higher level of regulatory flexibility. Thepractical significance of these changes will probably not be evident for atleast several years after the TPP enters into force. Some of the changeswould have an obvious impact on future ISDS—for example, Phillip Morriscould not bring an action under TPP, Chapter 9 against Australia or anyother Party that resorts to plain-packaging rules for cigarettes (perhapsCanada).140 In specific cases, the other changes listed above could alsobecome significant. Even if the United States never becomes Party to theTPP the TPP investment provisions are likely to be reflected in other U.S.FTA negotiations, such as the renegotiation of NAFTA likely to begin bymid-2017.141

This assumes of course that the TPP Parties who have other FTAs withinvestment chapters indicate clearly and unequivocally that TPP, Chapter 9supersedes earlier investment provisions that may be friendlier to foreigninvestors and less protective of host state regulatory flexibility, such asChapter 11 of NAFTA. The need for such indications is made necessary bythe language in TPP that indicates that as a general rule TPP provisionsshould “coexist” with the WTO Agreements and the many free tradeagreements to which one or more of the TPP Parties are also parties.142

With NAFTA, the prospect of Chapter 11 “coexisting” with TPP, Chapter 9should be of considerable concern to the NAFTA Parties, since all NAFTA

139. International Centre for Settlement of Investment Disputes, ICSID Convention, Regulationsand Rules (April 10, 2006), available at http://icsidfiles.worldbank.org/ICSID/ICSID/StaticFiles/basicdoc/main-eng.htm.140. See Daniel Hurst, Australia Wins International Legal Battle with Philip Morris over PlainPackaging, THE GUARDIAN (Dec. 17, 2015, 9:19 PM), http://www.theguardian.com/australia-news/2015/dec/18/australia-wins-international-legal-battle-with-philip-morris-over-plain-packaging.141. See Patrick Gillespie, Trump Wants to ‘Speed’ Up NAFTA talks, Calls Deal a ‘Catastrophe,CNN MONEY (Feb. 2, 2017), http://money.cnn.com/2017/02/02/news/economy/mexico-nafta-negotiations-90-days/ (last visited Feb. 22, 2017) (reporting that both Mexico and the UnitedStates had indicated that negotiations could begin after a ninety-day period for Mexicanconsultation with its stakeholders and the Trump administration with Congress under TradePromotion Authority legislation).142. TPP Text, supra note 16, at art. 1.2.1.




governments have assured their constituents that TPP provides them with amuch higher level of regulatory flexibility than NAFTA Chapter 11.

Regardless of these concerns, the TPP investment provisions are thelatest, although undoubtedly not the final, step in the evolution of thebalance between investor protection and host state preservation of a higherlevel of regulatory flexibility.



The Possible Impact of Legal Globalization onthe ECJ Decision on Human Embryonic StemCell Patents and its Implications

AMY LAI*

I. Introduction: From Brustle to ISCC

On December 18, 2014, the Grand Chamber of the Court of Justice of theEuropean Union (ECJ) lifted part of its more general 2011 ban on obtainingpatents for human embryonic stem cells (hESCs), by ruling in InternationalStem Cell Corporation v. Comptroller General of Patents, Designs and TradeMarks (ISCC) that hESCs made from unfertilized eggs can be patented.1 Inthis landmark case, the ECJ held that the moral exclusion of industrial andcommercial uses of “human embryos” in Article 6(2)(c) in Directive 98/44/EC on the legal protection of biotechnological inventions, or the BiotechDirective, does not cover “parthenotes,” the unfertilized human eggsproduced by parthenogenesis.2

This case arose when the United Kingdom’s Intellectual Property Office(UKIPO) refused to grant two national patents to International Stem CellCorporation (ISCC), a California-based publicly traded biotech company.The UKIPO stated that these two patents growing out of parthenogenesisfell within the definition of the term “human embryo” adopted by the GrandChamber in Brustle v. Greenpeace.3 ISCC appealed, arguing that Brustle didnot apply because mammalian parthenotes can never develop to term due toa lack of paternal DNA.4 ISCC cited specific language in Brustle thatdetermines what might constitute a human embryo: “capable of

* PhD Candidate, Allard School of Law, University of British Columbia.1. Case C-364/13, Int’l Stem Cell Corp. v. Comptroller Gen. of Patents, Designs, and Trade

Marks, EU:C:2014:2451 (Dec. 18, 2014).2. Id. “Parthenogenesis” is a term describing the reproduction from an ovum without

fertilization, a normal process in some invertebrates and lower plants.3. “The first patent, GB0621068.6, entitled ‘Parthenogenetic activation of oocytes for the

production of human embryonic stem cells,’ covered both the methods for producingpluripotent human stem cell lines from parthenogenetically-activated oocytes and the stem celllines. The second application GB0621069.4, entitled ‘Synthetic cornea from retinal stem cells,’included claims to methods and ‘product-by-process.’” Aurora Plomer, Case C-364/13 –Patentability of Embryonic Stem Cells and Parthenotes: Inherently Uncertain?, EUTOPIA LAW (Dec.19, 2014), https://eutopialaw.com/2014/12/19/case-c-36413-patentability-of-embryonic-stem-cells-and-parthenotes-inherently-uncertain/.

4. Id. More specifically, ISCC argued that the parthenogenetically-activated oocytes areincapable of initiating the process of development of a human being due to the phenomenon ofgenomic imprinting. Id. Confronted with research suggesting that these hurdles could besuccessfully overcome by genetic engineering, ISCC amended the claims by introducing the




commencing the process of development of a human being,” to argue for anarrow interpretation including only those organisms capable of leading to afull human being, rather than a broad one which would also includeorganisms capable of commencing such process but incapable of leading to afull human being.5 The Chancery Division (Patents Court) of the HighCourt of Justice (England & Wales) decided that the appeal “raised aquestion of considerable importance” with regard to the meaning of theterm “human embryos” in the Biotech Directive.6 Finally, the ECJ held thatin order to be classified as a “human embryo,” a non-fertilized human ovummust have the “inherent capacity” of developing into a human being.7

Because an unfertilized human ovum whose division and furtherdevelopment have been stimulated by parthenogenesis lacks the “inherentcapacity” to develop into a human being, it is not a “human embryo” withinthe meaning of the Directive, and stem cells derived from it are thereforepatentable.8 Reasoning that the issues at stake are questions of factanswerable with reference to the state of scientific knowledge at the time ofthe decision, the ECJ allowed national courts to decide, on a case-by-casebasis, whether parthenotes, in the light of “current scientific knowledge,”have the “inherent capacity” of developing into a human being and qualifyfor patent protection.9

While some may attribute the ISCC ruling to economic globalization or afear of “brain drain,” it may be understood in the context of the globalizationof law. This possibility raises two questions. First, did American laws andpolicies on hESC research and patents have any impact on the ECJ’sdecision? Second, how might legal globalization affect the Court’sapplication of the “inherency” test to unexamined or new biotech inventionsin the future?

Part II of this article will examine why American laws and policies onhESC research and patents may have had an impact on the ECJ decision,despite the lack of direct evidence of this impact. While the decision doesnot fully converge with American policy and rulings with regard to hESCresearch and patents, its partial lifting of the general ban on hESC patentssignals a progression towards the American jurisprudence on these matters.Moreover, as Part II will explain, the possible impact of legal globalizationcoincided with the ECJ’s activist role to promote human rights in the EU bypaying equal regards to all provisions of the Charter of Fundamental

word “pluripotent” before “human stem cell line” to exclude any possibility of geneticmanipulation. Id.

5. Case C-34/10, Oliver Brustle v. Greenpeace e.V., 2011 E.C.R. I-09821 (Oct. 18, 2011).6. Int’l Stem Cell Corp v. Comptroller General of Patents [2013] EWHC 807 (Ch) (17 April

2013) at para 5.7. Case C-364/13, Int’l Stem Cell Corp. v. Comptroller Gen. of Patents, Designs, and Trade

Marks, EU:C:2014:2451 (Dec. 18, 2014).8. Id.9. Id.



2017] POSSIBLE IMPACT OF LEGAL GLOBALIZATION 263

Freedoms for the European Union and the European Convention onHuman Rights.

Part III will look towards the future by predicting how courts of variousEU member states will apply the “inherency test” to determine thepatentability of hESCs, and how the ECJ, in the era of legal globalization,may apply this test to unexamined or new biotechnological inventions.Although the ECJ does not dictate how its member states should apply thetest, how various states, including Sweden, Germany, and Austria, willapproach and apply it is very predictable. This Part will also explain why the2014 decision may have revealed an interaction between civil law andcommon law features in the era of globalization, and how the ECJ maybalance the interests of different parties as it applies the law to unexaminedor new biotech inventions.

II. ISCC in the Context of Legal Globalization

The 2014 decision may be regarded as the result of economicglobalization or more specifically, the fear of brain drain on the part of theEU. Indeed, the topic of brain drain emerged repeatedly as the EU and theU.S. revised their policies and laws with regard to stem cell research. Forexample, the 2006 agreement among science ministers to allow part of theUnion’s expanded budget to be spent on hESC research led to theprediction that American scientists, dissatisfied with President George W.Bush’s restrictive policy on hESC research, would flock to Europe.10

President Obama’s 2009 Executive Order boosting domestic stem cellresearch funding likewise sparked fears among the European researchcommunity of a possible brain drain across the Atlantic in the oppositedirection.11 Reactions among European scientists to the Brustle ruling wereespecially gloomy.12

The impacts of these policies and laws nonetheless have beenoverestimated. Critics noted that the interpretation of Brustle wasunnecessarily gloomy.13 First, because the Directive did not prohibit allstem cell research, it neither “prevented European firms developingtechnology platforms based on non-embryonic human stem cells nor has itprecipitated a ‘brain-drain’ of European stem cell expertise to the US orAsia.”14 In addition, despite prior patent restrictions, firms that develop andsell human embryonic stem cell lines and their accompanying technology

10. Nicholas Watt, US Faces Science Brain Drain After Europe Backs Stem Cell Funding, THE

GUARDIAN (July 25, 2009), https://www.theguardian.com/world/2006/jul/25/eu.genetics.11. Ian Sample, Obama to Lift Restrictions on Funding Stem Cell Research, THE GUARDIAN (Mar.

8, 2009), https://www.theguardian.com/science/2009/mar/09/stem-cell-research-lift-us-ban.12. Emma, European Court Bans Stem Cell Patents, EUROSTEMCELL (Oct. 18, 2011), http://

www.eurostemcell.org/story/european-court-bans-stem-cell-patents.13. Watt, supra note 10.14. Michael Morrison, The Patenting of Human Embryonic Stem Cells, ESRC GENOMICS

NETWORK (Nov. 21, 2011), http://www.genomicsnetwork.ac.uk/egenis/news/25326.




platforms have flourished and remained competitive.15 Without denying therole of economics, this article examines whether legal globalization may alsohave played a role in the ISCC ruling.

A. WHAT IS LEGAL/JUDICIAL GLOBALIZATION?

Because of globalization, legal problems tend to arise in similar ways,especially in advanced societies and economies, including the U.S., the EU,Canada, and Japan.16 National governments frequently look to their peersfor solutions to these problems, leading to the convergence of nationallaws.17 Judicial globalization, or judicial interaction across borders, is onesource of this convergence.18 It takes place either “vertically” betweennational and international tribunals, or “horizontally” across nationalboundaries, as the need for judicial cooperation in resolving transnationaldisputes has become more common.19

While processes like dispute resolution represent the most active types ofjudicial interaction, “cross-fertilization” of national judicial decisions is acommon, more passive form of judicial globalization.20 Judges use foreignlaw to support their arguments or legal reasoning, often without citation.21

The U.S. Supreme Court in particular, which almost never quotes othercourts, is itself the most quoted among foreign courts due to its rich supplyof ideas.22 Because “[c]ourts don’t do what they say and they don’t say whatthey do,” the use of foreign case law in different ways—both direct and moresubtle—is likely more frequent than it seems to be.23

B. THE AMERICAN JURISPRUDENCE ON HESC RESEARCH AND

PATENT

American law and its judiciary possibly had an impact on the ECJ’sdecision. One should note that hESC research and patentability in the U.S.were first approved through legislation. The U.S. Patent Act holds that

15. Id.16. See, e.g., Ralf Michaels, Globalization and Law: Law Beyond the State, DUKE LAW

SCHOLARSHIP REPOSITORY (Jan. 2013), http://scholarship.law.duke.edu/faculty_scholarship/2862.

17. See, e.g., id.18. Anne-Marie Slaughter, Judicial Globalization, 40 VA. J. INT’L L. 1103, 1103-04 (2000).19. Id. at 1112.20. Id. at 1116-19.21. Marta Cartabia & Sabino Cassese, How Judges Think in a Globalised World? European and

American Perspectives, GLOBAL GOVERNANCE PROGRAMME, at 1, 3 (Dec. 2013). Judicialnetworks have been established by the European legislature (EJN – European Judicial Network)as well as by judiciaries themselves, such as the conference of European Constitutional Courtsand the International Association of Supreme Administrative Jurisdictions. Id. at 4-5. Academicinstitutions also set up forums where judges and academics meet in order to create bridgesbetween research and practice. Id.

22. Id.23. Id. at 4.




“[w]hoever invents or discovers any new and useful process, machine,manufacture, or composition of matter, or any new and useful improvementthereof, may obtain a patent therefor, subject to the conditions andrequirements of this title.”24 This broad grant was limited by a few judiciallyrecognized exceptions, namely, “laws of nature, natural phenomena, andabstract ideas.”25 Later, the Supreme Court in Diamond v. Chakrabarty ruledthat bioengineered living organisms were altered enough to deserve patentprotection.26 Following the Chakrabarty decision, the U.S. Patent andTrademark Office (USPTO) wrestled with the question of the patentabilityof other emerging forms of biotechnology, including those that are human-related. Its 1987 “Quigg Memo” considers that “[a] claim directed to orincluding within its scope a human being will not be considered patentablesubject matter under 35 USC 101.”27 Notwithstanding this longstandingpolicy against the patenting of “entire” or “complete” human beings, theUSPTO has allowed for patents on “living tissue, genetically modified cells,and other emerging forms of biotechnology,” such as isolated humangenes.28

With regard to hESC research, Congress banned the creation ordestruction of human embryos for research purposes in 1996, and PresidentGeorge Bush signed an order in 2001 barring the National Institutes ofHealth from funding research on embryonic stem cells beyond using thesixty cell lines already in existence.29 Nevertheless, President Obama’sExecutive Order 13,505 (2009), entitled “Removing Barriers to ResponsibleScientific Research Involving Human Stem Cells,” repealed Bush’s order bycasting such research as not ethically problematic.30 More recently, theAmerica Invents Act (AIA) of 2011 imposes a statutory limitation onpatentable subject matter through its § 33(a), stating that “no patent mayissue on a claim directed to or encompassing a human organism.”31 The

24. 35 U.S.C § 101.25. Alice Corp. Pty. Ltd. v. CLS Bank Int’l et al., 134 S.Ct. 2347, 2354-55 (2014).26. Diamond v. Chakrabarty, 447 U.S. 303, 318 (1980).27. Jonathan R. K. Stroud, Is Congress Politicizing Patents? Patenting Biotechnology in the Wake of

Section 33, Prometheus, and CLS Bank, FOOD & DRUG POL’Y F. at 4 (July 25, 2012).28. Id. at 2-3. “This policy was put to test in 1997, when scientist Stuart Newman sought to

obtain a patent for a human/non-human chimera,” in part to force the USPTO to clarify itspolicy regarding the patent eligibility of human organisms. Ava Caffarini, Directed to orEncompassing a Human Organism: How Section 33 of the America Invents Act May Threaten theFuture of Biotechnology, 12 J. MARSHALL REV. INTELL. PROP. L. 768, 776 (2013). Although theUSPTO rejected Newman’s patent application, stating that it would violate the ThirteenthAmendment’s ban on slavery and thus fail to meet the moral utility requirement under § 101, itdid not deal with the issue of the percentage of genetic material required to make a patentapplication human-related.

29. Timeline of Major Events in Stem Cell Research Policy, RESEARCH AMERICA, http://www.researchamerica.org/advocacy-action/issues-researchamerica-advocates/stem-cell-research/timeline-major-events-stem-cell (last visited Aug. 14, 2015).

30. Exec. Order No. 13,505, 74 Fed. Reg. 10,667 (Mar. 9, 2009).31. Leahy-Smith America Invents Act, PUB. L. NO. 112-29 §33(a), 125 STAT. 284, 340

(codified as amended at 35 U.S.C. §101 (2011)).




Congressional Record states that this amendment “simply reaffirms currentU.S. patent policy,” that it “would not interfere in any way with any existingpatents with respect to stem cells,” and that it would “not forbid fundingresearch on embryonic stem cells, because a human embryo is an ‘organism’but a stem cell clearly is not.”32 The USPTO also issued a memorandumstating that it viewed the amendment as “fully consistent with USPTO’spolicy on the non-patentabiliy of human life-forms.”33 Hence, § 33(a)codifies the already existing policy by narrowly tailoring the patent exceptionto only very rare circumstances, such as attempts to patent entire humanclones or human offspring for unethical, unsafe, or unconstitutionalpurposes.

The legality of hESC research and patents has not been challenged by thejudiciary. In early 2013, the Supreme Court refused to step into the heateddebate over hESC research by declining to hear Sherley v. Sebelius, in whichtwo scientists challenged Obama’s 2009 order.34 This lawsuit first arose in2010, when James Sherley of the Boston Biomedical Research Institute andTheresa Deisher of Sound Choice Pharmaceutical Institute sued on behalfof “plaintiff embryos,” alleging that Congress had forbidden hESC researchin 1996.35 When the Court of Appeals for the Federal Circuit upheld thelower court’s decision ruling that the National Institutes of Health couldlegally fund hESC research, plaintiffs appealed to the Supreme Court.36

The Supreme Court’s refusal to hear the case, though cannot be taken as itssupport for Obama’s order, allowed hESC research and patents to stayethical. Most recently, in Consumer Watchdog vs. Wisconsin Alumni ResearchFoundation (2014), the Federal Circuit rejected Consumer Watchdog’sattempt to strike down a long-contested hESC patent held by the WisconsinAlumni Research Foundation, by holding that Consumer Watchdog lackedstanding to challenge the patent.37 In February 2015, the Supreme Court

32. Stroud, supra note 27, at 4 (quoting 157 CONG. REC. E1, 177-80 (daily ed. June 23, 2011)(statement of Rep. Smith)).

33. Id. (quoting Memorandum from Robert W. Bahr, Senior Patent Counsel & Acting Assoc.Comm’r for Patent Examination Policy to Patent Examining Corps (Sept. 20, 2011), available athttp://www.uspto.gov/aia_implementation/human-organism-memo.pdf).

34. Terry Baynes, U.S. High Court Won’t Review Federal Embryonic Stem Cell Funds, REUTERS

(Jan. 7, 2013), http://www.reuters.com/article/us-usa-court-stemcell-idUSBRE9060IQ20130107.

35. Id.36. Id.37. Consumer Watchdog v. Wis. Alumni Research Found., 753 F.3d 1258, 1263 (Fed. Cir.

2014); see Donald Zuhn, Consumer Watchdog v. Wisconsin Alumni Research Foundation (Fed. Cir.2014), PATENTDOCS.ORG (June 5, 2014), http://www.patentdocs.org/2014/06/consumer-watchdog-v-wisconsin-alumni-research-foundation-fed-cir-2014.html. This case lasted for over eightyears. In July 2006, Consumer Watchdog (CW) (then known as the Foundation for Taxpayerand Consumer Rights), along with the Public Patent Foundation, filed formal requests with theUSPTO to revoke three patents held by Wisconsin Alumni Research Foundation (WARF), onthe grounds that they are overreaching and “significantly undermine research and wastetaxpayer money.” When the USPTO upheld the challenges for all three stem cell patents in2007, agreeing with CW’s claim that WARF’s work was “obvious in light of previous scientific




denied Consumer Watchdog’s petition to overturn the circuit ruling.38 Thisdecision, which does not examine whether hESCs are patentable, similarlyleft the legality of hESC research and patent intact. Meanwhile, althoughhuman stem cell patents in general do not go unchallenged, theirpatentability has earned support from the USPTO and the judiciary wherethe products are not naturally occurring.39

C. THE ECJ, JUDICIAL ACTIVISM, AND HUMAN RIGHTS

Decisions of the ECJ in general “[o]ffer no direct clue as to whether theyhave been influenced by decisions of the U.S. Supreme Court” or any otherforeign court.40 Nevertheless, in certain important cases, the opinions of theAdvocates General have made references to the Supreme Court, which thenbore direct relevance to the ECJ decisions; alternatively, these referencesmay have a dialectic function where the ECJ did not follow the AG’sopinions.41 For example, in Netherlands v. Parliament & Council, theNetherlands brought an action for annulment of the Biotech Directive.42

AG Francis Jacobs cited Diamond v. Chakrabarty to assure that the BiotechDirective would “leave untouched” the “[c]lassic requirements for a patentof novelty, inventive step, and industrial application,” thus quenching theanxiety that “[a]ny gene or gene sequence, or even the entire humangenome” would “automatically be patented.”43 This opinion likely had aheavy influence on the ECJ, which finally ruled in favor of the defendant by

research,” WARF narrowed its patent claims to only include stem cells derived from “pre-implantation embryos,” which were eventually granted by USPTO in 2008 for all three patents.In 2008, CW filed an appeal to the USPTO regarding the ‘913 patent. In 2013, it further filedan appeal with the U.S. Federal Circuit to overturn USPTO’s decision to uphold the ‘913patent. On January 17, 2014, the USPTO responded to a request by the Federal Circuit panelconcerning CW’s standing, arguing that CW had no actual standing to appeal its decision touphold WARF’s patent as CW lacked any “concrete or particularized interest” in the issue athand and failed to show any “injury or harm” to justify an appeal. Further, CW argued that thefederal court did not satisfy the requirements for jurisdiction as specified by Article III of theU.S. Constitution and therefore had no judicial power to render judgment.

38. David Jensen, California’s Consumer Watchdog Loses U.S. Supreme Court Challenge to WARFStem Cell Patents, CAL. STEM CELL REP. (Feb. 24, 2015), http://californiastemcellreport.blogspot.ca/2015/02/californias-consumer-watchdog-loses-us.html.

39. For example, in Association of Molecular Pathology v. Myriad Genetics, the Supreme Court,through a unanimous decision, held that while a naturally occurring DNA segment is a productof nature and not patent eligible, a complementary DNA, or cDNA, which corresponds to thenaturally occurring DNA sequences except that certain of its non-coding sequences (“introns”)are removed, is not naturally occurring and therefore is patent eligible. Ass’n for MolecularPathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2119 (2013).

40. Carl Baudenbacer, Judicial Globalization: New Development or Old Wine in New Bottles?, 38TEX. INT’L L.J. 505, 516 (2003); see also Peter Herzog, United States Supreme Court Cases in theCourt of Justice of the European Communities, 21 HASTINGS INT’L & COMP. L. REV. 903 (1998).

41. See Baudenbacer, supra note 40, at 516.42. Id. at 513.43. Id.




holding that the Directive was correctly adopted under Article 100a of theE.C. Treaty (now Article 95 E.C.).44

Admittedly, there is no direct evidence as to whether the 2014 ruling wasinfluenced by American law. Moreover, AG Cruz Villalon did not mentionany American cases or statutes at all in his opinion. On the other hand, thefact that the ECJ was heavily influenced by AGs’ references to American lawin past decisions indicates that it may have considered American law andcourt cases like Sherley. Although the ECJ decision does not fully convergewith American policy and rulings, its partial lifting of the general ban onhESC patents indicates its progression towards the American jurisprudenceon hESC research and patents.

Yet judicial globalization may have had a more indirect impact on the ECJdecision, which went hand in hand with its effort to further its role inchampioning human rights in the EU. Scholars have noted how the ECJ hasembraced the Supreme Court’s role in the nationalization of Americanpolitics in its own contribution to the EU’s integration through judicialactivism. For example, Elizabeth F. Defeis notes that throughout its fiftyyear history, the ECJ has held in a series of cases that fundamental rights ofindividuals such as non-discrimination, freedom of religion, association, andexpression, were enshrined in the general principles of its Community law.45

It has also incorporated provisions of the European Convention on HumanRights (ECHR), decisions of the European Court of Human Rights, and theCharter of Fundamental Rights of the European Union into its humanrights jurisprudence, noting that the principle aim of the Charter is toreaffirm rights as they result from constitutional traditions and internationalobligations common to Member States, the Treaty on the European Union,and the ECHR.46

Whether in the U.S. or in Europe, hESC research and biotechnology ingeneral have sparked fears that such innovations violate the sanctity ofhuman life.47 Further, hESC patents raise concerns that patients’ access tothe patented inventions will be limited by high costs as a consequence ofmonopolies.48 But the right to conduct research and intellectual propertyrights are also derived from basic human rights. The American legislatureand courts, by allowing patents except those encompassing humanorganisms, have striven to balance the right to conduct research and to ownintellectual property with the sanctity of human rights and the right to

44. Id.45. Elizabeth F. Defeis, Human Rights and the European Court of Justice: An Appraisal, 31

FORDHAM INT’L L.J. 1104, 1110 (2008).46. Id. at 1110-11; see also Case C-540/3, European Parliament v. Council of the European

Union, 2006 E.C.R I-5769.47. See, e.g., Jessica Reaves, The Great Debate Over Stem Cell Research, TIME (July 11, 2001),

http://content.time.com/time/nation/article/0,8599,167245,00.html; Human Embryonic StemCell Research and Ethics, EUROSTEMCELL (Mar. 4, 2011), http://www.eurostemcell.org/files/Human_ES_ethics_1.pdf.

48. See, e.g., Reaves, supra note 47.




access patented inventions. In contrast, until its 2014 ruling, the ECJ hadnot struck a similar balance. While the ECHR mentions neither humandignity nor intellectual property, Article 1 of its Protocol states that “[e]verynatural or legal person is entitled to the peaceful enjoyment of hispossessions.”49 The Charter more directly addresses these issues. AlthoughArticle 1 states that human dignity is to be safeguarded, and Article 3prohibits eugenic practices and human cloning, Article 17 safeguards theright to intellectual property.50 By lifting part of its general ban onobtaining patents for hESCs in ISCC, the ECJ thus addressed andaccommodated the right to conduct hECS research and patenting theproducts of such research by balancing it with the right to access newinventions and the dignity of human life.

III. Legal Globalization and the Likely Applications of the“Inherency” Test

Critics predict that national patent offices and courts will react differentlyto the ECJ decision.51 Although it empowered national courts to decidewhether parthenotes have the “inherent capacity to develop into a humanbeing,” it did not provide proper guidelines for the “inherency” test. As AGVillalon stated, Member States might still decide to ban the patenting ofhESCs derived from human parthenotes in accordance with the moregeneral exclusion in Article 6 (1) of the Biotech Directive on the grounds ofpublic order and morality.52 In light of the different positions of MemberStates regarding the definitions of embryo and stem cell research, thisdiscretion may lead to uncertainty. Further, one wonders whether a storedfrozen human embryo has the inherent capacity to become a human being ifit is never going to be implanted.53 This section thus predicts how courts ofvarious Member States will apply the “inherency test,” and how the ECJmay apply this test to unexamined or new biotech inventions.

49. European Convention on Human Rights, art. 1, Sept. 3, 1953, E.T.S. No. 005.50. Charter of Fundamental Rights of the European Union art. 1, 3, 17, 2010 O.J. C 83/02.51. Timo Minssen & AnaNordberg, The Evolution of the CJEU’s Case Law on Stem Cell Patents:

Context, Outcome and Implications of Case C364/13 International Stem Cell Corporation, 5 NORDIC

INTELL. PROP. L. J. 493, 502 (2015). First, it remains unclear how the European Patent Officewill react and how national patent offices will interpret the present decision in practice. TheEPO, which is not an EU institution, is not formally bound by the Biotech Directive, nor is itobliged to accept the decisions of the CJEU. But, its Administrative Council introduced inSeptember 1999 several of the relevant provisions of the Biotech Directive into theImplementing Regulations to the EPC (the “Rules”). For the sake of harmonization, it willlikely mirror the ISCC decision in its guidelines for examination and implemented in itspractice, which was the approach taken following the Brustle decision.

52. Opinion of Advocate General Villalon, Case C-364/13, Int’l Stem Cell Corp. v.Comptroller Gen. of Patents, Designs, and Trade Marks, EU:C:2014:2014 (Dec. 18, 2014).

53. Aurora Plomer, Case C-364/13 – Patentability of Embryonic Stem Cells and Parthenotes:Inherently Uncertain?, EUTOPIA LAW (Dec. 19, 2014), https://eutopialaw.com/2014/12/19/case-c-36413-patentability-of-embryonic-stem-cells-and-parthenotes-inherently-uncertain/.




A. PREDICTING MEMBER STATES’ NEW POLICIES ON HESCPATENTING

The hESC regulatory regimes in the EU countries are highly disparate.On the restrictive end, Germany prohibits embryo research and makes theimportation of stem cell lines from other nations subject to a cut-off date.54

Austria prohibits the procurement of cells from a human embryo forresearch purposes, but allows the use of pluripotent embryonic stem cells(which are capable of developing into any type of cell or tissue except thosethat form a placenta or embryo) that have already been established in alawful manner, for example, in other nations, or outside the territorial scopeof its law.55 Similarly, Italy bans the derivation of hESC lines, but permitsthe use of imported ones for research.56 On the more permissive end,France allows hESC research so long as specific conditions are met.57

Portugal allows stem cell research and permits the use of frozen or surplusembryos created in-vitro for the derivation of hESC lines that would bringtherapeutic and medical benefits to the community.58 The U.K. and Swedenhave remained the most aggressive promoters of hESC research: whileforbidding reproductive cloning, both have comprehensive and well-established regulatory frameworks for stem cell research, and allow the useof IVF embryos, the destruction of these embryos to find new stem lines,and the creation of embryos through somatic cell nuclear transfer.59

The responses of national courts to the ISCC ruling are not difficult topredict. Because Germany permits no hESC research at all, it will not allowthe patenting of hESCs, including those derived from parthenotes. Austriaand Italy, which permit the use of imported hESC lines for research, willmore likely than not permit the patenting of hESC research output derivedfrom parthenotes. First, parthenotes lack the “inherent capacity” to developinto a human being according to current scientific knowledge in these two

54. Regulation of Stem Cell Research in Germany, EUROSTEMCELL (Mar. 1, 2012), http://www.eurostemcell.org/regulations/regulation-stem-cell-research-germany.

55. Regulation of Stem Cell Research in Austria, EUROSTEMCELL (June 18, 2013), http://www.eurostemcell.org/regulations/regulation-stem-cell-research-austria.

56. Regulation of Stem Cell Research in Italy, EUROSTEMCELL (Mar. 1, 2012), http://www.eurostemcell.org/regulations/regulation-stem-cell-research-italy.

57. Regulation of Stem Cell Research in France, EUROSTEMCELL (Mar. 1, 2012), http://www.eurostemcell.org/regulations/regulation-stem-cell-research-france. The research must meetall four conditions: it is scientifically relevant; it is likely to allow major medical advances; itcannot be performed unless cells derived from embryos are used; it respects French ethicalprinciples for research on embryos and embryonic stem cell lines. Embryos used for researchmust come from the assisted reproduction process (IVF) and informed consent must beobtained from the donors. Id.

58. Regulation of Stem Cell Research in Portugal, EUROSTEMCELL (Dec. 1, 2011), http://www.eurostemcell.org/regulations/regulation-stem-cell-research-portugal.

59. Regulation of Stem Cell Research in the United Kingdom, EUROSTEMCELL (Dec. 14, 2011),http://www.eurostemcell.org/regulations/regulation-stem-cell-research-united-kingdom;Regulation of Stem Cell Research in Sweden, EUROSTEMCELL (Mar. 1, 2012), http://www.eurostemcell.org/regulations/regulation-stem-cell-research-united-kingdom.




nations. Second, these two nations have legalized abortion since 1974 and1978 respectively,60 and therefore have little reason to prohibit, on thegrounds of public order and morality, patenting hESCs made fromunfertilized cells that have not even achieved the “embryo” status. BecauseFrance and Portugal allow hESC research under certain conditions, they willlikely allow the patenting of parthenote-derived hESCs that are lawfullyproduced under these conditions. Finally, the U.K. and Sweden, both withprogressive policies, will find no justification in banning hESC research andpatents.

B. THE “INHERENCY” TEST AND UNEXAMINED AND NEW BIOTECH

INVENTIONS

The question concerning the application of the “inherency” test tounexamined and new biotech inventions is more difficult to answer. Becausethe 2014 decision possibly revealed an interaction between civil andcommon law features in the era of globalization, legal globalization providesa framework for predicting how the ECJ may apply the “inherency” test tothese inventions.

Scholars have attempted to lay out the major aspects of civil law andcommon law models as reflected in the EU and the U.S. legal systemsrespectively. For example, Charles H. Koch points out that the EU legalprinciples are largely founded upon the civil law model, the codes of whichare the product of the “Age of Reason” and premised on the belief that lifehas an order.61 The drive for certainty and stability “emphasizes systemicvalues focusing on definitions and categorizations.”62 Such an emphasis oncategorization is often criticized as “insensitive” and “static” by U.S.commentators whose modern jurisprudence focuses on balancing ratherthan categorization: “Balancing requires the explicit articulation andcomparison of rights or structural provisions, modes of infringement, andgovernment interests.”63 Nevertheless, one needs to consider that theprinciple of proportionality originated in continental Europe and is one ofthe fundamental principles of the jurisprudence developed by the ECJ.64 In

60. See Bundesgesetz vom 23. Janner 1974 uber die mit gerichtlicher Strafe bedrohtenHandlungen (Strafgesetzbuch [StGB]) [Federal Law of 23 January 1974 on Punishable Acts(Penal Code [StGB]) (in force on Jan. 1, 1975, as last amended by Bundesgesetzblatt [BGBl] INo. 106/214, Dec. 29, 2014, Part I, No. 1974/60, Stuck 21, pp. 641–92 (Austria) (available inEnglish at http://www.hsph.harvard.edu/population/abortion/Austria.abo.htm); Termination ofPregnancy and Abortion in Italy, ANGLOINFO, http://rome.angloinfo.com/information/healthcare/pregnancy-birth/termination

61. Charles H. Koch, Jr., Envisioning a Global Legal Culture, 25 MICH. J. INT’L L. 1, 10 (2003).62. Id. at 17-18.63. Id. at 44.64. The proportionality principle, according to which a public authority may not impose

obligations on a citizen except to the extent to which they are strictly necessary in the publicinterest to attain the purpose of the measure, is the preferred procedure for managing disputesinvolving an alleged conflict between two rights claims, between a rights provision and a state or




addition, because the civil system by no means prohibits change, itscategorization is an applied—not extreme—formalism that allows for certaindegrees of creativity in interpretations and applications, especially in the ageof globalization.65

Despite using the case law method, the ECJ was established in principleon civil law principles. Hence its rulings resemble interpretative decisionsby civil law courts more than creative ones by common law courts.66

Because the ISCC ruling made no reference to the proportionality principle,it arguably contained an implicit balancing of rights and interests thatpossibly revealed the influences of the common law principles. By tappinginto the ambiguity of Brustle’s criterion of a human embryo as one that is“[c]apable of commencing the process of development of a human being,”ISCC pointed out, first, that there exist two interpretations, and second, thatits narrow interpretation is preferable to its broad interpretation.67 AGVillalon and the ECJ did not expressly conduct such a comparison. But AGVillalon impliedly endorsed ISCC’s logic and argument for the narrowinterpretation by redefining “human embryo” as necessarily containing the“inherent capacity” of developing into a human being.68 The ECJ did thesame by following the AG’s opinion. By refusing to strictly adhere to thedefinition in Brustle, and by implicitly assessing two interpretations, the ECJbalanced the rights to intellectual property and to conduct research withrespect for human dignity and the right to access inventions.

Recent technological advances may complicate the application of the“inherency” test. Scholars have mentioned, for example, the generation ofhESCs from “non-viable”69 “triploid zygotes”:70 arising in approximately 5%of in-vitro fertilizations (IVF), these contain an extra set of haploidchromosomes of which prevent them from developing to term.71 Anotherexample would be the patentability of blastocysts created by abnormalnuclear transfer, which cannot be implanted into the uterus but are capable

public interest (constitutional law), or between a private interest and a state or public interest(administrative law). This principle originated in continental (in particular German)administrative law, but is also connected to the new wave of (liberal) constitutionalism that hasspread worldwide since the Second World War. Tor-Inge Harbo, The Function of theProportionality Principle in EU Law, 16 EUROPEAN L. J. 158, 158 (2010).

65. See Koch, supra note 61, at 18.66. See, e.g., id. at 38; Anita Frohlich, The European Union as a Mixed Legal System,

COMPARELEX (June 5, 2014), https://comparelex.org/2014/06/05/the-european-union-as-a-mixed-legal-sytem/.

67. Case C-34/10, Oliver Brustle v. Greenpeace e.V., 2011 E.C.R. I-09821 (Oct. 18, 2011).68. See Opinion of Advocate General Villalon, Case C-364/13, Int’l Stem Cell Corp. v.

Comptroller Gen. of Patents, Designs, and Trade Marks, EU:C:2014:2014 (Dec. 18, 2014).69. “Viability” refers to the potential to develop through gestation to birth.70. Organisms whose cells contain a distinct membrane-bound nucleus, and are formed by

fertilization between two gametes and containing three homologous sets of chromosomes.71. Gerard Porter, Chris Denning, Aurora Plomer, John Sinden & Paul Torremans, The

Patentability of Human Embryonic Stem Cells in Europe, 24 NATURE BIOTECHNOLOGY 653, 655(2006).




of generating customized embryonic stem cells.72 One further examplewould be hESCs created by using a discarded IVF supernumerary, which is afertilized egg.73

How would the ECJ apply the “inherency” test to unexamined or newbiotech inventions? Where fertilized cells, such as non-viable triploidzygotes and blastocysts are involved, the European Patent Office and theECJ would need to consider whether viability is a necessary condition forthe cells to be classified as an “embryo.” This leads to two options: Eitherviability is a necessary condition for the inherency test, or it is not. Givencurrent scientific development—neither non-viable triploid zygotes norblastocysts created by abnormal nuclear transfer can develop into humanbeings—the ECJ would likely consider viability to be a necessary conditionfor the “inherency” test. Thus, it would likely consider hESCs derived fromboth types of cells to be patentable. The ECJ could also achieve this resultby assessing and balancing the rights of different parties: because thefertilized cells cannot develop into human beings and therefore cannot besaid to have human dignity, the right to claim property in hESCs derivedfrom these new inventions would win the balance of these rights.

What about the use of a discarded IVF (in vitro-fertilized)supernumerary—a fertilized egg—to create hESCs?74 Because this methodinvolves a viable fertilized egg, which would pass the inherency test, hESCscreated through this method should not be patentable. Yet a furthercomplication may occur because among these fertilized eggs, or pre-embryos that are in deep freeze, some of the post-thaw pre-embryos may bedeemed “unviable” and thus lacking the inherent capacity of developing intoa human being.75 The ECJ may then consider the interests of various partiesand adjust the balance as it applies the law to different scenarios.

IV. Conclusion

This article has explained how legal globalization provides a framework tounderstand the ECJ ruling in ISCC. America’s laws and policies on hESCresearch and patents may have had some impact on the ECJ decision, animpact that went hand in hand with the Court’s activist role in its promotionof human rights in the EU. In the future, the ECJ may need to apply the“inherency” test to unexamined or new biotech inventions. It would likely

72. Id. Blastocysts are structures formed in the early development of mammals. They possessan inner cell mass that subsequently becomes the embryo.

73. E.g., Anna Nordberg & Timo Minssen, A “Ray of Hope” for European Stem Cell Patents or“Out of the Smog into the Fog”? An Analysis of Recent European Case Law and How It Compares to theUS, 47 INT’L REV. INTELL. PROP. AND COMPETITION L. 138, 138 n. 24 (2016).

74. E.g., Stem Cell Research, UNIV. OF MICH., http://www.stemcellresearch.umich.edu/overview/faq.html (last visited Oct. 7, 2016).

75. E.g., Embryo & Blastocyst Grading: Which to Transfer, Which to Discard, SHER FERTILITY,http://haveababy.com/fertility-information/ivf-authority/embryo-blastocyst-grading-which-to-transfer-which-to-discard (last visited Oct. 7, 2016).




adopt a mixed, creative approach towards these inventions, which may revealthe influences of common law influences upon civil law traditions in the eraof globalization.



Tax Avoidance, Revenue Starvation and the Ageof the Multinational Corporation

SARA DILLON*

I. Corporations, States and Global Revenue Starvation

A. THE CONTEXT FOR CORPORATE TAX AVOIDANCE AND

NATIONAL AUSTERITY PROGRAMS

There can be no doubt about the fact that wealthy individuals and largecorporations are feverishly, and routinely, engaged in an “offshore” quest toavoid the obligation to pay national taxes.1 An entire industry has grown upto serve this desire to avoid paying taxes.2 The fears of a suspicious globalpublic have been confirmed by the “LuxLeaks” and the Panama Papers, twocontrasting but related windows on the elaborate devices whereby largecorporations and wealthy individuals hide their assets and avoid the paymentof taxes.3 It should be noted, however, that these disclosures only confirmed

* Sara Dillon is professor of law at Suffolk University Law School, where she is also directorof international programs and co director of the international law concentration. She waspreviously a member of the law faculty at University College Dublin for seven years. ProfessorDillon has her law degree from Columbia University Law School and a Ph.D. in Japanesestudies from Stanford University. She teaches and writes in the areas of public internationallaw, international trade regulation, international children’s rights and European Union Law.

1. See Broken at the Top: How America’s Dysfunctional Tax System Costs Billions in Corporate TaxDodging, OXFAM AMERICA (Apr. 14, 2016), https://www.oxfamamerica.org/static/media/files/Broken_at_the_Top_FINAL_EMBARGOED_4.12.2016.pdf (“Tax dodging by multinationalcorporations costs the US approximately $111 billion each year. . . . The same tacticscorporations use to dodge US tax sap an estimated $100 billion every year from poor countries,preventing crucial investments in education, healthcare, infrastructure and other forms ofpoverty reduction.”).

2. See Stephen Long, Corporate Tax Minimization Costs Government $US1 Trillion SaysAccounting Insider, SHANGHAI DAILY (July 11, 2016, 2:56 PM), http://www.shanghaidaily.com/AustraliaPlus/Corporate-tax-minimisation-costs-governments-US1-trillion-says-insider/shdaily.shtml (quoting international accounting expert George Rozvany, as saying that themajor accounting firms are “masterminds of international tax avoidance” and must be broken upinto smaller companies). Rozvany also notes that these firms work with national governmentsto deliver results for the largest corporations. Id.

3. Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption, INT’LCONSORTIUM OF INVESTIGATIVE JOURNALISTS (Apr. 3, 2016), https://panamapapers.icij.org/20160403-panama-papers-global-overview.html (describing the “Panama Papers” as a “cache of11.5 million records [that] shows how a global industry of law firms and big banks sells financialsecrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sportsstars”); see also Simon Bowers, Luxembourg Tax Files: How Tiny State Rubber-Stamped TaxAvoidance on an Industrial Scale, THE GUARDIAN (Nov. 5, 2014), https://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale (noting that




what was already well understood: Tax avoidance by large corporations iswell-established, standard practice, and the global public has waited in vainfor effective steps to be taken to bring it to an end. The fact of tax evasion isold news; the lack of adequate regulatory action is the story of interest.

Tax avoidance is accomplished through the manipulative attribution orallocation of corporate profits to a low or no tax jurisdiction, instead of thehigher tax jurisdiction to which—under a more rigorously accurateregime—these profits “should” rightly be attributed. In this sense,corporations and their tax accountants have been permitted to draw andredraw geographical boundaries in order to shield more corporate profitfrom the tax collector. While the mechanisms of profit allocation arecomplex, proper and more accurate allocation is both possible andachievable. What prevents a reorientation of corporate profits is not thedaunting complexity of the problem, but the discretion granted bygovernments to corporations—implicitly or explicitly—to determine theirown tax obligations through the operation of geographical fictions.4

For wealthy individuals and large corporations, the payment of full oreven reasonable taxes has become a relic of the past. Globalization andautomation have together facilitated tax avoidance strategies of the mostaudacious kind.5 While wealthy individuals are as keen to avoid taxes asmultinational corporations, this article will focus on corporations inparticular, and the degree to which the very idea of a mandatory corporateobligation to contribute to the public good has disappeared. Thus, theimportant question is not how corporations are achieving radical taxavoidance (the devices and mechanisms have been fully described elsewhere),nor why they are (obvious to all), but rather why governments have taken sofew effective steps to stop these practices.6 A striking fact is that knowledge

“340 companies from around the world arranged specially-designed corporate structures withthe Luxembourg authorities,” and that the deals that slashed tax bills were “signed off by theGrand Duchy and are perfectly legal”).

4. Michael Motala, The New Global Politics of Sovereign International Tax: Space, Time and WhyBEPS Is Not the Final Frontier, ACADEMIA (2016), https://www.academia.edu/23971258/The_New_Global_Politics_of_sovereign_international_tax_space_time_and_why_BEPS_is_not_the_final_frontier (describing the recent shift in thinking about multinational corporations andtheir relationship to particular nations for purposes of assessing tax liability. Also, noting that“the spatial concept of the sovereign state has led to the legal deconstruction of MNEs intofictive national units, facilitating tax arbitrage and avoidance through intra-party exchange thatis real and virtual”).

5. See Wolfgang Schauble, Here’s the Fix to International Chaos: A Global Tax System, WASH.POST (Nov. 3, 2014), https://www.washingtonpost.com/posteverything/wp/2014/11/03/outdated-tax-policies-are-hurting-nations-budgets-we-need-a-global-approach-to-corporate-taxation/ (noting that due to the growing pace and intensity of globalization and digitization,international businesses have adapted their structures to work around outmodes tax laws, andthat existing tax-allocation laws date back a hundred years).

6. See, e.g., Aurore Chardonnet, Luxleaks and Tax Avoidance at EU level: Talk less, Act more,EURACTIV (Nov. 5, 2015), http://www.euractiv.com/section/eu-priorities-2020/opinion/luxleaks-and-tax-avoidance-at-eu-level-talk-less-act-more; Press Release, Oxfam International, EUAnti-tax Avoidance package will fail to end the era of tax havens, warns Oxfam (Jan. 28, 2016),



2017] TAX AVOIDANCE 277

alone has not led to the creation of remedies. Since national governmentshave shown themselves to be reluctant to police such tax avoiding behavior,unenforceable “information sharing” programs, automatic or otherwise, maynot have any appreciable effect.7

Many studies on the subject of tax avoidance have parsed the details ofcorporate tax behavior so minutely that the fact of governmental non-response has often been passed over. Reasonable people might differ as towhat categories of corporate profit should be included for taxation purposeswithin any given jurisdiction. But the overarching, pervasive problem is thatwe now have a culture of tax avoidance under which corporate tax lawyersand tax planners simply choose a method of tax avoidance to suit themselves,familiarly known as “aggressive tax planning.”8 Whether the U.S. publicloses out today and the Nigerian, Russian or Argentine public loses outtomorrow, all global citizens are losing out in the most fundamental waywhen it comes to necessary public investments.9 It is not surprising that anew term has arisen to indicate the low and/or no-tax phenomenon: “taxabuse.”10

available at https://www.oxfam.org/en/pressroom/reactions/eu-anti-tax-avoidance-package-will-fail-end-era-tax-havens-warns-oxfam.

7. See Press Release, Organisation for Economic Co-operation and Development (OECD),OECD Releases Full Version of Global Standard for Automatic Exchange of Information (July21, 2014), available at http://www.oecd.org/newsroom/oecd-releases-full-version-of-global-standard-for-automatic-exchange-of-information.htm (announcing “an important step towardsgreater transparency and putting an end to making secrecy in tax matters . . .”).

8. Aggressive tax planning is a term used by the OECD to indicate devices used by taxplanners to save large amounts of otherwise payable tax. See PETER BICKERS, TRACEY LLOYD,BHASKARAN NAIR & MICHAEL SLYUZBERG, INLAND REVENUE, NEW ZEALAND, DEMAND FOR

AGGRESSIVE TAX PLANNING, 95-112 (2013), available at https://www.irs.gov/pub/irs-soi/13rescontaxplanning.pdf. The authors note:

[a]n ATP scheme is generally understood to mean any scheme where the purpose orbenefit of the scheme appears to be the reduction of taxable income or inflation ofdeductible expenditure, and the tax advantage sought is not clearly sanctioned bythe tax laws. In other words, ATP involves those schemes that may follow the letterof the law but not its sprit.

Id.; see also Henrik Meldgaard et. al., Study on Structures of Aggressive Tax Planning and Indicators,Final Report 3-165 (European Comm’n Working Paper No. 61-2015, 2015).

9. See INDEP. COMM’N FOR THE REFORM OF INT’L CORP. TAXATION, DECLARATION OF

THE INDEPENDENT COMMISSION FOR THE REFORM OF INTERNATIONAL CORPORATE

TAXATION, 1-16 (2015), available at http://www.un.org/esa/ffd/wp-content/uploads/sites/2/2015/03/ICRICT_FINAL.pdf. The Commission notes in their Statement of Principles that“[t]ax abuse by multinational corporations increases the tax burden on other taxpayers, violatesthe corporations’ civic obligations, robes developed and developing countries of criticalresources to fight poverty and fund public services, exacerbates income inequality, and increasesdeveloping country reliance on foreign assistance.” Id. at 1.

10. The term “tax abuses” was famously used in a report by the International Bar Associationin 2013. See INTERNATIONAL BAR ASSOCIATION, TAX ABUSES, POVERTY AND HUMAN RIGHTS

1-268, 1 (Oct. 2013), available at http://www.ibanet.org/Article/Detail.aspx?ArticleUid=4A0CF930-A0D1-4784-8D09-F588DCDDFEA4. The International Bar Association questioned“why tax abuses [are] becoming so important” and suggested that this is because of “the




In virtually all contemporary societies, as has been made clear mostrecently by the Panama Papers revelations, corporate elites have developedelaborate global mechanisms to avoid paying taxes into public coffers.11

Detailed and technical discussions about the proper national “ownership” ofparticular tax revenues is a second-level consideration. What must first betackled is the seemingly entrenched notion that large corporations have aright, as corporations, to avoid as much taxation as they possibly can. Nodegree of audacity in the behavior of corporate tax planners and no degree ofpublic outrage seems to have had much effect in dislodging this idea. It isthis conception of corporate tax impunity that needs to change—the precisescope of governmental taxing power in any given situation can be dealt withas particular situations arise.

As mentioned above, recent revelations have shown in the most dramaticway that large corporations are engaged in a radical version of tax avoidance,and despite lip service to the contrary, national governments seem equallydetermined to assist corporations in this quest.12 Many of even the largestcorporations pay little or no taxes anywhere, certainly nothing like theamounts they would pay if states assessed and collected corporate taxes in astraightforward manner, based more accurately on where profits arederived.13 Corporate tax avoidance, reliant on what national tax laws allow,is a phenomenon with no public benefit.14 Such avoidance advantages onlythe corporations concerned. The fact that national governments have taken

immense magnitude of the issue.” Id. The IBA continues, stating that “the best estimates tellus that tax abuses are the most significant illicit financial flow out of the developing world,eclipsing the amount of official development aid that is invested in those countries”). Id. at 1.

11. There are many tax havens, offering almost countless opportunities to the very wealthyand to large corporations to avoid paying legitimate taxes in jurisdictions where they reside andoperate. See, e.g., Lucy Clarke-Billings, Panama Papers: Top Ten Tax Havens—Where the Money IsHidden, NEWSWEEK (Apr. 6, 2016, 10:34 AM), http://www.newsweek.com/panama-papers-top-ten-tax-havens-where-money-hidden-444512.

12. See Allison Christians, Drawing the Boundaries of Tax Justice, in THE QUEST FOR TAX

REFORM CONTINUES: THE ROYAL COMMISSION ON TAXATION FIFTY YEARS LATER 53-79(Kim Brooks ed., 2013), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2230668. (“The story of our time may be the awakening of society to an epidemic of global taxdodging by the world’s elites.”). The author goes on to state:

[c]itizens, watchdog groups, and even government officials are puzzled, frustratedand even outraged by the phenomenon, wondering where the nation state lost itsway in regulating its people and its resources, and why it is standing by, apparentlyhelplessly, as its tax base erodes even as fiscal turmoil drives societies towardausterity and the erosion of the welfare state.

Id. at 53.13. See Jasmine M. Fisher, Fairer Shores: Tax Havens, Tax Avoidance, and Corporate Social

Responsibility, 94 B.U. L. REV. 337, 342 (2014) (“[G]overnments face enormous difficulty taxingMNCs in a global market characterized by cross-border activity and involving intangible assetsand transfers accomplished at the push of a button.”).

14. See JOSEPH E. STIGLITZ, REFORMING TAXATION TO PROMOTE GROWTH AND EQUITY 9(May 28, 2014), available at http://rooseveltinstitute.org/reforming-taxation-promote-growth-and-equity/. Stiglitz observes that:




so long to react to the expanding phenomenon speaks volumes about theinfluence of corporations on national governments everywhere.15 In thelatter days of the Obama administration, which publicly decried corporatetax evasion, Treasury Secretary Lew berated the European Commission forfinally taking a firm stand against European-based, U.S. corporationsattempting to avoid any meaningful taxes.16 Secretary Lew describedEuropean Union (EU) efforts as unfairly aimed at U.S. corporations, and,perversely, a hindrance to U.S. attempts to get U.S. companies to pay theirfair share of taxes.17 If the objective was to find ways to alter corporate tax-avoiding behavior globally, this charge was misleading. Americanintervention on behalf of tax-avoiding, U.S. corporations operating inEurope is a striking example of mixed governmental messages on thissubject, and serves to heighten public confusion and mistrust.18

corporate income taxes have diminished as a major source of revenue, from 39.8percent in 1943 to 9.9 percent in 2012. The reason is not that corporations havecome to play a less important role in our economy, or that corporate profitabilityhas diminished. Rather, it is that corporations have learned how to exploitloopholes in our tax system, have lobbied hard and successfully to increase thoseloopholes, and have especially taken advantage of globalization to move profits tojurisdictions that are lightly taxed.

Id. at 9.15. See Tracy Kaye, The Offshore Shell Game: U.S. Corporate Tax Avoidance Through Profit

Shifting, 18 CHAP. L. REV. 185 (2014). Tracy Kaye points out that “public perception” isbeginning to catch on to the fact that the largest corporations are engaged in systematic taxavoidance and that there is a clear disconnect between where corporations do business andwhere they “locate” their profits for tax purposes. Id. On the other hand, the public hasdepended on news outlets to inform them of what politicians have apparently known for years.Id.

16. See Richard Rubin, US Treasury’s Lew Challenges E.U. on Corporate Tax Investigations, WALL

ST. J. (Feb. 11, 2016, 6:58 AM), http://www.wsj.com/articles/u-s-treasurys-lew-challenges-eu-on-corporate-tax-investigations-1455177782 (noting that Secretary Lew accuses the EU of“adopting an entirely new legal theory and applying it retroactively in a broad and sweepingmanner”); see also Duncan Robinson, Jack Lew Accuses Brussels of Bias Against US Companies, FIN.TIMES (Feb. 11, 2016), https://www.ft.com/content/a12074e0-d0d6-11e5-92a1-c5e23ef99c77.This perspective is especially interesting in light of the fact that certain E.U. member stateshave assisted U.S. companies in avoiding taxation on profits derived in many places. It wouldseem a more sensible approach for U.S. authorities to work with E.U. authorities—assumingthat the United States is sincere in its hope of taxing its multinational companies in a fairer way.In recent days, the U.S. Senate Finance Committee has added its voice to Secretary Lew’s byopposing the European Union’s moves to recoup unfairly evaded taxes. See Letter from U.S.Senate Finance Committee, to The Hon. Jacob Lew, U.S. Secretary of the Treasury, regardingEuropean Union Tax Enforcement (May 23, 2016), available at https://www.finance.senate.gov/imo/media/doc/Hatch,%20Wyden,%20Portman,%20Schumer%20Continue%20Push%20for%20Fairness%20in%20EU%20State%20Aid%20Investigations.pdf.

17. See Foo Yun Chee, U.S. Treasury Asks EU to Reconsider Tax Probes on Companies Such asApple, IRISH INDEP. (Feb. 12, 2016, 2:30 PM), http://www.independent.ie/business/world/us-treasury-asks-eu-to-reconsider-tax-probes-on-companies-such-as-apple-34446481.html.

18. Messages sent by the Obama administration on the subject of American corporatebehavior regarding tax avoidance appear to be in conflict. Compare Simon Bowers & PatrickWintour, Amazon Told: Time Is up for Tax Avoidance: G20 Nations Hail ‘Once in a Century’




Tax avoidance is the most powerful example of corporate dominance ofnational economic policy. In no sense can widespread tax avoidance bycorporations be a matter of indifference to the societies in which thecorporations operate.19 Nor would paying a normal rate of corporate tax beruinous for large corporations. When politicians talk about the supposedbenefits of “tax competition,” they are repeating a theory that lackssubstance, perhaps to present the public with an apparently reasonable basisfor inaction, implying that serving corporate needs aligns with the “national”interest.20

Many reports have analyzed the issue of corporate tax avoidance from aspecialist perspective. The modes and devices used by corporations and theiraccountants have been well explained in numerous outlets.21 This article will

Agreement to Close International Loopholes, THE GUARDIAN (July 19, 2013, 4:20 PM), https://www.theguardian.com/business/2013/jul/19/oecd-tax-reform-proposals-amazon, with John D.McKinnon, Inversions Require Congressional Action, Lew Says: Treasury Secretary Says More Mergersto Lower Taxes Are in the Works, WALL ST. J. (Sept. 8, 2014, 6:47 PM), http://www.wsj.com/articles/lew-imperative-for-congress-to-solve-inversions-problem-1410181113. Although theissues of corporate inversions and EU member nations’ tax avoidance vehicles are not exactlythe same, it makes little sense for Secretary Lew to denounce inversions as unfair tax avoidancestrategies, while castigating the EU for cracking down on tax avoidance strategies by the similarmultinational companies. The Obama administration has shown no comprehensive or cohesivesense of the problem and how to deal with it effectively.

19. See James S. Henry, The Price of Offshore Revisited, New Estimates for “Missing” GlobalPrivate Wealth, Income, Inequality and Lost Taxes, TAX JUSTICE NETWORK (July 2012), https://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf. Henry notesthat:

Since the 1970s, with eager . . . assistance from the international private bankingindustry, it appears that private elites in this subgroup of 139 countries hadaccumulated $7.3 to $9.3 trillion of unrecorded offshore wealth in 2010,conservatively estimated, even while many of their public sectors were borrowingthemselves into bankruptcy, enduing agonizing “structural adjustment,” and lowgrowth, and holding fire sales of public assets.

Id. at 5. See also Steven A. Bank, The Globalization of Corporate Tax Reform, 40 PEPP. L. REV.1307, 1310 (2013), (noting that some commentators believe that corporate tax is now essentially“optional” for multinational corporations).

20. See e.g., Syed Kamall, Tax Competition Works for Europe, WALL ST. J. (Nov. 20, 2014, 2:27PM), http://www.wsj.com/articles/tax-competition-works-for-europe-1416511643 (arguingthat proposals to harmonize European tax rates will drag down the EU). Kamall, a member ofthe European Parliament, believes that tax competition drives down overall rates andencourages inward investment. Id. He does not address the problem of the many corporationsthat do not pay taxes anywhere, due to the elaborate avoidance mechanisms made legallyavailable to them by corporation-friendly jurisdictions like Ireland, Luxembourg and theNetherlands. Id.

21. See CHRISTOPHER NEEDHAM, CORPORATE TAX AVOIDANCE BY MULTINATIONAL FIRMS

(2013), available at http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2013/130574/LDM_BRI(2013)130574_REV1_EN.pdf (providing background on the methods usedby multinational corporations to avoid paying high taxes within the Eurozone); see generallyAlexia Campbell, The Cost of Corporate Tax Avoidance, ATLANTIC (Apr. 14, 2016), https://www.theatlantic.com/business/archive/2016/04/corporate-tax-avoidance/478293/ (describingprocess by which many American companies avoid paying higher U.S. taxes, particularly with




confront the problem of governments deeply reluctant to interfere with therunaway train of global tax avoidance—by wealthy individuals and inparticular by multinational corporations.22 Not only have nationalgovernments lost control over the tax revenues due to them; they have alsoapparently lost the will to reverse course and assert the dominance of thestate over corporations.23 This article will move beyond the mechanisms bywhich taxes are routinely avoided and evaded, to confront the politicalclimate that sees this as the normal or at least tolerable behavior of thelargest corporations. In this sense, tax avoidance is a symptom ofglobalization gone wrong. It is an indicator of bad governance enabled byglobalization, as opposed to “immoral” corporate behavior. Sold to thepublic as a means to spread prosperity across the globe, globalization hasinstead provided cover to increasingly corporate-determined efforts to avoidcontributions to the common good.

This article first discusses the fundamental nature of taxation, and why itis necessary to the successful functioning of the state. It notes that in theabsence of explicit laws against tax avoidance, multinational corporations andtheir accountants have taken advantage of globalization and technologicaldevelopments to decouple corporate profits from the jurisdictions in whichthese are generated. Most forms of contemporary tax avoidance are basedon manipulative misallocations or misattributions of corporate profits towhatever jurisdiction offers the corporation the best possible tax “deal.”Corporations no longer consider themselves bound to pay taxes to the statesin which their profits are actually derived. This has led to a “new normal”where multinationals have come to consider corporate tax as “optional,” and

regard to offshore tax havens); Vanessa Barford & Gerry Holt, Google, Amazon, Starbucks: TheRise of ‘Tax Shaming,’ BBC (May 21, 2013), http://www.bbc.com/news/magazine-20560359(outlining methods used by popular multinational companies to avoid paying UK taxes); HilaryOsborne, How the Wealthy Avoid Paying Tax, THE GUARDIAN (Apr. 24, 2012, 7:32 AM), https://www.theguardian.com/money/2012/apr/24/how-avoid-paying-tax-maximise-income (providingbackground information on the methods used by high net worth individuals to avoid payinghigh tax bills). A primary component of tax avoidance for wealthy individuals includes theformation of a corporation in a jurisdiction with low, or in some cases no corporate tax. Id.

22. Both wealthy individuals and corporations with transnational reach have increasinglyavailed of tax schemes that have created an environment of “tax optional” for those with accessto the proper advice. See generally, Chuck Collins, The Panama Papers Expose the Hidden Wealthof the World’s Super-Rich, NATION (Apr. 5, 2016), https://www.thenation.com/article/panama-papers-expose-the-hidden-wealth-of-the-worlds-super-rich/. Collins notes:

For $2,500, an individual can now purchase the “Complete Offshore Package” thatincludes an offshore corporation in Belize, an offshore trust in the Bahamas, andoffshore bank account at the Global Bank of Commerce in Antigua, and mailforwarding for one year. After the set-up, this will only cost $1,000 a year.

Id.23. See Richard Brooks, You Think the Government Is Fighting Tax Avoidance? Think Again, THE

GUARDIAN (Mar. 17, 2013), https://www.theguardian.com/commentisfree/2013/mar/17/osborne-new-rules-tax-avoidance-dodge.




in many cases not to pay any tax at all on corporate profits, and at most verylittle.

In this, friendly governments in all parts of the world have assistedcorporations. The explosion of the “offshore” approach to corporate tax,made clear to the global public with recent revelations, is juxtaposed withthe failure of governments to bring this state of affairs to an end. The articledescribes the recent “LuxLeaks” revelations in Europe, and theextraordinary extent to which certain EU member states have come to beidentified with helping multinational corporations to avoid paying taxes. Inthe case of Luxembourg, the government was shown to be actively workingwith large companies to guarantee them low levels of taxation in the form ofspecial agreements. Other popular tax avoidance strategies, such as the“inversions” much discussed in recent months in the United States, are alsodiscussed.

The next section of the article discusses where fundamental reform mightcome from, given the anger and frustration of the global public followingfrom revelations of corporate tax avoidance, and examines initiativesemanating from the Organisation for Economic Co-operation andDevelopment (OECD), the European Union, and the United States. Itexplores the distinct but inter-related approaches taken at these differentlevels—international, regional and national—and considers the question ofwhether there exists adequate political will to confront the massive loss ofgovernment revenue attributable to corporate tax avoidance. Finally, thearticle highlights the recent declarations and recommendations of the“Independent Commission for the Reform of International CorporateTaxation” created through the joint action of several non-governmentalorganizations. The argument is made that while the IndependentCommission’s recommendations are clear and resounding, it remains to beseen whether such a group can exert sufficient influence to change what hasbecome an entrenched status quo. The article throughout notes thepowerful corporate interests determined to resist attempts to realigncorporate profits with the particular jurisdictions in which they are earned.It leaves open the question of whether laws at the international, regional, ornational level can re-establish the obligation of corporations to contribute tothe public good within those jurisdictions.

B. THE INDISPENSABLE THREE LETTER WORD

It is obvious that public goods cannot be sustained without funding.24

Taxation is an ancient practice, upon which the overall mechanisms of

24. See TROELS BOERRILD, MATTI KOHONEN & RADHIKA SARIN, GETTING TO GOOD—TOWARDS RESPONSIBLE CORPORATE TAX BEHAVIOR 9 (2015), available at https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/dp-getting-to-good-corporate-tax-171115-en.pdf (“Governments need sufficient and sustainable revenues from taxation to fund essentialpublic services for their citizens, including healthcare and education, and to pay for the publicinfrastructure needed to raise living standards, increase gender equality and build well-




government have been made possible.25 In modern times, human rights-based doctrines similarly depend upon the availability of revenue sufficientto the completion of core governmental tasks.26 The very idea of “humanrights” is not viable without adequate public revenue streams. The tragedyof governmental capture by corporate interests is that funds are divertedfrom their intended purposes and put to socially wasteful uses that serveuniquely private, rather than more general needs.27 Theoretical rights tohuman development, including the right to education, are essentiallymeaningless in the absence of funding to bring these goals about. Whilepolitical conservatives might reject any emphasis on the public orgovernmental role in successful socio-economic outcomes, individuals ontheir own lack the capacity to bring about collective goals. In modern times,it is the state that represents the principal structures of social and politicalorganization; if any doubt the necessity of a fully functioning nation state,they only have to consider the spectacle of collapsed states, in the MiddleEast and elsewhere, to appreciate the state’s essential role.28

At many levels and across a wide geographical and subject matter range,human society is experiencing revenue starvation.29 Even in well-developedand resource-rich countries, one hears repeatedly that there is insufficient

functioning economies.”); RICHARD MURPHY & JOHN CHRISTENSEN, TAX US IF YOU CAN 9(2015), available at http://www.taxjustice.net/cms/upload/pdf/TUIYC_2012_FINAL.pdf(“[T]ax justice matters because a modern economy requires that the state has sufficient revenueover time to fund the physical and social infrastructure essential to economic welfare.”).

25. See STEPHEN SMITH, TAXATION: A VERY SHORT INTRODUCTION 5-10 (2015) (outliningthe ancient historical roots of taxation as a core aspect of social and political organization).

26. See generally GABRIEL ZUCMAN, THE HIDDEN WEALTH OF NATIONS: THE SCOURGE OF

TAX HAVENS (2015) (providing a general outline of the recent rise of tax havens and the overallpernicious effects). Writing in the book’s foreword, Thomas Piketty writes that “[t]ax havensand their financial opacity are one of the key driving forces behind rising wealth inequality, aswell as a major threat to our democratic societies.” Id.

27. See James Thuo Gathii, Defining the Relationship Between Human Rights and Corruption, 31U. PENN. J. INT’L L. 125, 174 (2009) (discussing the overall adverse effects of officialcorruption). The author notes that:

corruption often depletes resources that would otherwise go to fund access toadequate healthcare facilities, equipment, supplies and personnel as well as to theunderlying determinants of good health including food, housing and safe potablewater. Thus, corruption undermines the ability of governments not merely to meettheir citizens’ wants and needs, but rather their social and economic rights.

Id.28. The notion of the “failed state” is often attributed to an article by Gerald B. Helman and

Steven R. Ratner. See Gerald B. Helman & Steven R. Ratner, Saving Failed States, 89 FOREIGN

POL’Y 3 (1992); see generally John Yoo, Fixing Failed States, 99 CAL. L. REV. 95 (2011) (providingan analysis of the challenge posed to the international community by the “failed state”).

29. See Yariv Brauner, What the BEPS? 16 FLA. TAX REV. 55, 64 (2014) (“The legal frameworkand the lack of coordination among countries further permitted these MNEs . . . to avoid someof the regulatory power imposed by countries, including their taxpaying obligations. Theinternational tax regime has proven incapable of stopping them . . . . Consequently, countries ingeneral face a revenue crisis.”).




funding for any number of worthy public goals; the development oftransport networks; abatement of various forms of pollution; the provision ofaffordable housing; expansion of educational institutions and correspondingtuition support—the list is a lengthy one. The idea that we live in a time ofausterity has been accepted as a truism, and even the prosperous states ofEurope have become unlikely advocates for a drastic rollback of publicspending.30

At the same time, there is an endless stream of expert commentary to theeffect that global society is becoming ever more unequal, with a smallnumber of hyper-rich controlling record percentages of overall wealth.31

Thomas Piketty’s recent bestselling book added academic rigor to thepopular perception that basic goods and services are increasingly out ofreach of working people in many societies, even those in the developedworld.32 There are now large populations of poor and working poor in eventhe wealthiest states.33 The post-World War II social compact, with itsexpectation of intergenerational progress, is crumbling.34 Under currentpolitical structures, simply to know this (in the sense of general awareness)does not lead to institutionalized improvement or change. Legislation thatfavors both the working and middle classes is increasingly difficult toachieve, while legislatures respond readily to the wishes of the so-called “onepercent.”35 The audacity of the hyper-wealthy is a manifestation of the

30. See Nektaria Stamouli, Stelios Bouras & Gabriele Steinhauser, Greece’s Parliament PassesAusterity Measures Required for Bailout, WALL ST. J. (July 15, 2015, 9:17 PM), http://www.wsj.com/articles/greeces-parliament-passes-austerity-measures-required-for-bailout-1437002734(describing the interaction of Greek political responses and the demands of the EuropeanCentral Bank).

31. See OXFAM INT’L, PULLING THE PLUG: HOW TO STOP CORPORATE TAX DODGING IN

EUROPE AND BEYOND 1 (2013) (“In a world where 80 people own as much wealth as thepoorest half of the global population, the recognition that growing inequality is a threat foreveryone is slowly starting to emerge.”).

32. THOMAS PIKETTY, CAPITAL IN THE TWENTY-FIRST CENTURY (2013); see also THOMAS

PIKETTY, THE ECONOMICS OF INEQUALITY (2015).33. See Stephanie Wagner, Big Box Living Wage Ordinances: Upholding Our Constitutive

Commitment to a Remunerative Job, 15 GEO. J. POVERTY L. AND POL’Y 359 (2008) (providing ahistory of the “living wage” movement).

34. See Thomas Kochan, Wages and the Social Contract, AMERICAN PROSPECT (Apr. 27, 2007),http://prospect.org/article/wages-and-social-contract. Kochan writes that:

From the end of World War II through the mid-1970s, the real wages of Americanworkers nearly doubled, moving up in tandem with the growth in productivity. TheUnited States benefited from an implicit social contract: by working hard andcontributing to productivity, profits and economic growth, workers and theirfamilies could expect improved living standards, greater job security, and a secureand dignified retirement. This social contract broke down after 1980, as employeeslost their bargaining power.

Id.35. See Who Exactly Are the 1%?, ECONOMIST (Jan. 21, 2012), http://www.economist.com/

node/21543178 (“[T]he average household income of the 1% was $1.2m in 2008.”). The article




increasingly entrenched domination of corporate interests over most aspectsof policy-making, across a variety of nations.36

While the main subject matter of this article is focused on tax avoidanceby corporations, it is imperative that we see such corporate maneuvers aspart of a larger historical trend—a trend in which law and policy areincreasingly controlled and drafted according to the interests of the largestcorporations. It should be noted that, as the CEOs of tax-avoidingcorporations say, most elaborate corporate stratagems aimed at cutting taxbills are “perfectly legal.”37 This reality, legal but socially detrimental,arguably obtains in such other (non-tax) areas as global trade regulation,other regulatory policy, including environmental rules, social policies such aspensions, labor rights and so forth. To a startling degree, the decades sincethe 1980s, in particular, have seen a sharp rise in the power of corporationsin influencing legal outcomes and defining the sphere of what ispermissible.38 At the heart of this evolution is the fact that most largecorporations no longer pay significant taxes on profits earned.39 Overseveral decades, corporate obligations to workers have thinned out, andobligations to the societies in which corporations operate have similarly

also mentions that the 1%, when “measured by net worth, rather than income, the top . . .started at $6.9m in 2009.” Id.

36. See Lee Drutman, How Corporate Lobbyists Conquered American Democracy, THE ATLANTIC

(Apr. 20, 2015), http://www.theatlantic.com/business/archive/2015/04/how-corporate-lobbyists-conquered-american-democracy/390822/ (noting that powerful businesses have moreinfluence over government than at any time since the Gilded Age).

37. See ZUCMAN, supra note 26, at 102 (“[M]ultinational groups, advised by great auditing andconsulting firms, are in practice free to move their profits wherever they want, which is usuallywherever it is taxed the least; and large countries have themselves mostly given up taxing theprofits booked outside of their territory.”); see also Jim Tankersley, Tim Cook’s Defense of Apple’sTax Strategy, Annotated, WASH. POST (Aug. 25, 2015), https://www.washingtonpost.com/news/wonk/wp/2016/08/25/tim-cooks-defense-of-apples-tax-strategy-annotated/.

38. See Zaid Jilani, 12 Tax-Dodging Corporations Spent $1 Billion to Influence Washington Over theLast Decade, THINK PROGRESS (Apr. 13, 2011), https://thinkprogress.org/12-tax-dodging-corporations-spent-1-billion-to-influence-washington-over-the-last-decade-f8e25c6659b0#.v28yij7pn (noting in detail that many of the largest corporations in the US,while spending large amount of money to lobby members of Congress, have paid almostnothing in corporate taxes). Indeed, many businesses have received generous rebates andrefunds. Id. Large banks, telecommunication companies, oil and technology companies—manyof which have paid essentially nothing in federal taxes over many years. Id.

39. Many commentators have noted the steep decline in corporate taxes as a proportion ofgovernment revenue over the past decades. See, e.g., JOEL FRIEDMAN, THE DECLINE OF

CORPORATE INCOME TAX REVENUE 4 (2003), available at http://www.cbpp.org/sites/default/files/atoms/files/10-16-03tax.pdf (“[T]he share that corporate tax revenues comprise of totalfederal tax revenues also has collapsed, falling from an average of 28 percent of federal revenuesin the 1950s and 21 percent in the 1960s to an average of about 10 percent since the 1980s.”).This was written in 2003, and the share of government revenue occupied by corporate taxreceipts has fallen significantly since then, with corporate tax avoidance persistently increasing.




attenuated. While this is generally known, the reaction of the political classis ineffective at best.40

This larger context must be central to the discussion, since economicsubject matter is often wrongly treated as of specialized and niche interest.It is perhaps more comforting to discuss human rights and the obligations ofstates to their citizens in isolation, separate from technical economic matters.Generally speaking, there is little intersection between the discourse of thebroader public good and economic analysis. When it comes to legalacademia, these two worlds, economic regulation and human rights, do notfrequently collide. One objective of this article is to contextualize publicdissatisfaction over corporate taxation and to account for the failure of ourglobal system to require meaningful payment of corporate taxes.

A larger purpose of this article is to bring together the widespreadawareness of the tax avoidance/tax evasion epidemic with the issue of effectiveremedies. It has become clear that the problem will never be seriouslyaddressed if it is approached in only a technocratic manner. The issues ofrevenue and its distribution are inherently political, and must be seen assuch. With the right intentions, tax laws can be explained and rewritten in amanner accessible to the public. As is also true of international trade law, taxlaw is too important to be left to tax lawyers.

II. The State of Play in Our Age of Tax Avoidance

A. HOME IS OFFSHORE

It has become increasingly apparent that large, successful, multinationalcorporations do not pay anything like their “fair share” of taxes.41 Indeed,over the past few years, it has become the norm for companies with global

40. It is also significant that U.S. law has not required taxes paid by corporations to be madepublic, thus making it difficult for researchers to determine how much tax is actually being paidby any given corporation. See Joshua D. Blank, Reconsidering Corporate Tax Privacy, 11 N.Y.U. J.L. & BUS. 31 (2014) (describing the evolution of this policy and the difficulties posed by lack oftax transparency). For a concrete example of how corporations manage to avoid detection intheir use of global subsidiaries to avoid taxation, see MARC AUERBACH & FRANK CLEMENTE,THE WALMART WEB: HOW THE WORLD’S BIGGEST CORPORATION SECRETLY USES TAX

HAVENS TO DODGE TAXES 4 (June 2015), available at http://americansfortaxfairness.org/files/TheWalmartWeb-June-2015-FINAL1.pdf, providing such examples as the fact that “althoughWalmart does not have a single store in Luxembourg, it has 22 shell companies there, 20 ofwhich have been established since 2009, and five of which were registered in 2015 alone.” Thesame report explains that “Walmart gives many of its tax haven subsidiaries obscure names like‘Azure Holdings’ or ‘MCLM III,’ which turns the simple task of identifying them into a majorinvestigative effort.” Id. at 1.

41. There are different approaches to the issue of what constitutes a “fair share” of taxes,although by any measure the current situation is rife with distortions. For any attempt toexplore an objectively sound basis for thinking about fair allocation, see Adam H. Rosenweig,Defining a Country’s “Fair Share” of Taxes, 42 FLA. STATE UNIV. L. REV. 373 (2013), setting outa theory of international tax allocation. Zucman points out that fifty-five percent of all theforeign profits of U.S. firms are now kept in tax havens. See ZUCMAN, supra note 26, at 4.




reach to structure their tax affairs in such a way as to essentially decidethemselves how much tax they will or will not pay.42 As mentioned, this iseuphemistically referred to as “tax planning.” Needless to say, no companywill voluntarily pay more than required by law. Corporations even couchthis avoidance as part of their fundamental “obligation” to shareholders.43 It iswidely thought that there is more than twenty trillion dollars in corporateprofits stashed within the intricate drawers of international tax avoidancecenters, with U.S. companies alone parking more than $2.1 trillion in suchjurisdictions.44 Apple, the premier American corporation, holds moremoney offshore than any other.45 Both the least and the most wealthycountries are being deprived of massive amounts of tax that would otherwisebe due from profitable corporations, including those companies that are themost successful, well-known, and highly regarded.46 The relationshipbetween national governments, corporations, and tax professionals hasreached the point where virtually no multinational enterprise feelscompelled, or is legally required, to pay any particular percentage of tax oncorporate profits.47 Indeed, international “tax cooperation” in the form ofbilateral tax treaties is likely to facilitate, rather than deter, an absurdly small

42. See ZUCMAN, supra note 26, at 4. Zucman points out that 55 percent of total foreignprofits of U.S. based firms is “made” in “six low or zero tax countries: the Netherlands,Bermuda, Luxembourg, Ireland, Singapore, and Switzerland.” Id. He goes on to note that“[n]ot much production or sale occurs in the offshore centers; very few workers are employedthere,” and further that “profits appear in Bermuda by sheer accounting manipulations.” Id.

43. For an analysis of this kind of argument, see generally Terry Macalister, Tax Avoidances‘Not a Legal Duty’, THE GUARDIAN (Sept. 8, 2013), https://www.theguardian.com/business/2013/sep/08/tax-avoidance.

44. See Clark Mindock, US Tax Evasion Cases: Apple, GE Among American Companies Holding$2.1 Trillion in Offshore Accounts, INT’L BUS. TIMES (Oct. 6, 2015, 4:07 PM), http://www.ibtimes.com/us-tax-evasion-cases-apple-ge-among-american-companies-holding-21-trillion-offshore-2129580. Quoting recent studies, the article indicates that 72 percent of Fortune 500companies operate subsidiaries in tax haven jurisdictions. Id.

45. See Bad Apple, AMERICANS FOR TAX FAIRNESS, http://www.americansfortaxfairness.org/badapple (last visited Jan. 29, 2017) (pointing out that Apple held $82.6 billion in offshoreprofits in 2012); see also Lee Sheppard, How Does Apple Avoid Taxes, FORBES (May 28, 2013, 7:46PM), http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/#67584106d6f7 (indicating that Apple’s foreign sales earnings are routed through Irishsubsidiaries and literally taxed nowhere).

46. See, e.g., Leslie Wayne, The Global Muckraker: UN Panel: Corporate Tax Avoidance Is Africa’sBiggest Financial Drain, INT’L CONSORTIUM OF INVESTIGATIVE JOURNALISTS (Feb. 10. 2014,10:30 AM), https://www.icij.org/blog/2014/02/un-panel-corporate-tax-avoidance-africas-biggest-financial-drain (“[A]n estimated $50 billion a year seeps out of Africa through illicitcapital outflows, which is twice as much as the amount of foreign aid the continent receives eachyear.”). The article points out that multinational corporations extract resources from Africa,but pay little in taxes. See id.

47. See Tom Bergin, Special Report: How the UK Tax Authority Got Cozy with Big Business,REUTERS (Dec. 27, 2012, 4:29 AM), http://www.reuters.com/article/us-tax-hmrc-idUSBRE8BQ03220121227; SCOTT KLLINGER & KATHERINE MCFATE, THE CORPORATE TAX RATE

DEBATE: LOWER TAXES ON CORPORATE PROFITS NOT LINKED TO JOB CREATION (2013),available at http://www.foreffectivegov.org/sites/default/files/budget/corp-tax-rate-debate.pdf.The authors argue that:




corporate tax burden.48 Cooperative efforts to establish an agreed-uponcorporate tax floor, or to allocate profits in a fact-based way to thejurisdictions where they are actually generated, have so far failed to bear realfruit.49 Indeed, the core problem with tax avoidance is one of allocation, inthat there is no required and internationally accepted method for allocatingprofits among the component parts of a corporate entity, in a manner thatreflects the actual site of corporate profit-generating activity. Whilecomplex, such a method could be devised and enforced with relative ease,given sufficient political will.50 Honest allocation should be the guidingprinciple for international tax reform, whereas manipulative allocation iscurrently the main skill of tax accountants.

No matter what the ideal level of corporate tax might be, majorcorporations are paying abnormally low levels—sometimes as low as nothingat all.51 Elaborate and misleading corporate devices have been created toassist large companies in tax avoidance, and this is well known to all playersin the game, including elected officials.52 In that sense, the technical

the heads of major tax committees in Congress, lobbied heavily by corporate CEOs,have a different idea. They want to trade the revenue gained by closing taxloopholes for a lower overall corporate tax rate on profits . . . [and] lock in lowercorporate tax rates under the guise of “simplifying” the tax code.

Id. at 5. The article argues that the purported justification of wanting these corporations tocreate more jobs is not credible. Id.

48. See PHILLIP BAKER, IMPROPER USE OF TAX TREATIES, TAX AVOIDANCE AND TAX

EVASION (May 2013), available at http://www.un.org/esa/ffd/tax/2013TMTTAN/Paper9A_Baker.pdf.

49. The European Commission continues to put forth its “wish list” for coordinatedEuropean tax reform. See Action Plan on Corporate Taxation, EUR. TAXATION & CUSTOMS

UNION (June 2015), http://ec.europa.eu/taxation_customs/taxation/company_tax/fairer_corporate_taxation/index_en.htm (describing the main elements in the Commission’s planning on thisissue, designed to ensure that European profits are not diverted through a small number of lowtax or no tax jurisdictions within the EU).

50. See Milt Isaacs, Beyond Panama: Making the Fight Against Tax Avoidance More Than a Nameand Shame Game, PUB. FIN. (June 3, 2016), http://www.publicfinanceinternational.org/opinion/2016/06/beyond-panama-making-fight-against-tax-avoidance-more-name-and-shame-game(arguing that the scale of the problem and an outline of a solution are both well known, but thatwhat is lacking is the commitment and political will to bring about fundamental tax fairness).

51. See Cyrus Farivar, If Apple Didn’t Hold $181B Overseas, It Would Owe Apple $59B in USTaxes, ARSTECHNICA (Oct. 7, 2015), http://arstechnica.com/business/2015/10/apple-google-microsoft-hold-more-than-336b-overseas-via-legal-tax-loopholes/ (describing typical devicesthrough which the largest US companies avoid US taxes: big American firms sell or licenseforeign rights for intellectual property developed in the United States to a subsidiary in a low-tax country). All profits derived from that technology are then attributed to the foreignsubsidiary. See id.

52. Congressional hearings on the subject of corporate tax avoidance were held in 2013 togreat fanfare. See Patrick Temple-West & Kevin Drawbaugh, Apple CEO Makes No Apology forCompany’s Tax Strategy, REUTERS (May 22, 2013), http://www.reuters,com/article/us-usa-tax-apple-idUSBRE94JOU320130522. On the contrast between Congressional views and publicexpectations see Richard Philips, The Huge Disconnect Between Congress and the Public on BusinessTax Reform, CITIZENS FOR TAX JUSTICE (Apr. 28, 2016, 10:19 AM.), http://www.taxjusticeblog




murkiness of tax law loopholes and avoidance methodologies is not aimed atdeceiving officials, but rather keeping the full reality from journalists, and byextension the general public; members of which, must pay their own incometaxes on time and in full.53 The largest corporations are understandablydisinclined to pay “real” taxes merely as a result of moral exhortation bypoliticians seeking to tamp down a temporary uptick in popular anger.54 Notsurprisingly, witnessing this futile ritual of blame and justification furtheragitates global electorates, but the nature of these political and financialruses is such that corporations feel little, if any, immediate pressure tochange.55

Without far more public pressure than has been brought to bear so far,politicians are unlikely to rewrite laws aimed at enforcing principles ofgenuine tax fairness. Despite holding hearings and scolding corporateexecutives, politicians themselves are deeply implicated in the game of “taxcompetition” and unwilling to take drastic steps that could disrupt themarket mood.56 This remains the case despite the fact that most modernstates are suffering from the “revenue starvation” described above—acircumstance in which the general public is treated to austerity, and publicgoods experience profound disinvestment. There is an obvious cause andeffect relationship between failure of corporations to pay their fair share oftax, and the budget crises experienced in virtually all countries, large andsmall.57 This article will explore below the main models being proposed for

.org/archive/2016/04/the_huge_disconnect_between_co.php#.V1XE-9krJdg (describing thecontrast between Congressional views and public expectations on tax reform); see also JoeRothstein, The Kochs, the Crooks and the Profitable Business of Not Paying Taxes, EIN NEWS (Aug.3, 2015), http://uspolitics.einnews.com/column/279230025/the-kochs-the-crooks-and-the-profitable-business-of-not-paying-taxes (indicating that new research indicates that there is farmore global wealth being held in offshore havens that was previous thought—up to $32trillion). The article contrasts this sum with the total U.S. budget deficit of $3.8 trillion. See id.

53. A separate, but obviously related, matter is that wealthy individuals also find mechanismsthat allow them to avoid taxation, leading to situations where the very wealthy pay far lessproportionately than those low wage individuals who serve their needs.

54. See Zachary R. Mider, ‘Unpatriotic Loophole’ targeted by Obama Costs $2 Billion, BLOOMBERG

(Dec. 2, 2014), http://www.bloomberg.com/news/atricles/2014-12-02/-unpatriotic-loophole-targeted-by-obama-costs-2-billion.

55. See Sara Dillon, Anglo-Saxon/Celtic/Global: The Tax-Driven Tale of Ireland in the EuropeanUnion, 1 N.C. J. INT’L L. & COMM. REG. 36 (2010) (providing background on Ireland’s specialrelationship to tax avoidance strategies). “Belatedly, the European Union began to considerconcrete steps towards creating uniform standards for calculating corporate taxes throughoutthe EU. As tax has been Ireland’s sole economic strategy for more than fifteen years, Irelandhas understandably continued to fight European tax coordination with determination.” Id. at37-38.

56. See Victor Uckmar, Countering Tax Avoidance at the EU level After “LuxLeaks”; A History ofTax Rulings, Transparency and BEPS: Base Erosion Profit Shifting or Bending European ProspectiveSolutions? 12 DIRITTO E PRATICA TRIBUTARIA INTERNAZIONALE 1035 (2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2737084 (reviewing the legal bases for Europeanattempts to deal with tax avoidance mechanisms promoted by certain EU member states).

57. See Charles Duhigg & David Kocieniewski, How Apple Sidesteps Billions in Taxes, N.Y.TIMES (Apr. 28, 2012), http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-




rigorous corporate tax reform and enforcement, scrutinizing currentinitiatives, however sporadically pursued, at national, regional, andinternational levels.

Just as the public struggles to understand free trade agreements they arepowerless to influence, so too is the general public kept from understandingthe mechanisms of tax avoidance enjoyed by the world’s largest corporations.Periodic revelations of shell companies, tactical inversions, internalcorporate “asset stripping” loans, and similar tax avoidance stratagems haveall failed to slow the growth of these mechanisms.58 It is also clear thatabsent some global political sea change, no national government, and noteven the European Union, is likely to write firmly enforceable, sufficientlyclear laws that run counter to the needs and wishes of multinationalcorporations.59 At the political level, representatives of large corporationsargue that a low or no corporate tax rate is in fact “better” for ordinarypeople because higher rates of taxation would be passed on to theconsumer.60

Few would dispute that national and international financial policy iscurrently directed by the demands of multinational corporations, as designedby their armies of lawyers and accountants. A world in which governmentswrite rules for private parties to follow, based on notions of the commongood or supportive of the middle class, seems quaintly old fashioned fromthe vantage point of 2016. The influence of corporations in thedevelopment of policy renders most political activism futile, as it does notaffect ultimate policy outcomes. While the general public understands thatmultinational corporations behave in ways contrary to the public good, theyare often helpless to exert any influence over this reality.61 Politicians tend

aims-at-low-tax-states-and-nations.html (detailing Apple’s low tax strategy and its relationshipto state budgets); Richard Wolff, The Real Reason for Public Finance Crisis, THE GUARDIAN (Feb.19, 2011), https://www.theguardian.com/commentisfree/cifamerica/2011/feb/19/us-taxation-taxavoidance.

58. For a discussion of the typical devices of tax avoidance, including strategic corporate debtsee JANE G. GRAVELLE, TAX HAVENS: INTERNATIONAL TAX AVOIDANCE AND EVASION

(2015), available at http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=2387&context=key_workplace.

59. See, e.g., Julie Martin, EU Ministers Unable to Agree on Multinational Anti-Tax AvoidanceRules, Compromise Plan Offered, MNE TAX (May 25, 2016), http://mnetax.com/15328-15328.But in recent days, EU Finance Ministers have adopted the “Anti-Avoidance Directive,” raisinghopes that the EU will deal with at least some of the most egregious tax avoidancemethodologies. Discussed infra.

60. See, e.g., Syed Kamall, supra note 20; Andrew Goodall, Ireland Retains Focus on TaxCompetition, ACCOUNTINGWEB (Oct. 15, 2014), http://www.accountingweb.co.uk/business/financial-reporting/ireland-retains-focus-on-tax-competition (describing Irish efforts to“reform” and retain its much-criticized “Double Irish” system).

61. OXFAM, BUSINESS AMONG FRIENDS: WHY CORPORATE TAX DODGERS ARE NOT YET

LOSING SLEEP OVER GLOBAL TAX REFORM (2014), available at https://www.oxfam.org/sites/www.oxfam.org/files/bp185-business-among-friends-corporate-tax-reform-120514-en_0.pdf.




to limit their commentary to vague concepts such as “corporate greed” or“Wall Street recklessness,” as if the main problem were a moral one.62

The manner in which professional schools teach “tax law” in isolationfrom other subjects would appear to contribute to this crisis of revenuestarvation—as mastering the techniques of tax avoidance has come to beseen as a goal of specialized studies in taxation and tax law.63 The task ofunraveling secretive and convoluted tax avoidance vehicles should not be leftto investigators or whistleblowers, who—even with enormous effort—cannot uncover sufficient data on every company engaging in thesepractices.64 Rather, tax avoidance schemes will only cease to be a commonfeature of economic life when states ensure that these secretive practices areexplicitly unlawful, through statutory reform, and appropriate sanctionsbrought to bear.

B. WHAT LUXLEAKS REVEALED TO ALL: HUGE TAX AVOIDANCE

HIDING IN PLAIN SIGHT OF THE “SOCIAL MARKET”

The “LuxLeaks” revelations burst onto the European scene in November2014—the product of dedicated, investigative journalism.65 LuxLeaksprovided concrete evidence of corporate tax evasion on a staggering scale,and demonstrated the key role of government officials in facilitating this taxevasion. Luxembourg entered into “special agreements” for years withmultinational corporations, allowing them to funnel their money throughLuxembourg via accounting devices that slashed overall corporate tax bills,

62. The most strident critic of large corporations, presidential candidate Bernie Sanders, oftenuses the term “corporate greed”—but in more detailed postings, also calls for specific reform ofthe corporate tax code. Contrast Nicole Gaudiano, Bernie Sanders to Wall Street: ‘Greed Is NotGood’, USA TODAY (Jan. 5, 2016), http://www.usatoday.com/story/news/politics/onpolitics/2016/01/05/bernie-sanders-wall-street-clinton/78301532/, with Making the Wealthy, Wall Streetand Large Corporations Pay Their Fair Share, BERNIE SANDERS 2016, https://berniesanders.com/issues/making-the-wealthy-pay-fair-share (last visited Jan. 29, 2017). See generally, AllisonChristians, Avoidance, Evasion and Taxpayer Morality, 44 WASH. U. J. L. & POLICY 39 (2014)(arguing against reliance on soft law ideas from morality to confront the epidemic of corporatetax avoidance).

63. This is true of economic law subjects generally. The author has made similar critiques inthe context of international trade law. See Sara Dillon, Opportunism and Trade Law Revisited: thePseudo-Constitution of the WTO, 54 B.C. L. REV. 1005 (2013).

64. See Leslie Wayne, Kelly Carr, Marina Walker Guevara, Mar Cabra & Michael Hudson,Leaked Documents Expose Global Companies’ Secret Tax Deals in Luxembourg, INT’L CONSORTIUM

OF INVESTIGATIVE JOURNALISTS (Nov. 5, 2014), https://www.icij.org/project/luxembourg-leaks/leaked-documents-expose-global-companies-secret-tax-deals-luxembourg (providingbackground Luxleaks discoveries).

65. See New Documents Have Dragged Disney, Microsoft and Koch Industries into Luxembourg’s TaxAvoidance Scandal, BUS. INSIDER (Dec. 10, 2014), http://www.businessinsider.com/afp-new-luxleaks-release-drags-disney-microsoft-into-tax-scandal-2014-12 (describing how the“Luxleaks” news first broke in November 2014, revealing that “hundreds of the world’s biggestcompanies brokered secret deals with Luxembourg to avoid paying billions of dollars in taxes”).




often to virtually nothing at all.66 Although structured in the form ofindividual “agreements” between the national authorities and corporations,the scale and persistence of this practice made clear that assisting with taxavoidance was a key pillar of Luxembourg’s national policy.67

These special agreements were made by Luxembourg with the mostfamous corporations in the world: Ikea, Disney, Amazon, Pepsi, Deloitte,and others.68 The accounting devices relied on included rules allowing thecompanies to borrow from themselves, with correspondingly generous taxdeductions for the interest on those “loans.”69 As in other such examples oflarge-scale, endemic tax avoidance, the corporations and the government ofLuxembourg quickly pointed out that the arrangements were “perfectlylegal”—in the sense that they did not violate any explicit tax laws of thejurisdiction.70 That was, of course, the problem—the fact that no clear laws(national, European or international)—actually existed to prevent suchunrepentant tax avoidance. Moreover, not only is the government of aLuxembourg deciding what its own companies will pay, it is makingsecretive decisions that affect the lives and well-being of millions of people

66. See Bowers, supra note 3 (“The leaked papers show Luxembourg acting as a go-between,both enabling and masking tax avoidance, which always takes place beyond its borders. Thedocuments are mainly Advance Tax Agreements-known as comfort letters . . . These ATAs aretypically schemes put to the Luxembourg tax authorities which, if implemented, reduce tax billsubstantially.”).

67. See Wayne, supra note 64 (describing the extent to which the Luxembourg authorities wereinvolved with the world’s major accounting firms to provide multinational companies with themechanisms to avoid paying anything like a normal rate of tax).

68. See Alison Fitzgerald & Marina Walker Guevara, New Leak reveals Luxembourg Tax Dealsfor Disney, Koch Brothers Empire, INT’L CONSORTIUM OF INVESTIGATIVE JOURNALISTS (Dec. 9,2014), https://www.icij.org/project/luxembourg-leaks/new-leak-reveals-luxembourg-tax-deals-disney-koch-brothers-empire (detailing the wide array of famous companies caught up in thetax scandal).

69. See Michael Hudson, Sasha Chavkin & Bart Most, Big 4 Audit Firms Play Big Role inOffshore-Murk, INT’L CONSORTIUM OF INVESTIGATIVE JOURNALISTS (Nov. 5, 2014), https://www.icij.org/project/luxembourg-leaks/big-4-audit-firms-play-big-role-offshore-murk(describing how PricewaterhouseCoopers helped multinational companies to obtain as many as548 tax rulings in Luxembourg between 2002 and 2010). It details how companies funneledmany billions of dollars in profits through the Duchy, and in turn saved billions of dollars in taxpayments. Id. The article notes that one “popular address” for Luxembourg-based subsidiariesof multinational companies was home to 1,600 companies. Id.

70. See Teri Sprackland, Antoine Deltour- The Luxleaks Whistleblower, TAX ANALYSTS (Dec. 21,2015), http://www.taxanalysts.org/content/antoine-deltour-luxleaks-whistleblower. The authornotes that:

Many people had to have known about Luxembourg’s secret tax rulings—fromgovernment officials to hundreds of company executives and staff to a battalion oftax lawyers and accountants. Yet only one man, a 24-year-old auditor barely twoyears into his career at PricewaterhouseCoopers LLP, decided that although legal,the private rulings were just plain wrong.

Id.




in other, unrelated jurisdictions, in particular the United States.71 Yetvarious spokespersons have presented this approach as friendly “taxcompetition,” and not the politically unfriendly act it actually is.72

The LuxLeaks scandal broke open during a period when former PrimeMinister Juncker of Luxembourg was being installed as the President of theEuropean Commission, an influential and high-profile role in the EU.73

Not only did many of these deals take place on his watch as leader of theGrand Duchy, but his newly installed European Commission was expectedto take on the vexed and long-running problem of corporate tax evasion andtax avoidance vehicles within the EU.74 While there were calls for hisresignation, nothing came of these demands and he survived a no-confidencevote in the EU’s Parliament.75 At the same time, the drama of EU-imposedausterity in Greece, with ordinary people forced to shoulder the cost ofreckless bank behavior in the run up to the financial crisis of 2009, provideda striking contrast to the sweetheart deals enjoyed by the world’s largestcorporations.76 The Luxembourg tax deals—which often amounted topermission to pay no taxes anywhere—had been conceived of in the

71. James Crisp, Luxembourg ‘Made 172 Secret Tax Deals’ With Companies in Year afterLuxLeaks, EURACTIV (Dec.7, 2016), http://www.euractiv.com/section/euro-finance/news/luxembourg-made-172-secret-tax-deals-with-companies-in-year-after-luxleaks/.

72. Richard Brooks, Havens Like Luxembourg Turn ‘Tax Competition’ into a Global race to theBottom, THE GUARDIAN (Nov. 5, 2014), https://www.theguardian.com/world/2014/nov/05/luxembourg-tax-haven-competition-global-grand-duchy-corporate-law-administration.

73. See James Crisp, Grumpy Juncker: ‘Call it EULeaks, not Luxleaks!’, EURACTIV (Sep. 15,2015), https://www.euractiv.com/section/euro-finance/news/grumpy-juncker-call-it-euleaks-not-luxleaks/; Matthew Holehouse, Jean- Claude Juncker Denies All Involvement in LuxLeaks TaxSystem, TELEGRAPH (Sep. 17, 2015, 6:17 PM), http://www.telegraph.co.uk/news/worldnews/europe/eu/11872853/Jean-Claude-Juncker-denies-all-involvement-in-LuxLeaks-tax-system.html; See Allison Christians, Lux Leaks: Revealing the Law, One Plain Brown Envelope at a Time,76 TAX NOTES INT’L 1, 2 (2014). (“When journalists breach taxpayer confidentiality, as theydid in the LuxLeaks reveal, the public gets a rare glimpse of a tax system so complex that someof its purposes are impossible to understand without extensive expertise or inside politicalknowledge.”); Professor Christians also raises the important question of whether law that isintentionally hidden from the public can actually be termed “law.” Id.

74. This ironic spectacle played out in the European press. See, e.g., Simon Bowers, JeanClaude Juncker Can’t Shake Off Tax Controversy, THE GUARDIAN (Dec. 14, 2014), https://www.theguardian.com/world/2014/dec/14/jean-claude-juncker-luxembourg-tax-deals-controversy.(noting that Juncker’s “own” EU Commission was charged with investigating actions he took asPrime Minister of Luxembourg).

75. See Anne-Claude Martin, Juncker Set to Survive Censure Motion as MEPS Trade Insults,EURACTIV (Jan. 8, 2015), https://www.euractiv.com/section/eu-priorities-2020/news/juncker-set-to-survive-censure-motion-as-meps-trade-insults/; Finbarr Bermingham, EuropeanCommission President Juncker Survives No Confidence Vote Led by Ukip, INT’L BUS. TIMES (Nov.27, 2014), http://www.ibtimes.co.uk/european-commission-president-juncker-survives-no-confidence-vote-led-by-ukip-1476919.

76. See Yannis Baboulins, Luxembourg’s Secret Tax Deals Exacerbate Eurozone Crisis, AL-JAZEERA AM. (Dec. 7, 2014), http://america.aljazeera.com/opinions/2014/12/luxleaks-eurozonecrisisluxembourgjeanclaudejuncker.html.




mundane and technocratic world of bureaucratic efficiency.77 The politicaloutcry was short-lived, and the apparent facilitator if not architect of theinfamous deals, Mr. Juncker, retained his leadership position in theEuropean Commission.78

The sheer scale of the LuxLeaks example again raised questions as towhether even the high-minded EU member states function as accountable“nation states” in a financially globalized world. The LuxLeaks scandalshowed that the Duchy of Luxembourg uniquely focused on providing taxavoidance services, a glaring instance of how far corporate privilege hadgone. The number of such deals rose into the mid-300s, and involvedhundreds of millions of dollars, all in a state of only 500,000 inhabitants.79

As one reviews the information unearthed in this scandal, it seems clear thatalthough Luxembourg was a founding member of the European Union, itsprincipal economic function had become to offer tax avoidance assistance tomultinational corporations—most of them founded outside the EU.80 Thesame accusation could easily be leveled against Ireland, which, though not afounder member, had been a part of the European Economic Community(EEC, later EC) since 1973.81

Clearly, the traditional “nation state” and the legal fiction of “thecorporation” had converged at the very heart of the EU in a manner thatviolated the rights of the working public to progress and development. Andyet, it remains to be seen whether even the EU, a supranational entity withan abundance of ambitious public interest goals, will react with sufficientseriousness.82 A full year after the revelations first broke, it was noted in

77. Matthew Karnitschnig & Robin Van Daalen, Business-Friendly Bureaucrat Helped Build TaxHaven in Luxembourg, WALL ST. J. (Oct. 21, 2014), http://www.wsj.com/articles/luxembourg-tax-deals-under-pressure-1413930593.

78. See Philip Blenkinsop, EU’s Juncker survives no-confidence vote over tax deals, REUTERS (Nov.27, 2014), http://www.reuters.com/article/us-eu-juncker-idUSKCN0JB13Q20141127.

79. Bowers, supra note 3.80. Id.81. See Stephen C. Loomis, The Double Irish Sandwich: Reforming Overseas Tax Havens, 43 ST.

MARY’S L. J. 825 (2012) (describing the tax avoidance trick made famous by Ireland); SuzanneLynch, Ireland is Complicit in Raising Global Inequality, IRISH TIMES (Jan. 25, 2016, 12:02 AM),http://www.irishtimes.com/opinion/suzanne-lynch-ireland-is-complicit-in-raising-global-inequality-1.2508603.

82. See State Aid Control, EUR. COMMISSION, http://ec.europa.eu/competition/state_aid/overview/index_en.html (last updated Dec. 9, 2016) (defining state aid as “an advantage in anyform whatsoever conferred on a selective basis to undertakings by national public authorities”).The European Commission has the authority to investigate, prosecute, and reprimand memberstates who violate rules regarding “state aid.” Id. See Treaty on the Functioning of the EuropeanUnion art. 109-08, May 9, 2008, O.J. (C 115) 91-92 [hereinafter TFEU] (granting theEuropean Commission the authority to investigate member states’ taxation schemes and rulingsif they violate the state aid regulations); Council Regulation 734/2013, Amending Regulation(EC) 659/1999 Laying Down Rules for the Application of Art. 93 of the EC Treaty O.J. (L.204/15) art.4 (conferring the authority on the European Commission to investigate claims of stateaid by granting them the power to request information from the member state and the relatedparty to the investigation); but see Neelie Kroes, Why EU State Aid is not the Right Tool to Fight




various outlets that nothing had changed, no loopholes closed, and nodefinitive anti-avoidance measures adopted in Europe or the United States.83

In January 2016, the European Commission published a draft Anti-Avoidance Directive, which was in fact adopted by the EU’s FinanceMinisters in July 2016.84 While a welcome development, the directive hasbeen criticized as inadequate to the task of eliminating the massive EU-based corporate tax avoidance.85

The “LuxLeaks” scandal provided a textbook case of what has occurred inthe relationship between corporations and states. The “leaks,” instigated byemployees of major accounting firms and placed in the hands of theInternational Consortium of Investigative Journalists group, showed thatmany of the world’s most famous and successful firms were lined up at thedoor of the Luxembourg government, looking for tax deals that wouldensure Luxembourg a steady, if very modest, stream of fees, as well as jobs inthe financial and accountancy sector, with staggeringly large tax savings forthe companies concerned.86 This “Luxleaks” behavior had become soprevalent that it was in essence “normal” corporate and accounting behaviorin Luxembourg and several other European states.87 Even more blatant tax-avoidance servicing was characteristic of certain non-EU (but British-affiliated) jurisdictions, such as the Cayman Islands, Bermuda, and others.88

Whatever illegal money laundering might be going on in the shadows ofthese tax avoidance structures, it is clear that LuxLeaks was about the normal

Tax Avoidance, THE GUARDIAN (Sept. 1, 2016), https://www.theguardian.com/technology/2016/sep/01/eu-state-aid-tax-avoidance-apple (Stating opinion of a former E.U. commissioner that“[s]tate aid is not suited to deal with [the exploitation of varying corporate tax rates betweenmember states]”). Former Commissioner Kroes continues, stating that “EU member states havea sovereign right to determine their own tax laws [and] [s]tate aid cannot be used to rewritethose rules.” Id.

83. See Nikolaj Nielsen, Corporate Tax Dodging Still Rampant in EU, EU OBSERVER (Nov. 3,2015), https://euobserver.com/economic/130938.

84. Council Directive 2016/1164 of July 12, 2016, Laying Down Rules Against Tax AvoidancePractices that Directly Affect the Functioning of the Internal Market, 2016 O.J. (L 193) (EU)[hereinafter EU Tax Avoidance Directive].

85. See Eric Maurice, Commission Unveils Anti-tax Avoidance Package, EU OBSERVER (Jan. 28,2016), https://euobserver.com/economic/132047 (noting that some NGOs have criticized theEU’s approach in the directive as completely inadequate to the task). The European Networkon Debt and Development, instance, was quoted as saying that “[t]his package is woefullyinadequate to stem the tsunami of scandalous cases of multinational corporations failing to paytheir taxes.” Id.

86. How much in taxes does Luxembourg collect from these companies? Even if modest, asmall state could really benefit from such tax revenue. See Stephanie Bodoni & Tom Mackenzie,The Quiet Man Who Made Big Trouble for Little Luxembourg, BLOOMBERG (Feb. 23, 2015), https://www.bloomberg.com/news/articles/2015-02-23/the-quiet-man-who-made-big-trouble-for-little-luxembourg.

87. Id.88. See Adam Ramsay, Britain’s Empire of Tax Evasion, FOREIGN POL’Y (Apr. 4, 2016), http://

foreignpolicy.com/2016/04/04/britains-empire-of-tax-evasion-panama-papers-mossack-fonseca/ (linking contemporary tax haven scandals to the British tradition of serving the needs ofglobal wealth, including through its overseas territories).




accounting practices of nations that serve prestigious, well-knownmultinational corporations, not those laundering the proceeds of criminalactivity. Tax avoidance expertise is a winning strategy for smaller states inparticular, due to the fact that even very modest infusions of such largeamounts of capital can be significant.89 In an interesting way, this strategyallows even very small states to acquire great importance in the global taxsweepstakes, and to cause great financial hardship to much larger (and thusmore revenue-needy) states.90

As mentioned, a corporate “who’s who” has been identified with the so-called sweetheart deals in Luxembourg––Walmart, Walt Disney, Microsoft,Koch Industries, and Pepsi.91 As is true for Ireland (enabler of tax avoidancefor Apple, Google, and Yahoo, among others), the Netherlands (Starbucks’tax ally), and the UK, Luxembourg built its own modern economy aroundserving the large multinationals that stood to gain most from global taxavoidance schemes.92 It is interesting that the first post-Brexit British PrimeMinister, Theresa May, has stated that dealing with corporate tax avoidanceand evasion will be at the top of her agenda.93

Commission President Junker’s response to the LuxLeaks revelations wasquite opaque, as he insisted he was “no more responsible than others” forthis state of affairs, and disclaimed direct knowledge of the deals.94 When hesurvived the no-confidence motion in the European Parliament, the EUmissed its chance to send a strong message on collective EU opposition tothese practices.95 There is certainly irony in the fact that the “nerve center”

89. Elyssa Kirkham, 10 Best Tax Havens in the World, GOBANKINGRATES (Apr. 15, 2016),https://www.gobankingrates.com/personal-finance/10-best-tax-havens-world/.

90. Tax Havens Hamper Development in Poor Countries, PBS NEWSHOUR (Apr. 15, 2009), http://www.pbs.org/newshour/updates/business-jan-june09-taxhavens_04-15/.

91. See Fitzegerald & Guevara, supra note 68; Crisp, supra note 73.92. See supra note 3 (describing the generally accepted principle that Luxembourg is one of the

biggest European tax havens); Nicholas Shaxson, Follow the Money: Inside the World’s Tax Havens,THE GUARDIAN (Jun. 19, 2015), https://www.theguardian.com/business/2015/jun/19/tax-havens-money-cayman-islands-jersey-offshore-accounts (noting that Luxembourg is a well-known European tax haven that provides flexibility for multinational corporations seeking toavoid paying higher taxes in other E.U. member states); see Simon Bowers, Luxembourg Warnedabout its Reliance on Multinational Corporations, THE GUARDIAN (Mar. 29, 2015), https://www.theguardian.com/world/2015/mar/29/luxembourg-warned-about-its-reliance-on-multinational-corporations (stating the potential effect of E.U.-level tax reform on the economyof Luxembourg, which is essentially tied to the multinational corporations enticed to openheadquarters in that country because of low tax rates).

93. See Raymond Doherty, Theresa May to Get Tough on Tax Avoidance, ECONOMIA (July 12,2016), <http://economia.icaew.com/news/july-2016/theresa-may-to-get-tough-on-tax-avoidance.>

94. See Alessio Colonnelli, Juncker’s Message to the EU: Tax Evasion is Not That Big a Deal, LEFT

FOOT FORWARD (May 7, 2015), http://leftfootforward.org/2015/05/junckers-message-to-the-eu-tax-evasion-is-not-that-big-a-deal/ (relaying Juncker’s statement that he was “no moreresponsible than others” for the tax deals).

95. As already described, Commission President Juncker managed to survive a no-confidencevote in the European parliament by a wide margin, despite the heated controversy over theLuxleaks revelations. See Juncker Survives No Confidence Vote Over Tax Allegations, BBC (Nov.




of a legalistic, ethically upright, and progressive EU would be led by apolitician closely associated with the most extreme tax avoidance schemes inthe world, and this disharmony was not lost on the press. But it is atestament to the fact that laws are no longer driven by public outrage orwritten by elected politicians that actions taken in the wake of LuxLeaks,remain ambivalent.96 Recent EU initiatives in the anti-tax avoidance realmwill be described in more detail below.

If secret agreements between Luxembourg and multinational corporations(many American-based) result in revenue starvation for other countries inthe world, this is apparently of no ethical concern to Luxembourg.Similarly, neither Ireland, the Netherlands, nor Singapore appears toconnect the dots between their policies on corporate taxation and therevenue deprivation of both rich and poor states.97 A surprising number ofEuropean and non-European states base much of their financial policy onthis role of catering to the tax avoidance needs of multinationals, pursuingthis aim with full knowledge of the financial implications. They defendthese practices as economically beneficial to all, and denounce any threats totheir freedom of “choice” in tax matters.98

As explained above, many willing governments enter into secret deals withcompanies seeking assistance in these schemes. Cooperative legislaturesprovide generous exemptions and attractive loopholes. With the awarenessand blessing of governments, lawyers and accountants set up elaboratemechanisms to split companies into smaller and harder to trace units,creating intra-company lending schemes and large numbers of nearlyinvisible (strangely named, and thus incognito) subsidiaries.99 In a manner

27, 2014), http://www.bbc.com/news/world-europe-30235005 (noting that the Luxleaks scandalrevealed that 340 large companies were provided with special tax deals during the 18 years thatMr. Juncker was Prime Minister of Luxembourg).

96. Hamish Boland-Rudder, Leslie Wayne & Kelly Carr, ‘Lux Leaks’ Causes ‘Tax Storm’ ofGovernment, Media Response, INT’L CONSORTIUM OF INVESTIGATIVE JOURNALISTS (Nov. 19,2014, 9:00 AM), https://www.icij.org/blog/2014/11/lux-leaks-causes-tax-storm-government-media-response.

97. See Max Bearak, How Global Tax Evasion Keeps Poor Countries Poor, WASH. POST (Apr. 8,2016), https://www.washingtonpost.com/news/worldviews/wp/2016/04/08/how-global-tax-evasion-keeps-poor-countries-poor/?utm_term=.1229d15c562c (“What’s so scandalous aboutthe Panama Papers isn’t just that there’s a nexus of rich people, some elected, who make profitsby evading taxes. It’s that so much of the money moved through tax havens would otherwise betaxed by some of the world’s poorest, most revenue-hungry governments.”).

98. See Simon Carswell, State Regards 12.5% Corporate Tax Rate as ‘Sovereign Right’, IRISH

TIMES (Sept. 16, 2014), http://www.irishtimes.com/business/economy/state-regards-12-5-corporate-tax-rate-as-sovereign-right-1.1931043, for the Irish insistence that maintaining a lowtax or no tax environment for US multinationals is an aspect of its “sovereignty.”

99. Walmart used obscure names used to hide its relationships with tax-avoiding subsidiaries.See MARC AUERBACH & FRANK CLEMENTE, THE WALMART WEB: HOW THE WORLD’SBIGGEST CORPORATION SECRETLY USES TAX HAVENS TO DODGE TAXES 1 (June 2015),available at http://americansfortaxfairness.org/files/TheWalmartWeb-June-2015-FINAL1.pdf(noting that Walmart has never “openly reported” the existence of its many subsidiaries in SECfilings). The Author notes that:




that is impossible for ordinary workers or for small, nationally-boundbusinesses, large multinational corporations are thus able to evade anyresponsibility to pay a fair share of taxation, and thus to support the publicinterest in the states from which they profit. While periodic revelationscause politicians to express outrage, in fact governments remain hesitant tointerfere as companies describe these technically complex schemes as“perfectly legal.” And in fact, as has been pointed out, they are mostly legalin the narrow sense.

Despite a great deal of ideological resistance to the very idea ofgovernmental taxing powers within the United States, it is apparent that nosociety has ever been able to invest in public goods, including health, safety,and general welfare, without substantial infusions of revenue. The UnitedStates is a prime example of what happens as a result of disinvestment inpublic universities, for instance.100 The concept of tax revenue is as old asorganized society itself, with general contributions being used to fund theactivities of the sovereign in the name of the people. Tax avoidance andausterity programs go hand in hand; were corporate taxes being collected ina normal manner, a wide variety of countries would be able to cover thecosts of educational, developmental, and infrastructural programs withease.101 Yet, the obvious steps are not being taken, and perhaps will not betaken.

C. PAPER CORPORATIONS AND INVERSIONS: TYPICAL

METHODOLOGIES OF TAX AVOIDANCE

As in other areas of law where economics and social policy intersect, thetax avoidance issue is often approached technocratically. As mentionedabove, the devices relied upon by corporate accountants are inherentlycomplex and technical (and are meant to be so); the responses ofgovernments are slow and tentative. Academic writing on the subject iscorrespondingly technical, citing to the relevant tax treaties, statutes, andcorporate structuring devices. It is very hard to see how the situation ofmass tax avoidance will change without some more accessible link being

Instead, Walmart has kept these tax-haven subsidiaries secretive by burying mentionof their existence deep inside of Sec filings and financial documents filed byWalmart subsidiaries all around the world, only some of which are available to thepublic. Moreover, Walmart gives many of its tax-haven subsidiaries obscure nameslike ‘Azure Holdings’ or ‘MCLM III’, which turns the simple task of identifyingthem into a major investigative effort.

Id.100. Public universities in the United States have seen a dramatic reduction in funding. See,e.g., Jonathan R. Cole, The Pillaging of America’s State Universities, THE ATLANTIC (Apr. 10,2016), http://www.theatlantic.com/education/archive/2016/04/the-pillaging-of-americas-state-universities/477594/ (indicating that, according to the American Academy of Arts and Sciences,between 2008 and 2013, states reduced financial support to research universities by 30 percent).101. See Bearak, supra note 97.




established between crafting political remedies and the complex legalstructures that facilitate tax-lowering maneuvers.

High levels of corporate tax avoidance depend upon the reality ofglobalization.102 Globalization makes tracing and documenting taxableprofits extraordinarily difficult.103 This is because corporations can noweasily change their location, legal residence, and thus the formal legal regimeunder which they operate.104 One particular technique used by U.S.corporations that has recently gained the attention of the U.S. public is the“inversion”—a legal device that allows companies to alter their corporatenationality to another (low tax or tax avoidance-facilitating) country, byarranging for its own purchase by a foreign firm.105

The excuse given by U.S. companies is, of course, that the “real” tax bill inthe United States is too high—even though few, if any, large corporationsactually pay such high rates of tax.106 It is never explained why the U.S.Congress simultaneously denounces the high published rate of U.S.corporate tax, and yet fails to lower it somewhat, in exchange for definitivelyclosing loopholes.107 It can also be speculated, if not proven, that the U.S.Congress leaves the corporate tax rate unusually high in order to continue toprovide cover for corporations offering excuses for failure to pay a fair share

102. Many have made the point that globalization is linked to ease of tax avoidance. See, e.g.,LEONCE NDIKUMANA, INTERNATIONAL TAX COOPERATION AND IMPLICATIONS OF

GLOBALIZATION, CDP Background Paper No. 24 ST/ESA/2014/CDP/24, Dec (2014)(pointing out that two main effects of globalization no taxation is the move towards harmful taxcompetition and the easier profit shifting of multinational corporations).103. See Reuven Avi-Yonah, Globalization, Tax Competition and the Fiscal Crisis of the WelfareState, 113 HARV. L. REV. 1573 (2000) (noting an early summary of looming problems in thearea of the globalization-tax intersection).104. Id. at 1590-92.105. See Kyle Pomerleau, Everything You Need to Know About Corporate Inversions, TAX FOUND.(Aug. 4, 2014), http://taxfoundation.org/blog/everything-you-need-know-about-corporate-inversions. Pomerlau notes that:

an inversion is simply the process by which a corporate entity, established inanother country, buys an established American company. . . . In essence, the legallocation of the company changes through a corporate inversion from the UnitedStates to another country. An inversion typically does not change the operationalstructure or functional location of a company.

Id.106. See Fact Sheet: Corporate Tax Rates, AMERICANS FOR TAX FAIRNESS, http://www.americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-corporate-tax-rates/ (lastvisited Jan. 26, 2017) (noting that the “Corporate share of federal tax revenue has dropped bytwo-thirds in 60 years” and that despite the legal corporate tax rate of 35%, many bigcorporations paid far less after deductions and other loopholes, that over 100 very profitablecorporations paid no federal income taxes, and that many other developed nations had a highereffective corporate tax rate than the U.S.).107. See Pat Garofalo, Bursting the Corporate Tax Reform Bubble, US NEWS (Nov. 6, 2014), http://www.usnews.com/opinion/blogs/pat-garofalo/2014/11/06/2014-republican-wave-doesnt-make-corporate-tax-reform-any-more-likely (indicating the lack of appetite in Congress for realcompromise aimed at obtaining more revenue from corporate tax).




of tax. And it is likely that U.S. corporations prefer to have a high publishedtax rate, and to pay no taxes at all through legally permissible tax avoidancemechanisms.108

Despite all the EU’s traditional rhetoric on fairness, equality, socialinclusion and broadly based prosperity, major EU nations have used suchforms as the “Double Irish” and “Dutch sandwich” to help U.S.multinationals avoid billions of dollars in taxes, to the detriment of realpeople in the United States, Europe, and the developing world.109 In thissense, it is undeniable that the national governments in Ireland and theNetherlands consider large multinationals to be their clients and work tosolidify that bond.110 By focusing on Ireland and the Netherlands, this is notto suggest that Britain, for instance, is any less culpable, as it maintains anelaborate web of tax avoidance schemes within its financial center as well.111

How this behavior might change post-Brexit is unclear. And the number oftrue tax haven jurisdictions—territories or mini-states that specialize in tax

108. See Fact Sheet: Corporate Tax Rates, supra note 106 (indicating how many large U.S.corporations paid no federal income tax over many years).109. The New York Times published a convenient graphic to show how Apple and othercompanies avoid paying any taxes on profits, regardless of where profits are actually derived.Because of quirks in Irish and Dutch law, the profits could end up untaxed and hidden awayindefinitely in Caribbean tax haven jurisdictions. Even though Ireland has pledged to end the“double Irish” practice, it is substituting a similar “innovation box” system, to funnel patent-derived profits in a low tax direction. It seems Ireland believes it can continue providing this“ultra-low” tax service to U.S. multinationals with impunity. See ‘Double Irish With A DutchSandwich’, N.Y. TIMES (Apr. 28, 2012), available at http://www.nytimes.com/interactive/2012/04/28/business/Double-Irish-With-A-Dutch-Sandwich.html; see also Richard Curran, TaxAvoidance Culture Still Thrives Despite Clampdown, IRISH INDEP. (Apr. 30, 2015), http://www.independent.ie/opinion/comment/tax-avoidance-culture-still-thrives-despite-clampdown-31182697.html (stating that the driving force behind Irish tax policy is competition). “When itcomes to making Ireland attractive for foreign direct investment, we have to do it. Becauseothers will.” Id. Ireland plans to phase out the “innovation box” loophole, which companiesexploit by funneling royalty payments to other subsidiaries in low-tax jurisdictions. Id.110. Steps have been taken to prevent these devices from continuing. See Still Slipping the Net:Europe’s Corporate-Tax Havens Say They Are Reforming. Up to a Point, ECONOMIST (Oct. 8, 2015),http://www.economist.com/news/business/21672232-europes-corporate-tax-havens-say-they-are-reforming-up-point-still-slipping-net (stating the intentions of the Irish and Dutchgovernments to be similar). In response to public outcry over the “Double Irish with a DutchSandwich” tax scheme, the Netherlands plans to implement new physical presencerequirements for businesses operating within that country. Id. Despite all the rhetoricsurrounding Dutch tax reform, the Netherlands’ focus is primarily on transparency with regardto transactions that allow companies to otherwise avoid paying taxes elsewhere in the Eurozone.Id.; see also Sam Schechner & Lisa Fleisher, Ireland Considers Closing Corporate-Tax Loophole,WALL ST. J. (Oct. 12, 2014), http://www.wsj.com/articles/ireland-considers-closing-corporate-tax-loophole-1413139198 (describing steps taken by the Irish government to close the “DoubleIrish” loophole). Ireland plans to phase out the “innovation box” loophole, which companiesexploit by funneling royalty payments to other subsidiaries in low-tax jurisdictions. Id.111. See Nicholas Shaxson, The Tax Haven in the Heart of Britain, NEW STATESMAN (Feb. 24,2011), available at http://www.newstatesman.com/economy/2011/02/london-corporation-city(describing the special status of the City of London and the secrecy and financial freedom itmakes available).




avoidance—creates a menu of options for companies and individualsincreasingly unwilling to pay anything like the actual “sticker price” of tax inany jurisdiction.112

Between Ireland, the UK, and the Netherlands, prominent corporations,such as Google, Apple, Yahoo, Amazon, and Starbucks have avoided literallymassive levels of tax. The main tax avoidance schemes rely on chopping upthe corporate identity and the corporate profit share into convenient piecesto be allocated to whichever jurisdiction works best for tax avoidancepurposes.113 In parallel fashion, the corporation, with the assistance ofnational tax authorities, chops up global territory in such a way as to makebelieve that certain events in corporate life took place where they did not infact take place.114 In essence, profits are “earned” wherever the corporationsays they are earned. For tax purposes, there is no longer much sense ofnational or territorial identity, let alone national obligations.

This article argues that many national governments have made a decisionnot to seriously attempt to collect taxes otherwise owed by multinationalcorporations. Global initiatives aimed at reducing the outrage of the tax-paying public (such as the legal changes proposed by the OECD, to bedescribed below) are only partial and will likely fail to change the underlyingstatus quo.115 The EU has wrestled with the problem of tax avoidance andconflicting corporate tax regimes for years; if change is to come fromanywhere, it is most likely to derive from creative legal thinking on the partof the EU, as also described below. The U.S. Congress, despite periodicexpressions of outrage, shows no definitive inclination to rein in the world-renown tax avoiding behavior of U.S.-grown, multinational corporations.The main U.S. initiatives in this area will also be briefly described below.

The process of globalization—which could have been used as a vehicle toenhance the spread of human rights and social benefits—has instead beencaptured by the largest and strongest corporations to increase their own

112. See Farny Otto, Franz Michael, Gerhartinger Philipp, Lunzer Gertraud, NeuwirthMartina, & Saringer Martin, Tax Avoidance, Tax Evasion and Tax Havens, ARBEITERKAMMER

(May 2015), https://media.arbeiterkammer.at/wien/PDF/studien/Studie_tax_avoidance.pdf, fora discussion on to various types of tax havens are assessed and listed.113. Apple has engaged in some of the most elaborate schemes to avoid taxes. See, e.g., WalterHickey, Apple Avoids Paying $17 Million in Taxes Every Day Through a Ballsy But Genius TaxAvoidance Scheme, BUS. INSIDER (May 21, 2013), http://www.businessinsider.com/how-apple-reduces-what-it-pays-in-taxes-2013-5 (describing the many Apple-owned entities in variousglobal locations that serve to eliminate Apple’s tax bill anywhere).114. See Transfer Pricing, TAX JUST. NETWORK (Feb. 2014), http://www.taxjustice.net/topics/corporate-tax/transfer-pricing/ (“Estimates vary as to how much tax revenue is lost bygovernments due to transfer mispricing. Global Financial Integrity in Washington estimatesthe amount at several hundred billion dollars annually. A March 2009 Christian Aid reportestimated $1.1 trillion in bilateral trade mispricing into the EU and the US alone from non-EUcountries from 2005 to 2007.”).115. See Joe Harpaz, Many Companies Not Ready For Global Tax Reform, FORBES (Oct. 6, 2015),http://www.forbes.com/sites/joeharpaz/2015/10/06/many-companies-not-ready-for-global-tax-reform/#8d43a6764807.




profits, with a corresponding weakening of government responsiveness todomestic constituencies.116 This is an interesting parallel to the process bywhich the main feature of globalization was actually the expansion of rightsand privileges for multinational corporations in the form of free trade-promoting laws. This enabled corporations to trawl the world for cheaplabor and favorable regulatory environments, while gaining easier access toall markets.

High on the wish list of corporations is the desire not to contribute to thepublic good—either by complying with labor standards, labor rights(including job security) or by paying significant levels of tax.117 Indeed, notonly have multinational corporations found ways to avoid paying taxes onprofits earned internationally—but these same devices have allowed them toavoid paying all taxes, contributing only a meager share of their earnings tothe public coffers.118 Many corporations are now not really basedanywhere,119 as the global economy has essentially demoted the notion ofterritory and of the defined and authoritative nation state itself.120 The state,as a viable actor, is seemingly still strong and relevant only for suchterritorially-bound matters as criminal law. The largest and most successfulcorporations are literally not anchored in nor responsible to any jurisdiction.All serious discussions concerning how to limit tax-avoiding behavior focuson how to return corporations to the structure and context of nations,peoples and places—a task that might yet prove politically impossible.

116. Joseph Stiglitz, Globalisation Isn’t About Just Profits. It’s About Taxes Too, THE GUARDIAN

(May 27, 2013), https://www.theguardian.com/commentisfree/2013/may/27/globalisation-is-about-taxes-too.117. See Thomas Byrne, False Profits: Reviving the Corporation’s Public Purpose, 57 UCLA L. REV.DISC. 25, 26 (2010) (“Corporate America has been fixated on share price, blinding corporateleaders from the macroeconomic effects of their decisions.”).118. See Lee Simmons, Why Corporate Tax Avoidance Is Bigger Than You Think, STANFORD BUS.(May 24, 2016), https://www.gsb.stanford.edu/insights/why-corporate-tax-shifting-bigger-you-think (describing pervasiveness of corporate tax avoidance). Multinational companies exploittheir presence in various jurisdictions to shift their income to lower tax jurisdictions. Id. Thispractice continues, as regulators around the world find it difficult to enforce new rules. Id.119. See, e.g., Lee Sheppard, How Does Apple Avoid Taxes?, FORBES (May 28, 2013), http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/#21fae099d6f7.120. The extraordinary rise of investor-state arbitration is an example of this. See, e.g., BrookK. Baker & Katrina Geddes, Corporate Power Unbound: Investor-State Arbitration of IP Monopolieson Medicines—Eli Lilly v. Canada and the Trans-Pacific Partnership Agreement, NORTHEASTERN

PUB. L. & THEORY FAC. RES., PAPER NO. 242-2015, 44 (Sept. 29, 2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2667062 (noting that the rise of investor-statearbitration awards reflects a corresponding rise in corporate power vis a vis the state).




III. The Way Forward: Will Anyone Really Shout Stop?

A. SLIDING SCALE OF SOLUTIONS—FROM LEAST TO MOST

EFFECTIVE

Because of the LuxLeaks revelations and other news stories to the effectthat corporate and personal tax evasion and avoidance are happening on amass scale, with incalculable social costs, “action” is supposedly being takenat a variety of levels, or at least there is the appearance of action.121 Thisarticle has argued that the basic problem is quite well known to nationalgovernments, and far from being shocked, these governments are trying toeither defend the notion of “tax competition,” or set up committees and passlaws designed to mollify an outraged public.122 Certain of these proposalsare bound to fail, since they close certain loopholes while opening the doorto others. Yet, this is a defining moment in the tax evasion and tax avoidancedebate. Public interest is high, political outrage is intense, and the situationhas not yet become impossible to deal with, given the appropriate level ofpolitical will.123

As will be outlined below, the proposals being offered by an internationaltax reform body recently set up by a coalition of NGOS, spearheaded byeconomist Joseph Stiglitz, and called the “Independent Commission for theReform of International Corporate Taxation” (Independent Commission),would go far towards actually stopping the problem, although this group hasno meaningful political power to induce governments to follow theirsuggestions.124 The Independent Commission, as will be explained below,has published an accessible list of recommendations, most of them basedaround the deceptively simple idea that large corporations need to beconsidered as one entity, and taxed accordingly, based on where corporateincome is derived. Interestingly, the group is a self-declared andindependent commission, acting outside any official channels.125 While thisgives it great freedom to identify the problem and its solution, it will likely

121. See Hamish Boland-Rudder, Luxleaks Anniversary Marked with Protests Calls for Action, ICIJ.ORG (Nov. 5, 2015), https://www.icij.org/blog/2015/11/luxleaks-anniversary-marked-protests-calls-action.122. See Simon Bowers, UK to Reject EU Plans to Combat Multinational Tax Avoidance, THE

GUARDIAN (June 18, 2016), https://www.theguardian.com/world/2015/jun/18/uk-reject-eu-plans-combat-multinational-tax-avoidance.123. See, Bruce Livesey, Why the Offshore Tax Haven Crisis Won’t Get Fixed, Despite PanamaPapers, NAT’L OBSERVER (Apr. 4, 2016), http://www.nationalobserver.com/2016/04/04/analysis/why-offshore-tax-haven-crisis-wont-get-fixed-despite-panama-papers, for a Canadianperspective on why governments do not act to end tax avoidance and evasion through taxhavens.124. Vanessa Houlder, Call to Reform ‘Outdated’ Global Corporate Tax Regime, FIN. TIMES (Oct.5, 2015), https://www.ft.com/content/8bc3e00e-6a89-11e5-aca9-d87542bf8673.125. See About ICRICT, INDEP. COMM. FOR THE REFORM OF INT’L CORP. TAXATION, http://www.icrict.org/about-us/.




have limited influence. Not surprisingly, there is strong corporate pushbackagainst the group’s ideas.126

Within the EU, the European Commission and European Parliamenthave for some years been in an uproar over EU member state schemes thathave given special tax avoidance privileges to multinational corporations;127

although very good proposals have been considered by the EU institutions,leading to an Anti-Avoidance Directive finally adopted in July 2016, therehas been strong internal division and critics insist that the final form of thedirective has been greatly watered down.128 The European Commissionmade global headlines when it ruled in August 2016 that Ireland had grantedunlawful state aids to corporate giant Apple, amounting to thirteen billioneuros.129 Going forward, it is likely that Commission enforcement actiontaken under the theory of state aids (tax deals as unlawful subsidies) will beaimed at only a symbolic handful of companies.130 Dating back to 2011, theEuropean Commission put forward proposals of a more fundamental kindbased on the idea of accurate allocation of profits.131 The result was itsproposed “Common Consolidated Corporate Tax Base,” or CCCTB, theessence of which was to consolidate the profits of any given transnationalcorporation, while allocating tax revenue to each member state in which the

126. See, e.g., Tim Worstall, Joe Stiglitz’s Mistake: Foreign Corporations Should Pay No Profits inPoor Countries, FORBES (Aug. 7, 2015), http://www.forbes.com/sites/timworstall/2015/08/07/joe-stiglitzs-mistake-foreign-corporations-should-pay-no-profits-tax-in-poor-countries/#28defc7b4753.127. Overview: the European Parliament’s Work on Taxation, EUR. PARLIAMENT, http://www.europarl.europa.eu/news/en/news-room/20160502STO25468/overview-the-european-parliament’s-work-on-taxation (last updated Oct 4, 2016). The concept of “harmful tax competition”was first articulated by the OECD, and has been elaborated on in various contexts, but the EUand by groups advocating for tax fairness. See generally Reuven S. Avi-Yonah, The OECDHarmful Tax Competition Report: A Tenth Anniversary Retrospective, 34 BROOK. J. INT’L L. 3(2009), 783-795, available at http://repository.law.umich.edu/cgi/viewcontent.cgi?article=1037&context=articles.128. See EU Tax Avoidance Directive, supra note 84, at 1-14; see Suzanne Lynch, EU AgreesNew Rules to Fight Corporate Tax Avoidance, IRISH TIMES (June 21, 2016), http://www.irishtimes.com/business/economy/eu-agrees-new-rules-to-fight-corporate-tax-avoidance-1.2693230(stating that some parties do not believe the new rules will be effective in combating taxavoidance); see Jan Stojaspal, EU Expects Tax Avoidance Fight to Reaffirm Continent’s Relevance,BLOOMBERG NEWS (Sept. 20, 2016), https://www.bna.com/eu-expects-tax-n57982077290/(outlining discontent among some member states, as there is a belief that more cooperationbetween individual member states is needed in order to affect meaningful tax reform on thecontinent).129. Press Release, European Comm’n, State Aid: Ireland Gave Illegal Tax Benefits to AppleWorth up to _13 Billion, IP/16/2923 (Aug. 30, 2016).130. Note that as of this writing, European Parliamentarian Fabio deMasi is taking theEuropean Commission itself to Court for not handing over documents relevant to aparliamentary investigation into member state tax deals. See Nikolaj Nielsen, MEP takes EU toCourt on Tax Transparency, EU OBSERVER (Jan. 14, 2016), https://euobserver.com/economic/131830, (“EU economics commissioner Pierre Moscovici said the consent of member states wasneeded first, noting that almost half had refused to transmit the documents.”).131. See infra, note 133 and accompanying text.




corporation operated, based on a clear formula for calculating proportionatetax liability.132 The core idea was a very good one—moving away from theartifice of corporate “nationality” or residence, using the entire EU territoryas a totality, and then allocating tax revenue into national coffers on a moreaccurate, pro-rata basis.133 A version of this concept has survived into thenew Anti-Avoidance Directive.134 Indeed, if a rigorous profit and taxallocation formula could be followed worldwide, the grosser forms of taxavoidance would be defeated.

In the face of such audacious tax avoidance behavior by multinationalcorporations and the apparent tacit policy support of national governments,it is not clear where the “cure” might come from, if it is to come at all. Asdescribed above, the legal landscape is technical and complex, and thedetailed understanding of the public limited. This section of the article willexplore the manner in which the problem has been framed by different“players” in the debate, and what suggestions for change have been offered.To be examined, in this order, will be responses of the OECD, the EuropeanUnion and the United States government. The final discussion will be ofthe recommendations of the “Independent Commission” on internationaltaxation, the global tax fairness advocacy group described above. It wouldappear that the problem of corporate tax avoidance is far easier to identifythan to resolve, and that if a remedy is to be found, it will in all probabilitybe within the creative legal formulations of the EU’s Commission and

132. See COMMON CONSOLIDATED CORPORATE TAX BASE (CCCTB), EUROPEAN COMM’N,available at http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm (last updated Jan. 27, 2017) (defining the CCCTB as “a single set of rules tocalculate companies’ taxable profits in the EU”). It continues:

a company would have to comply with just one EU system for computing its taxableincome, rather than different rules in each Member State in which they operate . . . .The consolidated taxable profits of the group would be shared out to the individualcompanies by a simple formula.

Id. This idea of accurate allocation of profits is at the heart of virtually all proposed solution tothe tax haven problem.133. Eric D. Ryan, European Union Re-Launches Formulary Apportionment: Key Points about theCCCTB, GLOBAL TAX NEWS (July 22, 2015), https://www.dlapiper.com/en/us/insights/publications/2015/07/global-tax-news-jul-2015/european-union-relaunches-formulary/. Theauthor writes that:

The CCCTB essentially aggregates related EU companies into a single,consolidated tax return for all those [corporate] entities. The EU group net taxableincome is then apportioned back out to each entity and country in proportion to therelative assets and other economic factors within those locations. Thus, theCCCTB is a system of formulary apportionment which abandons the existing arm’slength standard of treating each inter-company transaction separately.

Id.134. See Commission Proposal for a Directive Laying Down Rules Against Tax Avoidance Practicesthat Directly Affect the Functioning of the Internal Market, at COM (2016) 26 final (Jan. 28, 2016),for the “final compromise text” of the Anti-Avoidance Directive agreed to by the EU’s Councilon June 17, 2016.




Parliament. But, as indicated, the EU itself is not completely unified inoutrage over these practices.135 The resistance of its component partsnecessarily limits the EU’s ambitions, and several of these “componentparts” have been among the greatest abusers of global tax avoidanceschemes.136

B. WHAT WOULD THE OECD HAVE US DO?

In one sense, the OECD137 may be an unlikely place to look for a genuinesolution to corporate tax avoidance and evasion, despite the accuracy withwhich it has identified problems in the international taxation order. TheOECD, as an organization, is comprised of the nations whose largestcompanies have been allowed to get away with the kind of aggressive taxplanning the OECD claims it now wishes to end.138 In 2013, the OECDpublished its “Action Plan on Base Erosion Shifting” (commonly known as“BEPS Action Plan”) to much fanfare.139 The essence of this plan, andaccompanying reports, was to create guidelines for governments to follow asthey addressed the problem of corporate tax avoidance, specifically bysetting out the areas where national legislation should target corporate tax-avoiding behavior.140 In one sense, this represents the limit of what the

135. Ireland for one is deeply worried that after the British exit from the EU, the EU will be ina stronger position to come after Ireland’s low corporate tax rate. See, e.g., Kevin Doyle, EU hasour corporation tax in its sights after UK quits, IRISH INDEPENDENT (June 27, 2016), http://www.independent.ie/business/brexit/eu-has-our-corporation-tax-in-its-sights-after-uk-quits-34835831.html.136. Notably, Ireland, the Netherlands, Luxembourg and Britain before “Brexit”. See StillSlipping the Net: Europe’s Corporate-Tax Havens Say They Are Reforming. Up to a Point, supra note110.137. The Organization for Economic Co-operation and Development (OECD) is a forummade up of governments from 35 states with market economies, along with 70 non-memberswith the goal of identifying global economic issues with the aim of promoting economicgrowth, prosperity and sustainable development. For more background on the OECD, seegenerally About the OECD, OECD, http://www.oecd.org/about/.138. See About: Members and Partners, OECD, http://www.oecd.org/about/membersandpartners/#d.en.194378.139. Org. for Econ. Co-operation and Dev. [OECD], Action Plan on Base Erosion and ProfitShifting, 10 ISBN 978-92-64-20271-9 (July 19, 2013), available at http://dx.doi.org/10.1787/9789264202719-en (“BEPS relates chiefly to instances where the interaction of different taxrules leads to double non-taxation or less than single taxation. It also relates to arrangementsthat achieve no or low taxation by shifting profits away from the jurisdictions where theactivities creating those profits take place.”) [hereinafter Action Plan]. And with its 15 identifiedBEPS “Actions” to be addressed by OECD governments, the Action Plan states, “[t]he BEPSproject marks a turning point in the history of international co-operation on taxation.” Id. at25. For further background to OECD thinking on the corporate tax avoidance issue, see YarivBrauner, What the BEPS?, 16 FLA. TAX REV. 55 (2014) (describing the OECD approach torevelations of massive global tax avoidance by corporations and the core concept of “baseerosion”). The “base” here refers to the tax base in any given country. Id.140. See Action Plan, supra note 139, at 15. The Action Plan states, “globalization means thatdomestic policies, including tax policy, cannot be designed in isolation.” Id. Also that theremust be “instruments to put an end to or neutralise the effects of hybrid mismatch




OECD can do; it has no means of coercion or enforcement, and exists toarticulate consensus approaches to problems in the international economicorder.141 To the extent that it has any real powers of persuasion, this onlyextends to its membership of wealthy, industrialized countries.142 Whilethese countries represent the base of operations for the world’s largestcorporations, the OECD does not include among its members some of themost egregious tax avoidance-facilitating jurisdictions.143

The OECD sensibly identifies globalization and digitalization as the chiefenablers of mass corporate tax avoidance.144 It has been predicted that the“epic reforms” being called for by the OECD will, or at least could, have “ahuge impact on the way multinational corporations run their operations. . . .”145 While it is fair to say that the OECD countries are home to thecompanies most energetically availing of tax avoidance devices, at the sametime, OECD governments have demonstrated a surprising degree oftolerance as their corporations blatantly avoided paying a fair share oftaxes.146 In this sense, it should be asked whether the OECD has thecapacity to make the kind of difference to be hoped for, especially in light ofthe fact that enforcement of these principles is left to participating

arrangements”, which “can be used to achieve unintended double non-taxation or long-term taxdeferral . . . .” Id.141. Org. for Econ. Co-operation and Dev. [OECD], Executive Summaries, OECD/G20 BaseErosion and Profit Shifting Project 2015 Final Reports, at 9, available at https://www.oecd.org/ctp/beps-reports-2015-executive-summaries.pdf [hereinafter Executive Summaries]. In 2015,OECD published its final report on Base Erosion and Profit Shifting (BEPS). The Reportidentifies 15 specific action plans ranging from, “Addressing the Tax Challenges of the DigitalEconomy” to “Developing a Multilateral Instrument to Modify Bilateral Tax Treaties.” Id.However, throughout the report, flexibility measures provide governments with opportunitiesto go softly on full implementation. For instance, under Action 2 the report states:

As indicated in the September 2014 report, countries remain free in their policychoices as to whether the hybrid mismatch rules should be applied to mismatchesthat arise under intra-group hybrid regulatory capital. Where one country choosesnot to apply the rules to neutralize a hybrid mismatch in respect of a particularhybrid regulatory capital instrument, this does not affect another country’s policychoice of whether to apply the rules in respect of the particular instrument.

Id.142. See About: Members and Partners, supra note 138.143. The most notorious offshore jurisdictions, such as the Cayman islands, are of course notincluded in OECD membership. See id.144. See Action Plan, supra note 139, at 10. OECD members are called on to “Identify the maindifficulties that the digital economy poses for the application of existing international tax rulesand develop detailed options to address these difficulties, taking a holistic approach andconsidering both direct and indirect taxation.” Id. at 14.145. Joe Harpaz, BEPS Tax Storm Is Coming This Year, CFO MAGAZINE (July 9, 2015), http://ww2.cfo.com/tax/2015/07/beps-tax-storm-coming-year/.146. See, e.g., The Price Isn’t Right, ECONOMIST (Feb. 16, 2013), http://www.economist.com/news/special-report/21571557-corporate-profit-shifting-has-become-big-business-price-isnt-right (describing the process by which public outrage has finally spurred governments to takesome action to reform the decades-old and very outdated system of taxing corporations).




governments.147 In fairness, a number of OECD jurisdictions claim thatthey do intend to enact the OECD-based reforms, so it may be that theOECD reports and recommendations ultimately provide a serious roadmapfor reform.148 Indeed, the EU, in its most recently proposed reforms, givescredit to the OECD for providing a fundamental tax reform template.149

One key aspect of the OECD “solution” is country-to-countryinformation sharing.150 The core idea is that if countries have access to

147. See Harpaz, supra note 145.148. The OECD BEPS project has formed the basis for legislative planning in variousjurisdictions. See, e.g., William Bongaerts, Arnoud Knijnenburg, & Ivo IJzerman, EC Anti-TaxAvoidance Package: Responses from European Tax Practices, BIRD & BIRD NEWS CENTRE (Feb. 24,2016), http://www.twobirds.com/en/news/articles/2016/global/ec-anti-tax-avoidance-package-responses-from-european-tax-practices (indicating that the EU’s anti-tax avoidance “package isinspired by the OECD’s project on Base Erosion and Profit Shifting (BEPS), the final reports ofwhich were published in October 2015”). The European Commission has certainly expressed anintention to follow the OECD’s lead and ensure reform in the EU’s member states. See PressRelease, European Comm’n, Fair Taxation: Commission Presents New Measures Against CorporateTax Avoidance IP/16/159 (Jan. 28, 2016), http://europa.eu/rapid/press-release_IP-16-159_en.htm. See OECD Deal on Corporate Tax Avoidance Signed by 31 Nations, BBC BUS. (Jan. 27, 2016)http://www.bbc.com/news/business-35429459; see Dennis Weber, EU EPS/Taxing Low-TaxedNon-EU Income: Think Twice, KLUWER TAX BLOG (Feb. 11, 2016), http://kluwertaxblog.com/2016/02/11/eu-beps-taxing-low-taxed-non-eu-income-think-twice/, for critique of theCommission’s plans. See also Sanders Joins Dems Urging Public Country-By-Country Tax Reportingfor US Multinationals, MNE TAX (June 7, 2016), http://mnetax.com/bernie-sanders-joins-democrats-urging-public-disclosure-of-us-mulitinational-corporation-country-by-country-tax-reports-15546; see Ninja-Antonia Reggelin, Draft German Tax Law Adopts Low Threshold forTransfer Pricing Master File, Combats MNE Tax Avoidance, MNE TAX (June 8, 2016), http://mnetax.com/germany-transfer-pricing-documentation-rules-low-filing-threshold-master-file-combat-mne-tax-avoidance-15575. See David Ernick, US Implementation of BEPS ChangesBegins, BLOOMBERG BNA (Nov. 13, 2015), http://www.bna.com/us-implementation-beps-n57982063528, for U.S. responses. Ernick writes that:

[b]ecause many of the recommendations require legislative changes orincorporation into income tax treaties, it may be thought that the impact of theOECD’s recommendations may be somewhat muted in the United States, at leastinitially, as the changes would take some time to implement. However, a number ofactions from Treasury and the IRS in recent months indicate that the impact of thechanges resulting from the BEPS project may be coming sooner than expected.

Id.149. See Press Release, European Comm’n, The Anti-Tax Avoidance Package—Questions andAnswers, MEMO/16/160, (Jan. 28, 2016) (“[T]he Commission is pursuing an ambitiouscampaign for a coordinated EU approach against tax avoidance, following the global standardsdeveloped by the OECD last autumn, to boost Member States’ collective stance against thisproblem . . . .”).150. See Org. for Econ. Co-operation and Dev. [OECD], Mandatory Disclosure Rules, Action 12– 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, ISBN 978-92-64-24144-2 (Oct. 5, 2015), http://dx.doi.org/10.1787/9789264241442-en [hereinafter MandatoryDisclosure Rules]. In an effort to increase transparency and access to accurate and timelyinformation, the action plan imposes a mandate on governments to implement policies tostrengthen already existing mandatory disclosure requirements or to develop strategies with thesame effect, as a means of imposing pressure on the tax avoidance market. See id. Action 12 sets




information on corporate earnings and tax payments in fellow OECDcountries, policing corporate tax affairs would become easier—however, thisobviously assumes that governmental authorities in the OECD countriestruly intend to crack down on corporations as soon as this information isavailable.151 This is, as has been noted, a somewhat questionableproposition, or at least has yet to be shown to be effective.152 It also assumesthat participating countries are willing to legislate past the status quo, underwhich most of the tax avoidance multinational corporations are guilty ofremains “perfectly legal.”153 This, in fact, is the crux of the problem.

out a modular framework for both domestic and international tax schemes and addresses issuesof “who reports, what information to report, when the information has to be reported, and theconsequences of non-reporting.” Id. at 10. The key components of a mandatory disclosurescheme include:

[The imposition of] a disclosure obligation on both the promoter and the taxpayer,or . . . on either the promoter or the taxpayer; include a mixture of specific andgeneric hallmarks, the existence of each of them triggering a requirement fordisclosure . . .; establish a mechanism to track disclosures and link disclosures madeby promoters and clients as identifying scheme users . . .; link the timeframe fordisclosure to the scheme being made available to taxpayers when the obligation todisclose is imposed on the promoter; link it to the implementation of the schemewhen the obligation to disclose is imposed on the taxpayer; introduce penalties(including non-monetary penalties) to ensure compliance with mandatory disclosureregimes that are consistent with their general domestic law.

Id.151. See id. The OECD has set out a three-tier standardized approach to transfer pricingdocumentation that requires:

First, it requires multinational enterprises (MNEs) to provide tax administrationswith high-level information regarding their global business operations and transferpricing policies in a “master file” that is to be available to all relevant taxadministrations; second, detailed transactional transfer pricing documentation mustbe provided in a “local file” specific to each country, identifying material relatedparty transactions, the amounts involved in those transactions, and the company’sanalysis of the transfer pricing determinations they have made with regard to thosetransactions; third . . . file a Country-by-Country Report that will provide annuallyand for each tax jurisdiction in which they do business the amount of revenue, profitbefore income tax and income tax paid and accrued.

Org. for Econ. Co-operation and Dev. [OECD], Guidance on Transfer Pricing Documentation andCountry-by-Country Reporting, Action 13 – 2014 Deliverable, at 17-20, OECD/G20 Base Erosionand Profit Shifting Project, ISBN 978-92-64-21923-6 (Sept. 16, 2014), http://dx.doi.org/10.1787/9789264219236-en [hereinafter Guidance on Transfer Pricing]. It also requires MNEs toreport their number of employees, stated capital, retained earnings and tangible assets in eachtax jurisdiction. Id. at 35. Finally, it requires MNEs to identify each entity within the groupdoing business in a particular tax jurisdiction and to provide an indication of the businessactivities each entity engages in. Id. at 36.152. See Reuven S. Avi-Yonah and Haiyan Xu, Evaluating BEPS, 185 HARV. BUS. L. REV.(2016), for a penetrating critique of the proposed BEPS program.153. Mark Gruenberg, EPI: Corporate tax avoidance close to $700 billion, PEOPLE’S WORLD (Oct.17, 2016), http://www.peoplesworld.org/article/epi-corporate-tax-avoidance-close-to-700-billion/.




On the positive side, the OECD reports reflect a keen awareness of thenature of the tax avoidance problem in all its complexity.154 Theorganization covers both the details of manipulative transfer pricing and theneed for greater international transparency—and thus goes after bothtechnical implementation and a broader, more transcendent set of taxprinciples.155 It calls for an end to tax treaty abuse that leads to “double non-taxation,”156 as well as such devices as excessive deductible payments ofinterest (often on loans made by the corporation to another arm of itself)and manipulated transfer pricing between companies and theirsubsidiaries.157

It does seem that the OECD proposals have already had somepreliminarily positive effects, especially with regard to pre-emptive changesin corporate behavior, with tax planners taking into account that realchanges (at the national legislative level) may be on the horizon.158 But there

154. See, e.g., Mandatory Disclosure Rules, supra note 150.155. See Org. for Econ. Co-operation and Dev. [OECD], Aligning Transfer Pricing Outcomeswith Value Creation, Actions 8-10 – 2015 Final Reports, OECD/G20 Base Erosion and ProfitShifting Project, ISBN 978-92-64-24124-4 (Oct. 5, 2015), http://dx.doi.org/10.1787/9789264241244-en [hereinafter Aligning Transfer Pricing Outcomes with Value Creation];Mandatory Disclosure Rules, supra note 150; Org. for Econ. Co-operation and Dev. [OECD],Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report,OECD/G20 Base Erosion and Profit Shifting Project, ISBN 978-92-64-24148-0 (Oct. 5, 2015),http://dx.doi.org/10.1787/9789264241480-en [hereinafter Transfer Pricing Documentation].156. See Aligning Transfer Pricing Outcomes with Value Creation, supra note 137, at 69; see alsoOrg. for Econ. Co-operation and Dev. [OECD], Preventing the Granting of Treaty Benefits inInappropriate Circumstances, Action 6 – 2015 Final Report, OECD/G20 Base Erosion and ProfitShifting Project, ISBN 978-92-64-24169-5 (Oct. 5, 2015), http://dx.doi.org/10.1787/9789264241695-en [hereinafter Action 6 – 2015 Final Report]. OECD Action Plan 5 states that:

In the area of transparency, a framework covering all rulings that could give rise toBEPS concerns in the absence of compulsory spontaneous exchange has beenagreed. The framework covers six categories of rulings: (i) rulings related topreferential regimes; (ii) cross border unilateral advance pricing arrangements(APAs) or other unilateral transfer pricing rulings; (iii) rulings giving a downwardadjustment to profits; (iv) permanent establishment (PE) rulings; (v) conduit rulings;and (vi) any other type of ruling where the FHTP agrees in the future that theabsence of exchange would give rise to BEPS concerns. This does not mean thatsuch rulings are per se preferential or that they will in themselves give rise to BEPS,but it does acknowledge that a lack of transparency in the operation of a regime oradministrative process can give rise to mismatches in tax treatment and instances ofdouble non-taxation.

Org. for Econ. Co-operation and Dev. [OECD], Countering Harmful Tax Practices MoreEffectively, Taking into Account Transparency and Substance, Action 5 – 2015 Final Report, at 10,OECD/G20 Base Erosion and Profit Shifting Project, ISBN 978-92-64-24119-0 (Oct. 5, 2015),http://dx.doi.org/10.1787/9789264241190-en.157. See Org. for Econ. Co-operation and Dev., Action 6 – 2015 Final Reports, supra note 156;see also Org. for Econ. Co-operation and Dev., Actions 8-10 – 2015 Final Reports, supra note 155.158. It is clear that tax accountants and lawyers have been intensely focused on how to assisttheir clients in avoiding tax. Were the OECD standards to become generally applicable, itwould represent a profound change. See, e.g., Laurence Knight, Corporate Tax Avoidance: How




is intense suspicion among developing countries that the OECD will nothave the ability to curb tax avoidance sufficiently to ensure that developingcountries also receive their fair share of taxes on profits earned bymultinationals in those countries.159 As indicated above, in addition to themassive outflow of tax revenue from the home countries of multinationals,developing countries are now losing more money because of tax avoidanceschemes than they receive in foreign aid—in fact, far more.160 Given theOECD’s mission and membership, as well as the limited nature of itsenforcement mechanisms, it is not surprising that critics are skeptical as towhether its well-informed proposals will ultimately translate into seriouspolicy changes.161

Do Companies Do It?, BBC NEWS (Dec. 4, 2012), http://www.bbc.com/news/business-20580545;Jeffrey Knapp, Big Four Accounting Firms Avoid Scrutiny in Multinational Tax Avoidance, THE

CONVERSATION (Feb. 24, 2016, 2:02 PM), http://theconversation.com/big-four-accounting-firms-avoid-scrutiny-in-multinational-tax-avoidance-54879; Rajeev Syal, Simon Bowers &Patrick Wintour, ‘Big Four’ Accountants ‘Use Knowledge of Treasury to Help Rich Avoid Tax’, THE

GUARDIAN (Apr. 26, 2013), https://www.theguardian.com/business/2013/apr/26/accountancy-firms-knowledge-treasury-avoid-tax (explaining that the largest accountancy firms advised thegovernment on tax-related legislation, while then advising multinational clients on how to avoidpaying tax). But see Michael Cohn, OECD BEPS Heralds Big Changes for Tax Pros and CorporateTreasurers, ACCOUNTING TODAY (Nov. 6, 2015, 4:51 PM), http://www.accountingtoday.com/blogs/debits-credits/news/oecd-beps-heralds-big-changes-for-tax-pros-and-corporate-treasurers-76347-1.html.159. A recent conference in Ethiopia was intended to integrate the OECD project withconversations on development financing. Developing countries, who themselves lose hugeamounts of tax revenue to international tax avoidance schemes, were eager to promote the ideaof an international body with oversight in global tax matters. This cooperative attempt fellapart as major OECD countries resisted giving a new body any such powers. See OECD HoldsThree Tax Events in Addis to Promote Resource Mobilization, OECD (July 13, 2015), https://www.oecd.org/newsroom/oecd-holds-three-tax-events-in-addis-to-promote-domestic-resource-mobilisation.htm (noting approvingly the participation of developing countries in the OECD’sBEPS project). See also William Davison, Poor Nations Push for UN Body to Cut Company TaxAvoidance, BLOOMBERG (July 13, 2015, 10:53 AM), http://www.bloomberg.com/news/articles/2015-07-13/poor-nations-push-for-global-agency-to-cut-company-tax-avoidance (noting adeveloping country demand that responsibility for international tax policy should be movedfrom the OECD to the United Nations and a new global agency). Ironically, though, OECDcountries participating in the Ethiopia conference proved unwilling to address the taxavoidance/evasion issue. See Cecile Barbiere, Addis Ababa Development Financing ConferenceStumbles on Tax Evasion, EURACTIV (July 17, 2015), http://www.euractiv.com/section/developmnet-policy/news/addis-ababa-development-financing-conference-stumbles-on-tax-evasion/.160. See Barbiere, supra note 159 (quoting the director of the German NGO, VENRO, to theeffect that “for each euro invested, developing countries lose two euros to capital flight,particularly through the illegal transfer of business profits”). The article goes on to note that,according to UN estimates, such financial flows cost developing countries around 100 billioneuros per year. Id.161. See Simon Bowers, OECD Hopes Tax Reforms Will End Era of Aggressive Avoidance, THE

GUARDIAN (Oct. 5, 2015, 1:19 PM), https://www.theguardian.com/business/2015/oct/05/oecd-hopes-reforms-will-end-era-of-aggressive-tax-avoidance. Due to the large, multinationalnature of many of these corporations that pursue aggressive tax planning as a way of minimizingtheir total tax liability globally, critics believe that reforms will be difficult. Id. Countries also




C. RECENT DEVELOPMENTS IN THE EU: ARE THEY SERIOUS THIS

TIME? A TAX AVOIDANCE CRISIS AND THE LONG SEARCH

FOR A LEGAL THEORY

The European Commission has emphasized the vexed issue of corporatetax avoidance for many years.162 It has attempted to identify legal theories bywhich to get at the problem of member states that attract investment andjobs by offering (mainly US) multinational corporations specialopportunities to avoid most or even all appropriate taxation.163 Thefundamental roadblocks to this effort are: (1) EU legislation on the specifictopic of direct taxation requires unanimous acceptance by all the memberstates, which by definition has been difficult to achieve and dominated byclaims of national sovereignty;164 and (2) the difficulty posed by the fact thatindividual member state attempts to deal with corporate tax-avoidingbehavior by companies have been hampered by case law of the Court ofJustice of the EU, which has characterized such moves as being contrary toEU market rules. In other words, the Court of Justice of the EuropeanUnion (CJEU) has disallowed attempts by certain member states to passnational legislation containing anti-avoidance rules for corporations tofollow.165 The CJEU has unfortunately described member state attempts atself-help actions against the permissive rules of other member states asrestrictive of free movement, and thus contrary to core principles in the EUtreaties.166 Thus, the legal landscape facing the European Commission as it

compete with each other on taxation in an effort to attract new business to their jurisdiction. Id.“‘The [continuing international tax] system invites governments to destabilise [OECDrecommended reforms] by competing with each other for economic activity, tax revenue, andpossibly to try to advantage their own domestic companies . . . .’” Id. See also Peter Teffer, G20to Discuss Tax Avoidance Rules, but Critics Dubious, EU OBSERVER (Oct. 6, 2015, 9:16 AM), https://euobserver.com/economic/130565 (describing loopholes in the measures that allow companiesto continue to pursue aggressive tax avoidance plans).162. The EU Commission has had this issue on its radar screen since at least the late 1990s,although the problem has grown larger in recent years. See, e.g., Towards Tax Co-ordination in theEuropean Union – A Package to Tackle Harmful Tax Competition, COM (1997) 495 final (Jan. 10,1997).163. See, e.g., id. app. para. E.164. Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishingthe European Community, Dec. 13, 2007, 2007 O.J. (C 306) 1.165. See Ross Fraser, Reviewing the ECJ’s Judgment in Cadbury Schweppes, INT’L LAW OFFICE

(Oct. 20, 2006), http://www.internationallawoffice.com/Newsletters/Corporate-Tax/United-Kingdom/Herbert-Smith-LLP/Reviewing-the-ECJs-Judgment-in-Cadbury-Schweppes#(noting that in light of the Court’s rulings, “EU law precludes the United Kingdom fromcharging tax under the controlled foreign company provisions on the profits of non-UKsubsidiaries based in the European Economic Area (EEA) unless the provisions contains a ‘carveout’ for transactions and structures which are not wholly artificial.”).166. See Lilian V. Faulhaber, Sovereignty, Integration and Tax Avoidance in the European Union:Striking the Proper Balance, 48 COLUM. J. TRANSNAT’L L. 177 (2010) (describing in detail thesevere restrictions placed by the CJEU on Member States attempting to enact national anti-avoidance rules). The Court has chosen to emphasize free movement market principles and haslimited Member States to acting only when faced with “wholly artificial arrangements”. See id.




has tried to eliminate harmful tax competition has been difficult. In aninteresting legal development, the Commission has turned to the concept of“state aids,” or national subsidies, to attack member state behavior thatfacilitates corporate tax dodging.167 It remains to be seen whether thisapproach by the Commission will hold up if challenged by affected memberstates before the CJEU.168

The EU is known for its “social market”—a free market bounded by rulesand standards on consumer protection, social welfare and environmentalvalues.169 It is a highly legalistic system and has proven itself to be legallyimaginative and flexible over many decades. If any jurisdiction would seemto have the capacity to confront and defeat rampant tax avoidance, it wouldbe the EU. And yet, legislative solutions have until recently eluded theEuropean Commission, in large part because, as explained above, EU-widelegislation on matters of direct taxation requires unanimous agreement of allEU member states.170 By definition, detrimental member state tax ratecompetition favors the offending member state itself, at the expense of someother country, whether in the EU or outside.171 Member states that areheavily reliant on providing such “services” to corporations have been seenas unlikely to vote in favor of legislation that would shut them down.172

In light of recent adverse publicity on tax havens, and the high profile ofcertain “tax avoidance facilitation” EU member states like Ireland,Luxembourg, and the Netherlands, it appears that the EuropeanCommission is finally making good on its multi-year threats to bring the full

§ II. Thus Member States legislating to prevent corporate tax dodging may not be restrained bynational legislation simply because the Member State in question sincerely wishes to preventsuch behavior, as long as the national measure constitutes a single market restriction. See id.167. See U.S. DEP’T OF THE TREASURY, THE EUROPEAN COMMISSION’S RECENT STATE AID

INVESTIGATIONS OF TRANSFER PRICING RULINGS – U.S. DEPARTMENT OF THE TREASURY

WHITE PAPER at 2-3 (Aug. 24, 2016).168. Ireland has consistently claimed that it would bring a Court of Justice challenge to anyCommission decision that imposed back taxes on Apple. See, e.g., Michael Hennigan, Ireland’sDefence of Apple in EU State Aid Case is a Sham, FINFACTS (Dec. 15, 2015), http://www.finfacts.ie/Irish_finance_news/articleDetail.php?Ireland-s-defence-of-Apple-in-EU-state-aid-tax-case-is-a-sham-430 (reviewing the special arrangements Ireland made with Apple, andindicating that if the Commission found an illegal state aid, Ireland would be in the oddposition of challenging a decision that in fact yielded it billions of euros). The author calls this“political Kabuki.” Id. See also Paul Hannon, Ireland to Appeal EU’s Apple Tax Ruling, WALL ST.J. (Sept. 2, 2016), http://www.wsj.com/articles/ireland-appeals-eus-apple-tax-ruling-1472820356.169. Consolidated Version of the Treaty on European Union art. 3, Oct. 26, 2012, 2012 O.J.(C326).170. Suzanne Lynch, EU Parliament Endorses Clampdown on Tax Avoidance, IRISH TIMES (June 8,2016, 5:14 PM), http://www.irishtimes.com/business/economy/eu-parliament-endorses-clampdown-on-tax-avoidance-1.2677211.171. See id.172. See id. (“The European Parliament voted overwhelmingly in favour of a EuropeanCommission anti-tax avoidance package on Wednesday, though most Irish MEPs abstained orrejected the proposal.”).




force of EU law to bear on the crisis of vanishing revenue.173 As we haveseen, it is ironic that it is these EU countries—ostensibly progressive andpublic spirited—that have been the most egregious abusers of techniques tofacilitate corporate tax evasion and avoidance. When obscure island localesoffer such services, the effect may be important, but the evasion is too crudeto be completely useful. EU member states, by contrast, have used theirfavored position within the European market, as well as their tax treatieswith the United States, to assist multinational corporations in the mostaudacious kind of tax avoidance.174 In this sense, several EU member stateshave literally made the multinational dream come true.175

As mentioned above, coming at the problem through ordinary legislativemeans has proven problematic, due to the EU’s unanimity votingrequirement in this subject matter area. Strong opposition was expressed toa recently drafted Anti-Avoidance Directive by the tax avoidance states.Indeed, up to ten EU member states vowed to oppose this proposeddirective, based on the OECD BEPS principles.176 On the positive side ofthe ledger, the Commission continued to push for the adoption of thedirective, to put in place clear, if not comprehensive, legislation outlawingthe most egregious member state behavior in this realm.177 In the wake ofthe Brexit vote, and without Britain to lead the skeptical charge againstcorporate tax coordination, European Finance Ministers finally voted toaccept the “Anti-Avoidance Directive.”178 Although Oxfam and othergroups have criticized the directive as inadequate, it nevertheless reflects astep in developing an EU-wide policy against abusive tax accounting and

173. See EU Tax Avoidance Directive, supra note 84. The EU Tax Avoidance Directive “appliesto all taxpayers that are subject to corporate tax in one or more Member States, includingpermanent establishments in one or more Member States of entities resident for tax purposes ina third country.” Id. at art. 1.174. See Fintan O’Toole, US Taxpayers Growing Tired of Ireland’s One Big Idea, IRISH TIMES

(Apr. 19, 2016), http://www.irishtimes.com/opinion/fintan-o-toole-us-taxpayers-growing-tired-of-ireland-s-one-big-idea-1.2615065.175. See id.176. See Werner Haslehner, The Commission Proposal for an Anti-BEPS Directive: SomePreliminary Comments, KLUWER INT’L TAX BLOG (Feb. 5, 2016), http://kluwertaxblog.com/2016/02/05/the-commission-proposal-for-an-anti-beps-directive-some-preliminary-comments/(noting concern about EU competence in this area); see also EU Finance Ministers Fail to Agree onAnti-Tax Avoidance Directive, OUT-LAW.COM (May 27, 2016), http://www.out-law.com/en/articles/2016/may/no-agreement-from-eu-finance-ministers-on-anti-tax-avoidance-directive/.177. See EY Tax Insights for Bus. Leaders, European Commission Releases Anti-Tax AvoidancePackage Designed to Provide Uniform Implementation of BEPS Measures and Minimum StandardsAcross Member States, http://taxinsights.ey.com/archive/archive-news/european-commission-releases-anti-tax-avoidance-package.aspx (last visited Jan. 19, 2017).178. Todd Bradshaw, Christiana Serugova & Radoslav Kratky, EU Countries Reach PoliticalAgreement on Anti-Tax Avoidance Directive, PWC TAX & LEGAL ALERT (July 2016), http://www.pwc.com/sk/en/tax-news/eu-countries-reach-political-agreement-on-anti-tax-avoidance-directive.html.




member state facilitation of tax avoidance.179 The Directive covers a numberof areas of concern, including so-called hybrid mismatches.180

As mentioned above, the Commission has recently followed through indealing with tax evasion via another legal approach: a state aids (unlawfulnational subsidies) theory.181 In the EU, state aids (essentially subsidiesoffered by national governments to companies within their territorialjurisdiction) must be passed through the Commission and approved.182 If amember state should offer such state aid and if it is later found to be contraryto the EU treaty (because of distortions caused to the EU market), themember state might have to retrieve the aid from the company inquestion.183 This is obviously painful and disruptive, and serves as apotentially powerful deterrent.184 Until recently, state aids rules had notbeen used to try and address the pan-European—indeed, global—issue ofcorporate tax avoidance. The EU commissioner in charge of Competitionmatters, Margarethe Vestager, has placed great emphasis on the corporatetax/competition law intersection, and moved forward creatively to apply the

179. See, e.g., Florian Oel, EU Anti-Tax Avoidance Package Will Fail to End the Era of Tax Havens,Warns Oxfam, OXFAM INT’L (Jan. 28, 2016), http://oxf.am/Znr9; see also, Bongaerts,Knijnenburg, & IJzerman, supra note 131 (describing criticism of the ATA Directive from taxpractitioners of some EU member states).180. The term “hybrid mismatches” refers to situations where:

there are differences in the legal characterization of payments or entities betweenEU member states. The rules would require that when an entity or instrument isclassified differently in different member states, the treatment in the state in whichthe first deduction is claimed should be followed by the second state where eitherincome is received or a second deduction is claimed.

See Bill Dodwell, European Commission Releases Proposed Anti-Tax Avoidance Package, DELOITTE

EUROPEAN UNION TAX ALERT (Jan. 28, 2016), https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-alert-european-union-28-january-2016.pdf. Also coveredin the Directive are interest restrictions, such that the deduction of financing costs should berestricted to a certain percentage of earnings. Id. Further, controlled foreign company rules willbe established for the member states, creating restrictions on the apportionment of profitsamong subsidiaries. Id.181. See U.S. DEP’T OF THE TREASURY, THE EUROPEAN COMMISSION’S RECENT STATE AID

INVESTIGATIONS OF TRANSFER PRICING RULINGS – U.S. DEPARTMENT OF THE TREASURY

WHITE PAPER (Aug. 24, 2016).182. See Nicholas J. DeNovio, Elisabetta Righini & Nicolle Nonken Gibbs, State Aid: What ItIs, and How It May Affect Multinationals and Tax Departments, TAX EXECUTIVE (Apr. 6, 2016),http://taxexecutive.org/state-aid-what-it-is-and-how-it-may-affect-multinationals-and-tax-departments/ (describing the European Commission as “the sole body charged with state aidenforcement”).183. See Press Release, European Comm’n, Commission Decides Selective Tax Advantages forFiat in Luxembourg and Starbucks in the Netherlands are Illegal Under EU State Aid Rules,IP/15/5880 (Oct. 21, 2015) (“[A]s a matter of principle, EU state aid rules require thatincompatible state aid is recovered in order to reduce the distortion of competition created bythe aid.”).184. See DeNovio, Righini & Gibbs, supra note 182 (providing a practical backgrounddescription of what multinational corporations should look for in the EU’s enhanced use ofstate aids law to confront tax avoidance effected through Member State “tax rulings”).




state aid concept to special taxation deals that involve the granting bymember state governments of EU market-distorting “aids” in the form of taxrevenue foregone.185

At the time of this writing, the European Commission has determinedthat Ireland broke EU rules on state aids in the deals made with Apple.186

The Commission has also found tax deals made by the Belgian governmentwith several large corporations to constitute illegal state aids.187 Asindicated, the “enforcement” aspect of this approach is that when illegalstate aids are found, the member state government in question is required tocollect the amount of the unlawful subsidy back from the company receivingthe aid.188 In the case of tax deals, collecting taxes foregone from amultinational corporation is obviously difficult, and resembles a financialpenalty. This remedy is extremely effective, though, and unless theCommission decisions are overturned on appeal to the CJEU, is likely toprove one of the more innovative and effective techniques used todisincentivize corporate tax avoidance in the EU to date.189

As background, many voices in the EU have decried tax avoidancefacilitation by member states over many years. For a long time, Ireland wasthe most obvious source of the problem, drawing in American multinationalsby offering low rates of tax and assistance in avoiding even that low level oftax.190 Even though the EU reined in the most clearly discriminatory aspectsof the Irish schemes in 2014, the European Commission struggled to find away of inducing Ireland to separate its development policy from over-

185. See Nicholas Hirst, Vestager Hits Fiat and Starbucks With Tax Claw-Back, POLITICO (Oct.21, 2015), http://www.politico.eu/article/vestager-fiat-starbucks-taxation-claw-back-netherlands-state-aid/ (noting that her state aids rulings “represent an unprecedented attack onthe ability of certain European countries, notably Luxembourg and Ireland, to marketthemselves as tax havens to corporations”).186. See Sean Farrell & Henry McDonald, Apple Ordered to Pay _13bn After EU Rules IrelandBroke State Aid Laws, THE GUARDIAN (Aug. 30, 2016, 10:33 AM), https://www.theguardian.com/business/2016/aug/30/apple-pay-back-taxes-eu-ruling-ireland-state-aid (outlining effectof EU state aid ruling on Ireland’s tax arrangement with Apple).187. See Press Release, European Comm’n, State Aid: Commission Concludes Belgian “ExcessProfit” Tax Scheme Illegal; Around 700 Million Euros to be Recovered From 35 MultinationalCompanies, IP/16/42 (Jan. 11, 2016) (referring to the fact that this scheme had allowed certainmultinational companies to pay substantially less tax than would otherwise have been due, onthe basis of Belgian state rulings providing the companies with these special rates).188. Id.189. Id.190. Ireland has relied on both a very low absolute rate of corporate tax (in recent years, 12.5percent) and further “services” to multinational corporations in the form of special schemes andstratagems that allow the companies to avoid paying little or no taxes on certain income. SeeStephen Castle & Mark Scott, Ireland to Phase Out ‘Double Irish’ Tax Break Used by Tech Giants,N.Y. TIMES at 1, 4 (Oct. 14, 2014), https://www.nytimes.com/2014/10/15/business/international/ireland-to-phase-out-tax-advantage-used-by-technology-firms.html?_r=0. Ireland has longargued that because the EU treaty requires EU legislation in the area of direct taxation to beadopted unanimously, it was acting within its sovereign rights when serving U.S. multinationalcorporations in this manner. Id.




reliance on tax schemes.191 The cleanest and simplest solution wouldobviously be legislatively-based coordination of corporate tax rates at EUlevel, or at least strong member state coordination in levels of corporatetaxation. This long remained beyond the jurisdictional reach of the EU,however, because, as already indicated, direct taxation is one of the fewTreaty areas still requiring unanimous decision-making on the part of all EUmember states. In particular, Ireland and Luxembourg took leading roles indefending this “tax competition” as a key aspect of EU “subsidiarity”—withthe UK, the Netherlands and the Channel Islands right behind.192 It seemsthat with Britain out of the legislative picture post-Brexit, there might beroom for faster progress on the corporate tax front.

In fact, it seems that the Commission has managed to seize the momentand successfully pushed for a coordinated approach to corporate taxcollection across the EU; however, there is as yet no harmonization of rates,nor even the establishment of a tax rate floor.193 Especially in light of recentthreats to Eurozone unity during the Greek financial crisis, it remains to beseen whether the EU institutions will expend the political capital necessaryto either float treaty changes, or go for “enhanced cooperation” on this issuewith a select group of EU member countries.194

A key element, as reflected to some extent in the Anti-AvoidanceDirective, will be the finalization of a CCTB mechanism, designed to trackand accurately allocate the profits of multinational corporations according towhere the profits were actually generated within the EU, as part of theCommission’s long-term plan for corporate tax reform.195 This might well

191. See id. at 2 (noting that both the EU and the Obama administration had put pressure onIreland to eliminate the so-called “double Irish” tax break, under which “corporations withoperations in Ireland . . . make royalty payments for intellectual property to a separate Irish-registered subsidiary. That subsidiary, though incorporated in Ireland, typically has its home ina country that has no corporate income tax”). Ireland still hopes to replace this scheme withanother form of intellectual property-based loophole, though the EU may forge ahead with itslong-term plan to create some kind of floor on corporate tax rates.192. Apart from the affected member states, corporate voices have been strong in theirresistance to the idea of EU-wide corporate tax coordination. See, e.g., Giacomo LevMannheimer, There’s No Such Thing as ‘Harmful’ Tax Competition in the EU, CAPX (May 4,2016), http://capx.co/theres-no-such-thing-as-harmful-tax-competition-in-the-eu/ (arguingthat tax coordination would interfere unfairly in individual member states’ autonomy).193. Matthew Holehouse, France and Germany Behind Plans for ‘Common EU Corporation Tax’,THE TELEGRAPH (2015), http://www.telegraph.co.uk/news/worldnews/europe/eu/11630468/France-and-Germany-behind-plans-for-common-EU-corporation-tax.html.194. See TFEU, supra note 82, at art. 326-88; see also Treaty of Lisbon, supra note 164, at art.20.195. In an effort to combat the use of base erosion and profit shifting methods by multinationalcorporations, the EU has proposed making the CCTB measures in their Anti-AvoidanceDirective from January 2016 a mandatory requirement for all multinational companies. SeeThe Outlook for Global Tax Policy, EY (2016), http://www.ey.com/Publication/vwLUAssets/ey-the-outlook-for-global-tax-policy-in-2016/$FILE/ey-the-outlook-for-global-tax-policy-in-2016.pdf (describing general changes in corporate tax policy worldwide in 2016). See also LeakedEU directive makes CCTB/CCCTB Tax Scheme mandatory for large multinationals, MNE TAX




put an end to companies funneling profits through low or no tax countrieswithin the EU. This hard-edged solution has been strongly resisted by EUmember countries that derive a large share of their jobs and revenue fromthe very multinationals that would be disadvantaged by any such changes—namely Ireland, the (at least pre-Brexit) UK, Luxembourg and theNetherlands. Ireland especially has continued to build essentially all of itsnational economic policy around providing tax avoidance strategies tomarquee level multinational corporations.196 Ireland may prove to be thebiggest loser from the Commission’s long awaited drive to bring this issueinto legislative form.

On the state aids front, it is heartening that the European Commissionhas recently reverted to “thinking like a (tax) lawyer,” and has tried to find astrong legal rationale for attacking member state tax arrangements that allowmultinational corporations to avoid appropriate taxes. The state aidsapproach is an innovative, though risky, strategy, as it depends upon theCJEU ultimately agreeing with the Commission that a particular type of taxagreement (“sweetheart deal”) between an EU member state and amultinational corporation is in fact a “state aid,” or unlawful national subsidyto the industry.197 Should such a legal challenge not go the Commission’sway, it would constitute a major setback to the entire European project.198

Should the state aids approach survive legal challenge, the prospect of majortax repayment could pave the way to significant changes in the way memberstate governments interact with multinational investors—companies whosecapital these states are seeking to attract.

(Oct. 20, 2016), http://mnetax.com/leaked-cctb-directive-ccctb-directive-mandatory-for-large-multinationals-17708 (stating that this directive, if adopted, would require multinationalcompanies to comply with the E.U.’s CCTB mechanism implemented in January 2016). Seegenerally Proposal for a COUNCIL DIRECTIVE on a Common Corporate Tax Base (CCTB), COM(2016), http://mnetax.com/wp-content/uploads/2016/10/proposed-directive-ccctb.pdf.196. At least in public, the Irish government in a post-Brexit world has expressed support forthe newly adopted Anti-Avoidance Directive. However, Ireland continues to insist on its rightto maintain a very low rate of corporate tax generally, as part of its sovereign control over directtaxation matters. See Press Release, Ireland Department of Finance, Minister Noonanwelcomes agreement on the Anti-Tax Avoidance Directive (June 22, 2016), available at http://www.finance.gov.ie/news-centre/press-releases/minister-noonan-welcomes-agreement-anti-tax-avoidance-directive.197. See Raymond Luja, Directorate Gen. for Internal Policies, Policy Dep’t A: Econ. and Sci.Policy, EU State Aid Law and National Tax Rulings, at 6-11, IP/A/TAXE/2015-02 (Oct. 13,2015), available at http://www.europarl.europa.eu/RegData/etudes/IDAN/2015/563453/IPOL_IDA(2015)563453_EN.pdf.198. The implications of linking state aids law and corporate tax coordination are quite large.See, e.g., James Waterworth, State Aid Rulings Decoded: What to Watch out For, DISRUPTIVE

COMPETITION PROJECT (Nov. 12, 2015), http://www.project-disco.org/competition/111215-state-aid-rulings-decoded-what-to-watch-out-for/#.V46Qa_kwiUk.




D. THE VIEW FROM THE U.S.: ANY COMMITMENT TO CLOSING

“LOOPHOLES”?

U.S.-based corporations have undoubtedly learned a great deal overrecent decades on the subject of how to avoid paying “normal” levels of taxto the American government—or indeed, to any government. Thepercentage of government revenue attributable to corporate taxation hasplummeted over time, and the elaborate devices relied upon by U.S.companies to avoid and evade U.S. taxes are well understood. Thus, it is notsurprising that there has been a great deal of discussion at the political levelabout how to ensure that U.S. companies pay their “fair share” of taxes. It isalso unsurprising that Congress has failed to take meaningful action toprevent corporate tax-avoiding behavior, and that the problem continues totrouble the American public year after year, and revelation after revelation.

Important aspects of the U.S. corporate tax scene are that U.S. corporatetaxes are “worldwide,” rather than territorial.199 This means that profitsgained by U.S. firms abroad are subject to U.S. taxes, rather than just onprofits derived within the United States.200 (This is not the case in mostother jurisdictions.) These taxes may be “deferred” until the profits arerepatriated, creating powerful incentives for U.S. firms to leave the profitsparked offshore.201 Tax treaties with other countries confront the problem ofdouble taxation, allowing U.S. persons to deduct taxes paid in anotherjurisdiction from U.S. taxes owed.

In addition, U.S. corporate taxes are relatively high at 35 percent.202 Thatbeing said, most large corporations do not pay anything like this level oftaxation, depending on their ability to manipulate the rules on corporatenationality.203 As this article has described above, corporate accountantshave developed ways to attribute profits to places where taxes are extremelylow or non-existent, even if (as is usually the case) little economic activityactually occurred there.

So the situation in the United States is that Democratic members ofCongress have pushed forward legislation that will plug the many loopholesin the U.S. tax code, and bring back honest levels of corporate tax revenue tothe United States. These initiatives are blocked in turn by Republican

199. The more pro-corporate voices in the U.S. favor changing the U.S. over to a territorialsystem, although others argue that this would further encourage an exodus of corporations fromthe U.S. See Curtis S. Dubay, A Territorial System Would Create Jobs and Raise Wages for USWorkers, HERITAGE FOUNDATION (Sept. 12, 2013), http://www.heritage.org/research/reports/2013/09/a-territorial-tax-system-would-create-jobs-and-raise-wages-for-us-workers.200. Id.201. See Americans for Tax Fairness, Tax Fairness Briefing Booklet: Offshore Corporate TaxLoopholes (2014), available at http://www.americansfortaxfairness.org/files/ATF-Offshore-Corporate-Tax-Loopholes-Fact-Sheet.pdf (arguing that the best way to end the practice of U.S.corporations in shifting profits to low tax jurisdictions is to end deferral on tax of foreign-derived profits).202. See id. at 2.203. See id.




members of Congress, on the grounds that there must first be “fundamentalreform” of the U.S. tax code, and a change in overall corporate taxorientation. Fundamental reform is generally understood to refer to aswitch to territorial, rather than worldwide, taxation and a lowering of therate of corporate taxation. Other commentators counter that a changeoverto territorial taxation would incentivize large numbers of U.S. corporationsin moving abroad to avoid U.S. taxes.204 The argument is also made that theU.S. corporate tax rate is not in fact all that high, and that the real rate paidby U.S. companies is far lower, given all the deductions available.

In January 2015, Democrats and Republicans in both the House ofRepresentatives and Senate introduced a bill called the “Stop Tax HavenAbuse Act.”205 While the bill has had its critics, it did try to address some ofthe principal aspects of tax avoidance by U.S. corporations, namely byattacking “inversions” that allow U.S. corporations to become foreignentities through being purchased by foreign firms; limiting the amount ofdebt interest that can be deducted from tax liability, a practice known as“earnings stripping”; requiring country-by-country reporting of earnings bylarge corporations; and making it much harder to shift profits from a high-tax to a low-tax or no-tax jurisdiction.206 The bill’s provisions would go along way towards weakening the tax avoidance stratagems relied on by U.S.corporations and their accountants.207 The bill, however, has not movedforward in the legislative process.208

It would be unfair to say that the Obama Administration has not beensupportive of such Congressional initiatives. It is certainly the case,however, that the Administration has not been sufficiently supportive.209

Many in Congress have also been resistant to changing the rules underwhich their corporate allies operate. This article has argued thatgovernment policy is increasingly dominated by corporate interests, andmaintaining a low-tax and even no-tax environment is an item high on thewish list of all major U.S. corporations. Despite the high profile, charitable

204. See 24 International Tax Experts Oppose Plans in Congress to Give a Big Tax Break on $2.1Trillion in Offshore Corporate Profits and to Shift U.S. to a “Territorial” System, AMERICANS FOR

TAX FAIRNESS (Sept. 25, 2015), http://americansfortaxfairness.org/files/24-International-Tax-Experts-Letter-to-Congress-9-25-15-FINAL-for-printing.pdf.205. H.R. Res. 297, 114th Cong. (2015).206. Id. at sec. 401.207. See Summary of Stop Tax Haven Abuse Act, GLOBAL FIN. INTEGRITY (Mar. 2, 2009),available at http://www.gfintegrity.org/storage/gfip/2009%20stop%20tax%20haven%20abuse%20act%20summary%203-2-09.pdf.208. In fact, similar bills had been put forward a number of times, but were always stopped inCongress. See Sen. Carl Levin, Stop Tax Haven Abuse Act: New US Legislation Introduced, TAX

JUST. NETWORK (Sept. 20, 2013), https://taxjustice.blogspot.com/2013/09/stop-tax-haven-abuse-act-new-us.html.209. See id. (expressing the view that for whatever reason, the White House has not putsufficient energy into the corporate tax avoidance issue, although it has been energetic in itsapproach to tax avoidance by wealthy individuals). See also Charles Davidson, Cleaning Up theFinancial World, HUDSON INST. (June 28, 2016), http://www.hudson.org/research/12606-cleaning-up-the-financial-world.




giving done by many corporations, this largesse pales in comparison with theamount of money being saved through tax-avoiding strategies.

The U.S. media reported widely on the phenomenon of “inversions”during 2014-2015.210 Because of several inversions by large and prominentU.S. corporations, inversions became the public face of corporate taxavoidance for a period of time.211 This attention was aided by the fact thatthe U.S. corporations in question actually changed their nationality, thusleading to charges of “un-American” corporate behavior, which in turn,naturally became a focus for public outrage.212 These inversions, a processallowing U.S. corporations to change corporate nationality by being boughtout by foreign companies, were of course motivated by tax considerations.213

As U.S. corporate tax rates are high by international standards, the idea isthat U.S. based multinationals can gain tax advantages by no longer being“U.S.” corporations.214

During 2015-2016, President Obama and Treasury Secretary Jack Lewsounded the alarm on corporate inversions, denouncing them and vowing torein them in.215 While unable to bring about any legislative action inCongress, the President took a number of steps through executive powersavailable to him, adopting rules that would make inversions more difficult,even if not eliminating them for all time.216 The Treasury Departmentadopted temporary regulations to hinder U.S. firms from shifting their assetsand profits to lower tax jurisdictions through the inversion process.217

Exactly why the inversion phenomenon took center stage, as opposed to thelarger story of U.S. corporations and their multi-faceted quest to avoid taxes—is unclear. President Obama famously called these inversions “unpatriotic”and took steps at the executive level to make them less advantageous for U.S.corporations.218

210. See generally Scott DeAngelis, If You Can’t Beat Them, Join Them: The US Solution to theIssue of Corporate Inversions, 48 VAND. J.TRANSNAT’L L. 1353, 1354 (2015).211. See id.212. See id. at 1357-58.213. See id. at 1356.214. See id. at 1359, 1361.215. See Press Release, US Department of the Treasury, Treasury Announces Additional Actionto Curb Inversions, Address Earnings Stripping (Apr. 4, 2016), available at https://www.treasury.gov/press-center/press-releases/Pages/jl0405.aspx.216. Treasury has urged Congress to take permanent steps to prevent inversions by reducingthe tax advantages companies derive from inversions. Id. (describing the most recent in a seriesof temporary regulations introduced by the Treasury Department and Internal revenue Service,aimed at making it more difficult for companies to benefit from inversions).217. See generally id. This document provides a description of the proposed regulations.218. The business-oriented press in the United States has responded to President Obama’ssuggestion that inversions are “unpatriotic” with the argument that the high US corporate taxrates are outliers within the OECD, and that if US companies can legally pursue inversions, andthe tax rates remains high as they are, that inversions will continue to proliferate. See AndrewOsterland, Are corporate tax inversions ‘unpatriotic’?, CRAINS NEW YORK BUSINESS (Sept. 29,2015), http://www.crainsnewyork.com/article/20150929/FINANCE/150929855?template=print.




At the same time, the role of the U.S. in defending the interests of tax-avoiding U.S. companies is an ambiguous one. The European Commission,at the time of this writing, has handed down a major decision to the effectthat Irish tax deals with Apple constituted improper state aids, and thatApple will be required to “pay back” a certain amount of the taxesforegone.219 The Obama administration tried in vain to convince the EU’sCommissioner for Competition, Margarethe Vestager, not to find Ireland inviolation, and to stop her supposedly “discriminatory” pursuit of U.S.companies over their tax affairs in Europe.220 If the real goal of the Obamaadministration was to progress toward a point in time when the largest U.S.companies understand that they must pay a reasonable level of taxes on theirprofits, and in places where those profits are derived, it is difficult tounderstand the position of Secretary Lew in the Apple Corporation stateaids matter. Surely such a penalty, although painful for Apple in the shortterm, would teach a valuable lesson on the new global approach to taxation.On the other hand, if the Obama administration is less than serious aboutgenuine reform in the corporate tax realm, its repeated exhortations to theEuropean Commission on corporate America’s behalf make a good dealmore sense.

E. THE “INDEPENDENT COMMISSION FOR THE REFORM OF

INTERNATIONAL CORPORATE TAXATION”: PIE IN THE SKY?OR ROADMAP TO MAKING REVENUE STARVATION A

THING OF THE PAST?

Despite the highly technical nature of the corporate tax avoidance problem(if one looks primarily at the manner in which companies are structuringthemselves to avoid tax), it is not accurate to say that the global public lacksaccess to data on the problem. It is well established, most dramatically sincethe LuxLeaks and Panama Papers revelations, that major global corporationsare paying only a tiny fraction of what they “owe” the public good in variouscountries, causing severe revenue depletion and contributing to a crisis ofenforced austerity. The “leaks” phenomena were most useful for what theyconfirmed by way of cold, hard facts.

It is well known, and also well described by specialist scholars, that thelargest companies have armies of accountants who assist them in movingtheir money from one jurisdiction to another, and often to no actualjurisdiction at all, creating a fictional financial world in which no taxes or

219. Natalia Drozdiak & Sam Schechner, Apple Ordered by EU to Repay $14.5 Billion in Irish TaxBreaks, WALL ST. J. (Aug. 30, 2016), http://www.wsj.com/articles/apple-received-14-5-billion-in-illegal-tax-benefits-from-ireland-1472551598.220. See Duncan Robinson, Jack Lew Accuses Brussels of Bias Against US Companies, FIN. TIMES

(Feb. 11, 2016), https://www.ft.com/content/a12074e0-d0d6-11e5-92a1-c5e23ef99c77.




extremely low taxes only, are owed.221 As mentioned above, many nationalgovernments term this “healthy tax competition,” and the companiesthemselves, in various hearings, insist that they are only doing what is“allowed under the law.” That there is a serious legal gap, and that thiscould be solved in the near term, is abundantly clear. But this articlepresents the argument that many, perhaps most, national governments areattempting to confuse the public by promoting reforms of a weak andineffective nature, as opposed to the clear and meaningful legislativesolutions of the type set out, for instance, by the new “IndependentCommission for the Reform of International Corporation Taxation.”222

The Independent Commission approaches the problem of corporate taxavoidance in a manner that is comprehensive and idealistic. It treats thismassive global problem as one that can be solved with the right policyinterventions.223 Not surprisingly, the Commission has been criticized onthe grounds that its recommendations are very unlikely to be implementedby governments.224 The Commission’s “Declaration” sets out a Statementof Principles that makes the overall point that multinationals should be taxedas single firms doing business across international borders.225 The principles alsoinclude a commitment to ending “tax competition” by establishing aminimum corporate tax rate.226 The Statement recognizes that the oldsystem of corporate taxation has become obsolete and demands real reform,along with meaningful transparency and enforcement.227

A main driver behind the creation of the Independent Commission iseconomist Joseph Stiglitz, who has repeatedly made the point that thecurrent system of international corporate taxation cannot be justified on anyrational grounds.228 The Nobel Prize-winning Stiglitz has repeatedly calledfor a complete overhaul of the world’s outmoded system of taxation.

221. See Adam Jones & Vanessa Houlder, MPs Grill Accountants Over Tax Avoidance: ‘Big Four’Firms Accused of Undermining Society, FIN. TIMES (Jan. 31, 2013), https://www.ft.com/content/35692ffa-6bb0-11e2-8c62-00144feab49a.222. This Declaration was established by a broad coalition of civil society and labororganizations, including ActionAid, Alliance Sud, CCFD-Terre Solidaire, Christian Aid, theCouncil of Global Unions, the Global Alliance for Tax Justice, Oxfam, Public ServicesInternational, Tax Justice Network and the Word Council of Churches” and also supported byFriedrich Ebert Stiftung. See Independent Commission for the Reform of InternationalCorporate Taxation [ICRICT], Declaration of the Independent Commission for the Reform ofInternational Corporate Taxation (2015), available at http://www.icrict.org/wp-content/uploads/2015/06/ICRICT_Com-Rec-Report_ENG_v1.4.pdf [hereinafter ICRICT Declaration].223. See id.224. See, e.g., Robert Goulder, Global Tax Harmonization and Other Impossible Things, TAX

ANALYSTS BLOG (June 5, 2015), http://www.taxanalysts.org/blog/global-tax-harmonization-and-other-impossible-things/2015/06/05/165121.225. See ICRICT Declaration, supra note 222, at 1.226. See id. at 3.227. See id. at 1, 6-8. 12.228. See Ben Walsh, The International Tax System is ‘Repulsive and Inequitable.’ Here’s a Way toFix It, HUFFINGTON POST (Aug. 20, 2015), http://www.huffingtonpost.com/entry/multinational-corporations-taxes_us_55d4baede4b055a6dab265d9 (“If you had to argue on principle in




IV. Conclusion: A Staggering Problem, the Need for aCourageous Solution

Expert (but conservative) estimates of the amount of money parked inoffshore tax avoidance schemes reach to at least twenty to thirty trilliondollars.229 This is by any definition an unimaginable figure and a significantpercentage of the world’s total capital assets. Studies put the number ofoffshore “secrecy jurisdictions” to be around eighty.230 These practices areno longer confined to the margins, but constitute normal, predictablebehavior on the part of large corporations, as well as the wealthiestindividuals. Full payment of taxes is now characteristic only of the“immobile” classes—namely, people who work in ordinary jobs, with incomethat is clearly traceable by bureaucratic means. More than two trilliondollars in U.S. corporate profits alone are believed to be stashed away inoffshore vehicles.231 This translates into specific losses for the nationaltreasury in many countries, including losses of well over 300 billion dollarsper year in the United States.232 It really does not matter what kinds ofeconomic or non-economic “human rights” are articulated, nor whatnational laws purporting to reduce inequality are passed, given the enormouslevel of tax avoidance: the upshot is that national governments have lost andare losing available funds at a rate that far outpaces any possible publicpolicies in favor of human development. No Millennium Goals or HumanDevelopment Index can compete with this striking failure to get hold of therunaway phenomenon of corporate (and individual) tax avoidance.

The amount of money being set aside untaxed via all the existing schemesand centers dwarfs foreign aid, social welfare payments or other publicinterest or developmentally-oriented money transfers.233 Societies across the

favor of the current system, referred to as ‘transfer pricing’, over treating global companies asone entity and taxing them at one rate, ‘you’d be laughed out of court’, Stiglitiz says.”).229. This was the figure arrived at in a comprehensive report by the Tax Justice Networkseveral years ago, and the phenomenon has continued to expand. See James S. Henry, The Priceof Offshore Revisited: New Estimates for “Missing” Global Private Wealth, Income Inequality and LostTaxes, TAX JUST. NETWORK (July 2012), http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf.230. Id. at 12 (providing a description of the 80 largest tax havens). See Directorate Gen. forInternal Policies & Budgetary Affairs, Study on European Initiatives on Eliminating TaxHavens and Offshore Financial Transactions and the Impact of these Constructions on theUnion’s Own Resources and Budget, at 49, IP/D/CONT/IC/2012-071 (2013) (stating that thenumber of “secrecy jurisdictions” is around 80).231. See Richard Rubin, U.S. Companies Are Stashing $2.1 Trillion Overseas to Avoid Taxes,BLOOMBERG (Mar. 4, 2015), https://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-stashing-2-1-trillion-overseas-to-avoid-taxes (noting that a small number of bigU.S. tech firms account for one fifth of all U.S. corporate profits parked offshore).232. Chris Matthews, Here’s How Much Tax Cheats Cost the U.S. Government a Year, FORTUNE

(Apr. 29, 2016), http://fortune.com/2016/04/29/tax-evasion-cost/.233. See Leslie Wayne, UN Panel: Corporate Tax Avoidance is Africa’s Biggest Financial Drain,INT’L CONSORTIUM OF INVESTIGATIVE JOURNALISTS (Feb. 10, 2014), https://www.icij.org/blog/2014/02/un-panel-corporate-tax-avoidance-africas-biggest-financial-drain (quoting Thabo




world have become impoverished for lack of investment capital, largelybecause of the loose coalition of actors that has enabled corporations andwealthy individuals in their tax avoidance efforts.

Developing countries are especially hard hit when multinationalcorporations operating within their borders rely on elaborate tax avoidancemechanisms that rake profits out of the country.234 While public attentiontends to focus on issues such as development aid and philanthropicgenerosity, in fact, developing countries are losing hundreds of billions ofdollars in revenue every year as a direct result of tax avoidance schemesavailed of by corporate investors.235 These practices could not exist ifnational governments in capital exporting countries seriously addressed thecorporate taxation crisis and consequent revenue starvation. The newly-created Independent Commission for the Reform of InternationalCorporate Taxation has stated the problem this way: “Abusive multinationalcorporate tax practices are a form of corruption that weakens society anddemands urgent action.”236 Such a formulation re-characterizes the issue asone of widespread abuse, moving us away from ordinary ideas of “taxplanning” and even the understated “tax avoidance.” The increasingnormalcy of heavy reliance on tax havens is symptomatic of public-privatecollusion and the rise of the autonomous, de-nationalized corporation.

This article cannot fully address the many types of tax havens, thelegislative weaknesses that allow for tax avoidance and evasion, or thecomplex machinations of tax lawyers and accountants. The basic contours oftax havens have been well outlined in the popular press and well documentedin the academic literature. As has been stated above, the extraordinaryfeature of contemporary economic life on the global stage is that nationalgovernments have gone so far to facilitate tax dodging, a dramatic instance ofgovernments working on behalf of the mega-wealthy and multinationalcorporations, with seemingly no regard for the obvious needs of ordinarypeople in the form infrastructural investments, education, social welfare,health, and other public goods.

As described above, a main pillar in the policy recommendations of theIndependent Commission is the legislatively-based elimination of artificialsegmentation of multinational corporations, and a call to return to a visionof the large company as one entity, with profits derived and properly taxablein the different jurisdictions of its operation.237 The Commission hasinsisted that the only fair solution is to have appropriate taxes paid wherever

Mbeki as stating that “an estimated $50 billion a year seeps out of Africa through illicit capitaloutflows, which is twice as much as the amount of foreign aid the continent received eachyear”).234. See Bearak, supra note 97 (noting that African governments lose at least 30 to 60 billiondollars per year to tax evasion, with some estimates closer to 1 trillion dollars).235. Wayne, supra note 233.236. See ICRICT Declaration, supra note 222, at Statement of Principles.237. Id.




the activities are performed and the profits derived.238 This concept is verysimilar in nature to what has long been proposed by the EuropeanCommission in the idea of CCCTB.239 As things currently stand,multinational corporations essentially choose the jurisdiction they wish topay taxes in—and that will always, not surprisingly, be the jurisdiction withcorporation tax levels closest to zero.240 As this article has made clear, thereis an increasing number of countries willing and eager to assist companies inthe techniques of tax evasion, and in this race to the bottom, national andinternational regulators have held back on plans to put an end to these unjustcorporate prerogatives.

In the end, even if a comprehensive remedy includes some type ofspecialized global enforcement body, there will be inevitable problems withits enforcement powers. The OECD is likely too voluntary and toowealthy-country oriented to get the task done. The EU could acteffectively, but is in a very precarious state politically, especially after theBrexit vote, and has a Commission President who was, as the Prime Ministerof Luxembourg, identified with many of the most outrageous forms ofcorporate tax evasion in Europe.

As described above, members of the U.S. Congress have proposed the“Schumer plan,” which is already being panned as a false start, without thecapacity to seriously undermine tax avoidance by U.S. multinationalcorporations.241 It remains to be seen, of course, whether a new Americanadministration will take on the issue of corporate tax avoidance and evasionwith any seriousness. Despite the relentless research and publishing ofcitizen watchdog groups in all parts of the world, their ultimate influence onpublic policy must still be characterized as marginal.

Our collective attention is often misdirected away from the legalunderpinnings of economic injustice, the symptoms of which are poverty,underdevelopment, and under-investment. Corporate taxation is not atechnical issue best left to specialists; many of these justice-related issues can

238. Id.239. The article states that the CCCTB:

aggregates related EU companies into a single, consolidated tax return for all thoseentities. The EU group net taxable income is then apportioned back out to eachentity and country in proportion to the relative assets and other economic factorswithin those locations. Thus, the CCCTB is a system of formulary apportionmentwhich abandons the existing arm’s length standard of treating each inter-companytransaction separately.

See Ryan, supra note 133.240. See Jeanne Sahadi, 20% of Big Companies Pay Zero Corporate Taxes, CNN MONEY (Apr. 13,2016), http://money.cnn.com/2016/04/13/pf/taxes/gao-corporate-taxes/.241. See Bob McIntyre, Bipartisan Senate Plan Confuses Real Tax Reform with Tax Cuts forMultinational Corporations, TAX JUST. BLOG (July 8, 2015), http://www.taxjusticeblog.org/archive/2015/07/bipartisan_senate_plan_conflat.php#.V4-YdPkwiUk (making the point thatunder this plan—which in fact remains stalled in Congress—large companies can simply findnew ways to avoid paying taxes).




be directly linked with the failure of corporations to pay their fair andreasonable share of taxes. Despite sporadic flare-ups of media attention, onecould not say that global corporate tax avoidance has received anything likethe sustained analytical treatment it deserves, so as to educate and inform thepublic on the basic reasons for revenue starvation. As of this writing, it issimply not clear whether steps taken by the OECD, the EU or the UnitedStates will bear fruit, or whether mass-scale corporate tax avoidance willbecome a permanent, ingrained feature of our increasingly unequal world.



Influence of the Arbitral Seat in the Outcome ofan International Commercial Arbitration

GONZALO VIAL*

I. Introduction: Increasing Use of International Arbitration

There are different types of international arbitrations.1 Categories ofinternational arbitrations include disputes between nations regarding issuesof international public law, investment arbitrations confronting states withprivate investors, and commercial arbitrations between foreign companies.2

International commercial arbitration applies to conflicts of private law.3 It isan “alternative method of resolving disputes arising out of commercialtransactions between private parties across national borders that allows theparties to avoid litigation in national courts.”4

Different systems of law are expected to apply to different types ofinternational arbitration.5 For example, the 1899 and 1907 Conventions forthe Pacific Settlement of International Disputes include provisions for theadministration of state-to-state arbitrations,6 while the Convention on theSettlement of Investment Disputes between States and Nationals of OtherStates of 19657 provides a popular mechanism and forum for investmentdisputes between a contracting state and nationals of another signatorystate.8 The cornerstone of international commercial arbitration is the

* Gonzalo Vial is senior associate at Bulnes, Urrutia & Bustamante and teaches CivilProcedure at Universidad Catolica de Chile and Adolfo Ibanez University. He recently workedas visiting scholar at the University of Sydney and in the Australian Centre for InternationalCommercial Arbitration. He holds a Master’s Degree from Stanford Law School and wasawarded a Fulbright Scholarship.

1. Dyala Jimenez Figueres, El Sistema de Arbitraje de la Corte Internacional de Arbitraje de laCamara de Comercio Internacional [The System of Arbitration of the International Court of Arbitrationof the International Chamber of Commerce], in ESTUDIOS DE ARBITRAJE: LIBRO HOMENAJE AL

PROFESOR PATRICIO AYLWIN AZOCAR, 519, 519-20 (Editorial Jurıdica de Chile, 2007).2. Id. at 520-21.3. Luis Malpica de Lamadrid, El arbitraje internacional y el derecho maritime [International

Arbitration and Maritime Law], in PANORAMA DEL ARBITRAJE COMERCIAL INTERNACIONAL

(SELECCION DE LECTURAS) 413, 414 (Serie 1. Estudios De Derecho Economico, num. 9, 1983).4. Georgetown Law Library, International Commercial Arbitration Research Guide, http://

guides.ll.georgetown.edu/InternationalCommercialArbitration (last updated Sept. 14, 2016).5. Jimenez Figueres, supra note 1, at 520-21.6. GARY B. BORN, INTERNATIONAL ARBITRATION: CASES AND MATERIALS 28 (2d ed. 2015).7. International Centre for Settlement of Investment Disputes, Convention on the

Settlement of Investment Disputes between States and Nationals of Other States, ratified Mar.18, 1965, 17 U.S.T. 1270, 575 U.N.T.S. 159 (entered into force Oct. 14, 1966).

8. BORN, supra note 6, at 41. As stated by the same author, the commented convention hasunusual features for the field of international arbitration because “ICSID awards are subject to




Convention on the Recognition and Enforcement of Foreign ArbitralAwards of 1958 (New York Convention),9 which “amounts to a universalconstitutional charter for the international arbitral process.”10 The NewYork Convention sought to increase the efficiency of arbitration as aninternational dispute resolution method.11 For that purpose, the provisionsfocus on the recognition and enforcement of arbitral agreements andarbitration awards.12

The success of the New York Convention came gradually, but ultimatelyit has “promoted arbitration as a mode of settlement of internationalcommercial disputes by means of increasing confidence in recognition andenforcement of the arbitral awards in foreign countries.”13 This growth inarbitration contrasts with challenges national court decisions face, such asrecognition and enforcement aboard.14

As a matter of fact, international commercial arbitration has grown inpopularity over the last twenty years and shows no signs of slowing down.15

A 2015 report prepared by the International Bar Association (IBA) shows theuse of arbitration increased in countries around the world, “even thosewhere it has long been established,” such as the United States.16 Moreover,according to the same report, “ ‘growth in international arbitration isanticipated’ in regions where litigation before national courts is currentlymore prevalent than alternative resolution methods.”17

immediate recognition and enforcement in the courts of Contracting States without settingaside proceedings or any other form of other review in national courts.” Id. Additionally,“ICSID awards are subject to a specialized internal annulment procedure, in which ad hoccommittees selected by ICSID are mandated, in limited circumstances, to annul awards forjurisdictional or grave procedural violations.” Id.

9. Id. at 32.10. Id.11. Joseph T. McLaughlin & Laurie Genevro, Enforcement of Arbitral Awards Under the New

York Convention – Practice in U.S. Courts, 3 BERKELEY J. OF INT’L L. 249, 251 (1986).12. As noted by the same author, the United States Supreme Court stated the following in this

regard: “The goal of the Convention, and the principal purpose underlying American adoptionand implementation of it, was to encourage the recognition and enforcement of commercialarbitration agreements in international contracts and to unify the standards by whichagreements to arbitrate are observed and arbitral awards are enforced in the signatorycountries.” Id. n.8 (citing Scherk v. Alberto-Culver, 417 U.S. 506, 520 n.15 (1973)).

13. Tetiana Bersheda Vucurovic, 50th Anniversary of the New York Convention: Any Progress inRecognition and Enforcement of Foreign Arbitral Awards in Ukraine?, 11 INT’L ARB. L. REV. 165,165 (2008).

14. Id.15. Mark Bezant, James Nicholson & Howard Rosen, Trends in International Arbitration: A

New World Order, FTI J. 1, 5 (Feb. 2015), http://www.fticonsulting.com/~/media/Files/us-files/insights/journal-articles/fti-journal-trends-in-international-arbitration.pdf.

16. IBA Arb. 40 Subcomm., The Current State and Future of International Arbitration: RegionalPerspectives, INT’L BAR ASS’N, 9 (2015), http://www.ibanet.org/Document/Default.aspx?DocumentUid=2102ca46-3d4a-48e5-aa20-3f784be214ca.

17. Id.



2017] INFLUENCE OF THE ARBITRAL SEAT 331

In this context of increasing use of international commercial arbitration,several cities and states have promoted themselves as attractive arbitralseats.18 In some cases, this has been done with the intention of receiving theeconomic benefits flowing from the international legal industry, such asgrowth in the use of hotels, translators, expert witnesses, and lawyers.19

Additionally, in the opinion of this author, becoming an important arbitralforum can have profound consequences to an emerging country in theinternational political arena because it could provide the opportunity toshow the world the country’s capacity of duly conducting processes underinternational standards. Also, it has been stated that having a modernframework for solving international commercial disputes could favorinternational commerce within a country.20

Currently, there are identifiable differences between international,regional, and emerging arbitral seats, which were highlighted in the 2015IBA report.21 This article does not analyze characteristics that make aparticular forum attractive. But it focuses on the selection of a particulararbitral seat and the influence that decision could have on the outcome of aninternational commercial arbitration. In other words, it focuses on theconsequences flowing from conducting an international commercialarbitration within a particular jurisdiction.

For reference purposes, this article first explains the concept of thearbitral seat and then briefly describes what makes a particular forumattractive. Next, it notes the juridical and material consequences of selectinga particular arbitral seat. Finally, it elaborates the conclusion by showinghow crucial the selection of the seat could be for the outcome of anarbitration.

II. The Notion of the Arbitral Seat

The arbitral seat is the legal location of the arbitration,22 meaning it is“the jurisdiction in which an arbitration takes place legally.”23 It is not the

18. This has been the case in Latin America. See Marıa Fernanda Vasquez Palma, Importanceof Arbitral Seat and Criteria for Venue Selection, 16 R. CH. D. PRIV. 75, 76-77 (2011).

19. Juan Jose Obando Peralta, ¿Turismo legal in Costa Rica? El caso de la nueva ley de arbitrajecomercial internacional [Legal Tourism in Costa Rica? The Case of the New Law on InternationalCommercial Arbitration], https://www.academia.edu/10838821/Arbitraje_comercial_internacional_en_Costa_Rica_turismo_legal_y_la_nueva_Ley.

20. Cameron Weil, Has Florida Become an Attractive Seat for International Arbitration? TheAdoption of the ICAA, N.Y.U. L. SCH. BLOGS: TRANSNAT’L NOTES (Apr. 16, 2014), http://blogs.law.nyu.edu/transnational/2014/04/has-florida-become-an-attractive-seat-for-international-arbitration-the-adoption-of-the-icaa/.

21. IBA Arb. 40 Subcomm., supra note 16, at 12.22. CLAYTON UTZ, A GUIDE TO INTERNATIONAL ARBITRATION 6 (2d ed. 2012).23. SIMON GREENBERG, CHRISTOPHER KEE & ROMESH WEERAMANTRY, INTERNATIONAL

COMMERCIAL ARBITRATION: AN ASIA-PACIFIC PERSPECTIVE 54 (Cambridge Univ. Press 2011).




same as the venue of the arbitration24 because the seat “refers to the legal,rather than physical, location of the arbitration.”25 The venue is thegeographical setting where the proceedings occur and the “location wherehearings are to take place.”26

Most arbitration statutes and institutional rules distinguish “between theseat of the arbitration and the venue in which hearings are held.”27 Forinstance, Article 16.3 of the Arbitration Rules of the London Court ofInternational Arbitration (LCIA) states, “[t]he arbitral tribunal may hold anyhearing at any convenient geographical place in consultation with the partiesand hold its deliberations at any geographical place of its own choice,” whichcould be “elsewhere than the seat of the arbitration.”28

Despite the distinction, the seat and the venue are decidedly connected,being likely to coincide.29 In fact, when the arbitration agreement is silentabout the seat, the venue will be a deciding factor to determine thejurisdiction of the appropriate court.30 This has been clearly explained in thefollowing terms:

There is an important distinction between the legal place (the “seat”) ofany arbitration and the place where one or more of the hearings orother procedural steps physically take place. Although the two oftencoincide in practice, it is the seat which determines the legal frameworkwithin which the arbitration takes place, not the location where theparties or the tribunal choose (as a matter of convenience) to meet.31

24. Laura Warren, The Seat of Arbitration: Why is it so Important?, CLYDE & CO (Sept. 13,2011), http://www.clydeco.com/insight/article/the-seat-of-arbitration-why-is-it-so-important.

25. UTZ, supra note 22, at 6.26. Warren, supra note 24.27. Id.28. LONDON COURT OF INT’L COMMERCIAL ARBITRATION RULES, LONDON CT. INT’L ARB.

6 (2014), http://www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2014.aspx(“The Arbitral Tribunal may hold any hearing at any convenient geographical place inconsultation with the parties and hold its deliberations at any geographical place of its ownchoice; and if such place(s) should be elsewhere than the seat of the arbitration, the arbitrationshall nonetheless be treated for all purposes as an arbitration conducted at the arbitral seat andany order or award as having been made at that seat.”).

29. Warren, supra note 24.30. Indu Bhan, Seat Versus Venue, FIN. EXPRESS (Feb. 27, 2014, 8:26 AM), http://www

.financialexpress.com/archive/seat-versus-venue/1229641/. As stated by another author,“Certainly, the designation of ‘venue’ will be considered as strong evidence of intention that theseat should be in the same jurisdiction.” Phillip Capper, Dipen Sabharwal & Clare Connellan,When is the ‘Venue’ of an Arbitration its ‘Seat’?, KLUWER ARB. BLOG (Nov. 25, 2009), http://kluwerarbitrationblog.com/2009/11/25/when-is-the-venue-of-an-arbitration-its-seat/.

31. LATHAM & WATKINS, GUIDE TO INTERNATIONAL ARBITRATION, 17 (2014), https://www.lw.com/thoughtleadership/guide-to-international-arbitration-2014.




In summary, the seat of a particular arbitration is the juridical connectionof the arbitral process with a given system of rules and principles.32

III. Brief Review of the Characteristics of an Attractive ArbitralSeat

The practical and legal consequences flowing from the selection of theseat of the arbitration makes the decision “one of the most important aspectsof any international arbitration agreement,”33 forcing the parties to choose itcarefully.34 Considering its significance, the reputation and recognition ofcertain locations as proper forums to conduct arbitral procedures have beenconsidered the main reasons explaining the selection of a particular city orcountry as the seat of an international arbitration.35

Generally, attractive forums are expected to provide “a supportive legalenvironment, a positive attitude of the nation’s courts towards arbitration,adequate facilities, political stability and the availability of experiencedpractitioners.”36 According to a 2015 survey on International Arbitration byQueen Mary University of London, the most important considerations forpreferred seats were the “neutrality and impartiality of the local legalsystem,” the national arbitration laws, the “track record of enforcingagreements to arbitrate and arbitral awards,” and the “availability of qualityarbitrators familiar with the seat.”37 Other factors mentioned byrespondents were cultural familiarity with the seat, efficiency of local courtproceedings, location, availability of prepared lawyers, costs, hearingfacilities, language, and transport connections.38 Findings from a different

32. Matthias Scherer, The Place or ‘Seat’ of Arbitration (Possibility, and/or Sometimes Necessity ofits Transfer?) – Some Remarks on the Award in ICC Arbitration No. 10’623, 21 ASA BULL. 112, 112(2003).

33. GARY B. BORN, INTERNATIONAL ARBITRATION AND FORUM SELECTION AGREEMENTS:DRAFTING AND ENFORCING 64 (3d ed. 2010).

34. Capper, Sabharwal & Connellan, supra note 30.35. QUEEN MARY UNIV. OF LONDON ET AL., 2015 INTERNATIONAL ARBITRATION SURVEY:

IMPROVEMENTS AND INNOVATIONS IN INTERNATIONAL ARBITRATION 2 (2015), http://www.arbitration.qmul.ac.uk/docs/164761.pdf. According to the survey, the preferred seats forarbitration in the world are London, Paris, Hong Kong, Singapore, and Geneva. Id.

36. Gonzalo Vial, Australia as a Seat for Arbitration: lesson from the Andes, 2 AUSTRALIAN

ALTERNATIVE DISPUTE RESOLUTION LAW BULLETING, 97, n. 5 (2015) (citing Karina CherroVarela, The New Chilean Arbitration Law: Will Chile Become a New International Arbitration Venue?10 MAX PLANCK YEARBOOK OF UNITED NATIONS LAW 681; Elina Mereminskaya, ArbitrajeComercial Internacional en Chile: Una Mirada jurisprudencial, REVISTA ECUATORIANA DE

ARBITRAJE 265; Jonathan Sacher, Traditional arbitration centres hold strong, but South East Asiaemerges as a new challenger (2014), https://www.blplaw.com/media/press-releases/traditional-arbitration-centres-hold-strong-south-east-asia-emerges-new-challenger/; SYDNEY ARBITRAL

ADVANTAGE, http://www.sydneyarbitration.com (last visited Sept. 21, 2015)).37. QUEEN MARY UNIV. OF LONDON ET AL., supra note 35, at 14.38. Id.




survey on international arbitration showed that having a personal connectionwith a city was an important factor in choosing it as a seat.39

Recently, in an effort to understand the features of an attractive arbitralseat, the Chartered Institute of Arbitrators identified the following “keycharacteristics” that a forum shall present: (1) a modern internationalarbitration law that limits court intervention in the arbitral process; (2) “anindependent judiciary. . .respectful of the parties’ choice of arbitration astheir method for solving disputes;” (3) a pool of practitioners withexperience in international arbitration; (4) the commitment to educate actualand future professionals in transnational disputes; (5) the possibility that theparties could be represented by the counsel of their choice; (6) an accessibleand safe seat; (7) the material conditions to properly conduct arbitrationprocedures; (8) ethics and professional norms that govern the behavior ofparticipants according to the diversity of legal cultures and traditions ofinternational arbitration; (9) the participation of treaties promoting theenforceability of foreign arbitral awards; and (10) the protection of thearbitrator from liability if acting in good faith.40 As can be concluded fromthe above, generally, a proper arbitral seat shall give the parties thepossibility to conduct the procedures in an efficient manner and withoutundue interferences from external factors.

IV. Conssequences Flowing From the Selection of the ArbitralSeat

The selection of the seat is crucial because it generally determines the “lexarbitri and the courts with supervisory jurisdiction over the arbitration,”41

providing an essential framework for the proceedings.42 The lex arbitri hasbeen defined as the “totality of national law provisions that apply generallyto arbitrations in each country”43 and as “the law governing the arbitralproceedings.”44 Some state that this concept is broader than the proceduralnorms affecting a particular arbitration, including matters like “arbitrability,

39. Press Release, Jonathan Sacher, Traditional Arbitration Centres Hold Strong, but SouthEast Asia Emerges as New Challenger (Sept. 24, 2014), https://www.blplaw.com/media/press-releases/traditional-arbitration-centres-hold-strong-south-east-asia-emerges-new-challenger/.

40. Chartered Institute of Arbitrators, CIArb London Centenary Principles (2015), https://www.ciarb.org/docs/default-source/centenarydocs/london/the-principles.pdf?sfvrsn=4.

41. Capper, Sabharwal & Connellan, supra note 30.42. William Kirtley, The Importance of The Seat of Arbitration, INTERNATIONAL ARBITRATION

ATTORNEY NETWORK (Feb. 8, 2016, 6:19 PM), https://www.international-arbitration-attorney.com/importance-seat-arbitration/. This is notwithstanding the fact the principle of partyautonomy allows the parties to derogate that law if the “lex arbitri itself permits it,” as stated bythe same author citing NIGEL BLACKABY ET AL, REDFERN AND HUNTER ON INTERNATIONAL

ARBITRATION (5th ed. 2009).43. Alastair Henderson, Lex Arbitri, Procedural Law and the Seat of Arbitration, 26 SING.

ACADEMY OF L. J. 886, 887 (2014).44. Alexander J. Belohlavek, Importance of the Seat of Arbitration in International Arbitration:

Delocalization and Denationalization of Arbitration as an Outdated Myth, 31 ASA BULLETIN 262,265 (2013), available at https://www.academia.edu/10270800/Importance_of_the_Seat_of_Arbi




decisions on jurisdiction, national court intervention in support ofarbitration, and the grounds on which awards may be challenged and setaside.”45 One author explains the content of the lex arbitri in the followingterms:

The precise content of the lex arbitri will vary from country to countrybut in modern arbitral jurisdictions it will typically include provisionswhich regulate: (a) matters internal to the arbitration, such as thecomposition and appointment of the tribunal, requirements for arbitralprocedure and due process, and formal requirements for an award; (b)the external relationship between the arbitration and the courts, whosepowers may be both supportive and supervisory, such as the grant forinterim relief, procuring evidence from third parties and securing theattendance of witnesses, the removal of arbitrators and the setting asideof awards; and (c) the broader external relationship between arbitrationsand the public policies of that place, which includes matters such asarbitrability and possibly also—more controversially—the impact onarbitration of social, religious and other fundamental values in eachState.46

As explained below, it is possible to recognize that the followingarbitration-related issues are affected by the selection of the arbitral seat: (A)the recognition and enforcement of arbitral awards; (B) the courts withsupervisory jurisdiction over the arbitration; (C) some procedural rules thatcould apply to the arbitration; (D) the costs of the procedure; (E) the way inwhich conflict of laws are solved; and (F) mandatory norms that could applyto the arbitration.

A. RECOGNITION AND ENFORCEMENT OF ARBITRAL AWARDS

The recognition of an award is different from its enforcement, therefore,it is possible to recognize and not enforce an award, but impossible toenforce it without previous recognition.47 The following excerpt clearlydescribes the difference between these two concepts:

Recognition is an undertaking by a state to respect the bindingness offoreign arbitral awards. Such awards may be relied upon by way ofdefence or set-off in any legal proceedings concerning the subject-matter of the award commenced in the courts of the state concerned,

tration_in_International_Arbitration_Delocalization_and_Denationalization_of_Arbitration_as_an_Outdated_Myth.

45. Henderson, supra note 43, at 887.46. Id. at 887-88.47. Tecle Hagos Bahta, Recognition and Enforcement of Foreign Arbitral Awards in Civil and

Commercial Matters in Ethiopia, 5 MIZAN L. REV. 105, 107 (2011) (citing ALAN REDFERN &MARTIN HUNTER, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION 10-09 (3d ed. 1999)).




whereas enforcement is an undertaking by a state to enforce foreignarbitral awards, in accordance with its local procedural rules.48

The selection of the seat could have consequences in the recognition andenforcement of a foreign arbitral award because selecting a jurisdiction thatis not party to the New York Convention could impede its recognition andenforcement in a different country.49

Indeed, even though the treaty focuses on the recognition andenforcement of arbitration agreements and arbitral awards without requiringreciprocity,50 several parties only apply the New York Convention to awardsrendered in other contracting parties.51 In other words, if the arbitration isseated in a state that participates from in the treaty, “the parties ensure theymay obtain the benefits and protections of the Convention with respect tothe aid of the local courts in recognizing and enforcing their arbitrationagreement, the arbitral process, and any arbitral award.”52 Theaforementioned has been explained in the following terms:

The seat of arbitration is also of critical importance to the enforceabilityof the resulting award pursuant to the New York Convention. Bybecoming party to the Convention, each of the states (see Annex 2) hasagreed, subject to limited grounds of refusal, to enforce commercialarbitral awards made in other contracting states. Accordingly, byselecting a state which is party to the New York Convention as the seatfor any arbitration, parties provide considerable scope for enforcementof their awards.53

Even though a majority of arbitral awards are “voluntarily complied withand do not require judicial enforcement,”54 the possibility of enforcingarbitral awards is crucial because the enforcement is perceived asarbitration’s most appreciated characteristic,55 and “perhaps one of the mostimportant aspects to be considered when deciding to submit a particulardispute to arbitration,”56 especially in the field of international commercial

48. Id. at 107-08. As stated by the author: “The recognition of an award by a court gives a resjudicata effect thereto. Enforcement, however, goes a step further than recognition. AsRedfern and Hunter noted, ‘ . . . where a court is asked to enforce an award, it is asked notmerely to recognize the legal force and effect of the award, but also to ensure that it is carriedout by using such legal sanctions as are available.’”

49. UTZ, supra note 22, at 14.50. Jennifer L. Price, Why Where Matters: The Seat of Arbitration in International Energy

Contracts, ENERGY NEWSLETTER, (King & Spalding) Aug. 2013, http://www.kslaw.com/library/newsletters/EnergyNewsletter/2013/August/article1.html.

51. Id.52. Id.53. LATHAM & WATKINS, supra note 31, at 18.54. R. Doak Bishop & Elaine Martin, Enforcement of Foreign Arbitral Awards, (King &

Spalding), http://www.kslaw.com/library/pdf/bishop6.pdf.55. QUEEN MARY UNIV. OF LONDON ET AL., supra note 35, at 2.56. Catalina Andrea Medel Lucas, RECONOCIMIENTO Y EJECUCION DE LAUDOS

EXTRANJEROS: La Convencion de Nueva York y la Jurisprudencia Chilena Actual [Recognition and




arbitration.57 In fact, the “credibility of international arbitration as apreferred method of dispute resolution in commercial matters dependsmainly on the cross border enforceability of arbitral awards,”58 one way inwhich the successful party can guarantee that it will recover the object of afavorable award.59

B. COURTS WITH SUPERVISORY JURISDICTION OVER THE

ARBITRATION

The selection of the seat will determine which courts exercise jurisdictionover the arbitration,60 which is extremely relevant because such courts couldhave important roles to play in issues related to the annulment of the arbitralaward, the speed of the proceedings, and the costs associated with thearbitration.61 Unsurprisingly, some state that, “as important as the law is theattitude of local judges towards international arbitration.”62

The degree to which national courts interfere varies among differentseats.63 For instance, in pro-arbitration jurisdictions like France, they“usually intervene only in support of arbitration, for instance to offer interimrelief,” but in others, they “may intervene in the arbitration and even declineto respect the arbitration agreement, severely impacting the proceedings.”64

Generally, it is suggested to conduct the proceeding in a place where courtsdo not unduly interfere with arbitration, but assist with it when necessary.65

Even though arbitration laws usually declare that the rendered awards arefinal, they frequently leave open the possibility of requesting an annulmentor setting aside or vacating the award.66 In other words, the law may allow

Enforcement of Foreign Arbitral Awards] (Dec. 2010) (unpublished undergraduate thesis,University of Chile School of Law Department of International Law) (on file with theUniversity of Chile), http://repositorio.uchile.cl/tesis/uchile/2010/demedel_c/pdfAmont/de-medel_c.pdf.

57. Id.58. Harisankar K. S., Annulment versus Enforcement of International Arbitral Awards: Does the

New York Convention Permit Issue Estoppel?, 3 INT’L. A.L.R., 47, 47 (2015), available at https://www.academia.edu/13638114/Annulment_versus_Enforcement_of_International_Arbitral_Awards_Does_the_New_York_Convention_permit_Issue_Estoppel?auto=download.

59. Bishop & Martin, supra note 54 (citing GARY B. BORN, INTERNATIONAL COMMERCIAL

ARBITRATION IN THE UNITED STATES 460 (1st ed. 1994)).60. Warren, supra note 24.61. Id.62. Jimenez Figueres, supra note 1, at 526.63. Kirtley, supra note 42. As stated, the seat will also influence the degree to which national

courts could involve themselves in a procedure, because the degree of procedural autonomygiven to arbitration could vary in different countries. Warren, supra note 24.

64. Kirtley, supra note 42.65. Id.66. FERNANDO LEILA, Setting Aside an Arbitration Award, in FROM THE SELECTED WORKS OF

FERNANDO LEILA 1, 1 (Fordham Univ., 2010), https://works.bepress.com/fernando_leila/2/.




awards to be declared “disregarded in whole or in part.”67 For instance,Article 34 of the UNCITRAL Model Law considers the application forsetting aside an award the only avenue of recourse.68 Following suit, Article34 of the Chilean International Commercial Arbitration Act also treats thenullification of awards as the only recourse against a court’s ruling.69

As the arbitral seat is the place where the award is formally made, its lawsgovern the proceedings to annul it,70 indicating the situations in which anaward could be “contested by the parties and possibly set aside by a judge.”71

Moreover, the courts located in the arbitral seat will decide on the actions toannul an arbitral award.72 Indeed, “only courts in countries with primaryjurisdiction may effectively vacate an arbitral award,”73 and differentstandards under different national laws exist for these purposes.74 Asexplained by one author, every “country will allow an award to be challengedon certain, limited grounds. . .but some also allow the challenge of the awardbased on errors of law or grounds of public policy, which means differentthings in different jurisdictions.”75 In sum, the grounds for vacating arbitralawards are set out in the arbitration laws of the seat,76 and the degree andextent to which judicial review would be accessible to parties will depend onthose same laws77 and the national court’s attitude towards internationalcommercial arbitration.

Regarding the aforementioned, it is worth clarifying that there is adifference between refusing the enforcement of a foreign arbitral award—which may or may not be sought in the place where the award was made—and the annulment of such decision,78 an issue that necessarily has to berequested in the arbitral seat, that is to say, the place where the award was

67. Id. (citing ALAN REDFERN ET AL., LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL

ARBITRATION 404 (4th ed. 2004)).68. UNITED NATIONS COMM’N ON INT’L TRADE LAW, UNCITRAL MODEL LAW ON

INTERNATIONAL COMMERCIAL ARBITRATION 1985 WITH AMENDMENTS AS ADOPTED IN 2006,at 19, U.N. Sales No. E.08.V.4 (2008), available at https://www.uncitral.org/pdf/English/texts/arbitration/ml-arb/0786998_Ebook.pdf.

69. Law No. 19971, Septiembre 10, 2004, DIARIO OFICIAL [D.O] (Chile), available at http://www.anfitrion.cl/ley/19971.html.

70. BORN, supra note 33, at 599.71. Chioma Okafor, What is the Significance of the Lex Arbitri in International Arbitration?, web

document (Feb. 9, 2016 9:40 PM), file:///C:/Users/usuario/Downloads/cepmlp_car17_39_442689951.pdf; Kirtley, supra note 42.

72. BORN, supra note 33, at 599.73. Catherine A. Giambastiani, Lex Loci Arbitri and Annulment of Foreign Arbitral Awards in

U.S. Courts, 20 AM. U. INT’L. L. REV. 1101, 1101 (2005).74. BORN, supra note 33, at 65.75. Kirtley, supra note 42.76. Teresa Giovannini, What Are the Grounds on Which Awards Are Most Often Set Aside?, THE

INSTITUTE FOR TRANSNATIONAL ARBITRATION (June 15, 2000), http://www.lalive.ch/data/publications/tgi_what_are_the_grounds.pdf.

77. Warren, supra note 24.78. Harisankar, supra note 58, at 47.




formally made.79 An author explains the difference between the refusal ofenforcement and annulment of arbitral awards in the following terms:

Despite the copiousness of academic literature on the enforcement offoreign arbitral awards a distinction that is not always fully recognised isthe difference between refusal of enforcement and annulment of arbitralawards. Concisely, the supervisory court at the seat of arbitration hasthe power to annul an award made within its territory, while theenforcement court abroad has power only to consider granting orrefusing the recognition and enforcement of an award in its territory.Frequently, in international arbitration jurisprudence, this distinctionhas been generally referred to as a segregation between “PrimaryJurisdiction” and “Secondary Jurisdiction.”80

Additionally, national courts could certainly affect the speed and costs ofthe proceedings because they might have to involve themselves in issues likethe selection, challenge, removal and appointment of arbitrators,81 decisionsabout the jurisdiction of the arbitral tribunal,82 collect evidence in aid of thearbitration,83 and grant of interim measures.84 As could be easily noted, all ofthe referred issues could affect the expenses incurred by the parties and theswiftness of the process.

C. PROCEDURAL-RELATED ISSUES

By choosing the arbitral seat, the parties are “selecting the procedural lawwhich applies.”85 If London is selected as the seat of the arbitration, theparties will bring the application of the United Kingdom 1996 ArbitrationAct,86 but if they prefer to seat the arbitration in Santiago (Chile), it wouldbe necessary to apply Law 19.971 of 2004 on International CommercialArbitration.87 Thus, it is necessary to consider the possibility that a

79. Leila, supra note 66, at 2.80. Harisankar, supra note 58, at 47 (citing Karaha Bodos Co., L.L.C. v. Perusahaan

Pertambangan Minyak dan Gas Bumi Negara, 335 F.3d 357 (5th Cir. 2004); W. MICHAEL

REISMAN, SYSTEMS OF CONTROL IN INTERNATIONAL ADJUDICATION & ARBITRATION—BREAKDOWN AND REPAIR (Duke University Press, 1992)).

81. UNITED NATIONS COMM’N ON INT’L TRADE LAW, supra note 68, at 6-8.82. Id. at 8.83. BORN, supra note 6, at 536.84. Id.85. LATHAM & WATKINS, supra note 31, at 17.86. Id.87. Which was enacted to offer an effective mechanism to adjudicate transnational business

disputes, and to promote the country as an important arbitral seat, as appreciated in the messagefrom the executive power of June 2003 initiating the project of a new law for internationalcommercial arbitration. See Ricardo Lagos Escobar, Luis Bates Hidalgo & Marıa SoledadAlvear Valenzuela, MENSAJE DE S.E. PRESIDENTE DE LA REPUBLICA CON EL QUEINICIA UN PROYECTO DE LEY SOBRE ARBITRAJE COMERCIAL INTERNACIONAL[Message S.E. the President of the Republic That Starts with Bill on International CommercialArbitration], in HISTORIA DE LA LEY NO. 19971 SOBRE ARBITRAJE COMERCIAL




particular arbitration statute can contain procedural norms with which theparties would be forced to comply.88

In other words, some procedural issues of a particular arbitration will beaffected by the laws of the arbitral seat. For instance, the selection andremoval of arbitrators,89 evidence taking in aid of the arbitration,90 and thepossibility of granting interim measures.91 Additionally, the seat’s laws coulddetermine issues such as the parties’ autonomy to agree on procedural issues,the rights of foreign counsels to act in the arbitration, and the application ofpleading and evidentiary rules.92

Generally, it has been recommended to arbitrate a dispute within a legalframework that contains few mandatory provisions and allows the parties totailor the arbitration according to their real needs.93 The way in whichapplying certain procedural laws could affect the outcome of an arbitration isclearly explained in the following excerpt:

The procedural laws applicable in arbitration “friendly” centres (such asLondon, New York, Paris, Hong Kong and Singapore) have fewmandatory provisions and allow the parties considerable freedom toagree upon the lawyers to represent them, the procedure to be followed,the language of the arbitration and the tribunal to decide their dispute.The result is that these centres and the specialist lawyers, experts andtechnical staff (such as translators, stenographers and IT personnel)who service them are able to accommodate the considerable diversity ofdisputes which arise in the international arena. Arbitration isencouraged (often in order to promote trade) and, accordingly, the roleof the courts is kept to a minimum, being primarily to support thearbitration process and to assist, if necessary, with the enforcement ofthe award.94

In less arbitration-friendly countries, the courts have greater powers toassume control over disputes within their jurisdiction and tend to be moreinterventionist (particularly where disputes have a political dimension).“There are also sometimes constraints upon the conduct of the arbitration,such as the requirement to use locally qualified lawyers and restrictions uponwho can act as arbitrators.”95 In summary, the application of particulararbitration laws could force the parties to comply with certain proceduralissues.

INTERNACIONAL, BIBLIOTECA DEL CONGRESO NACIONAL DE CHILE, 5 (2004) (providing theofficial history of the enact process for Chile’s international commercial arbitration legislation).

88. LATHAM & WATKINS, supra note 31, at 17.89. BORN, supra note 6, at 599.90. Id.91. Id.92. Id.93. LATHAM & WATKINS, supra note 31, at 17.94. Id.95. Id.




D. COSTS AND PRACTICAL MATTERS

International arbitration procedures tend to be costly,96 with expenselevels rising—according to some—“at an unsustainable rate.”97 Nowadays,costs are “perceived as the worst characteristic of international arbitration”;98

thus unsurprisingly, when selecting the arbitral seat, parties must consider“relatively mundane issues of convenience and cost,”99 which can be relevantto “the conduct and outcome of an arbitration.”100

Due to the fact that the venue101 and the seat are likely to coincide,102 theselection of the seat can influence the costs of the arbitration in part becauseof collateral costs like hotels and transportation.103 Additionally, practicaland relatively uncostly matters—like visa requirements, hearing facilities andsupporting staff—shall also be considered when selecting the arbitral seat.104

E. CHOICE OF LAW

The conflict of laws is the legal reality that there may be a “differencebetween the laws of two or more jurisdictions with some connection to acase, such that the outcome depends on which jurisdiction’s law will be usedto resolve each issue in dispute.”105 The act of deciding which law should beapplied is known as a choice of law,106 for which conflict of law rules areuseful.107 An author explains the aforementioned in the context ofinternational commercial arbitration in the following terms:

However, in International Commercial Arbitration, when the partiesare of different legal systems, there automatically arises a conflict oflaws, and a choice of the substantive law to be applied in a given disputehas to be made. Many a time, the substantive law to be applied inarbitration may be specified by the parties in their original agreement.But problems arise in determining the applicable law in situations when

96. Jennifer A. Trusz, Full Disclosure? Conflicts of Interest Arising from Third-Party Funding inInternational Commercial Arbitration, 101 GEO. L. J. 1649, 1663 (2013) (citing Folkways MusicPublishers, Inc. v. Weiss, 989 F.2d 108, 111 (2d Cir. 1993); GARY BORN, KLUWER LAW INT’LCOMMERCIAL ARBITRATION 1462, 84 (2009)).

97. Thibault De Boulle, Third-Party Funding in International Commercial Arbitration, at 26(2013) (unpublished Master’s thesis, Ghent University), http://lib.ugent.be/fulltxt/RUG01/002/163/057/RUG01-002163057_2014_0001_AC.pdf.

98. QUEEN MARY UNIV. OF LONDON ET AL., supra note 35, at 7.99. BORN, supra note 6, at 598.

100. Id.101. The “location where hearings are to take place.” Warren, supra note 24.102. Id.103. BORN, supra note 6, at 598.104. Id.105. Conflict of Laws, WEX LEGAL DICTIONARY, https://www.law.cornell.edu/wex/conflict_of_laws.106. Id.107. Conflict of Laws, USLEGAL, http://conflictoflaws.uslegal.com/.




the parties fail to agree upon a choice of law for the settlement of theirdispute.108

It is possible to distinguish between four different choice of law issues thatcould arise in relation to an international commercial arbitration: (a) the lawapplicable to the substance of the dispute; (b) the law governing thearbitration agreement; (c) the procedural law applicable to the arbitralproceedings; and (d) the conflict-of-law rules applicable to select each of theaforementioned laws.109 In each of the four scenarios, the arbitral seat couldplay an important role.

Indeed, if the law applicable to the substance of the parties’ dispute is notagreed to, the arbitral tribunal will have to determine the dispute accordingto some conflict of law rules, traditionally applying the seat’s nationalconflict of law rules.110 Moreover, in cases where the law applicable to thesubstance of the dispute was agreed upon by both parties, the arbitratorscould still choose not to enforce such agreement based upon mandatorynational laws and public policy issues.111

In turn, the law of the arbitral seat could be important for determining thelaw applicable to the arbitration agreement.112 This is expressly recognizedby Gary Born, who argues that the law of the arbitral seat is an alternative ofparticular importance when it comes to the law governing an arbitrationagreement.113 A different author describes a situation in which the law of thearbitral seat was important for determining the law governing the arbitrationagreement in the following terms:

The Court reaffirmed the principles for determining the applicable lawof the arbitration agreement which were set down in Sulamerica andconsidered in Arsanovia. The Court summarised the guidance providedby these cases, including the three stage test set out in Sulamerica thatthe proper law of the arbitration agreement is to be determined byundertaking a three stage enquiry: (i) whether the parties expresslychose the law of the arbitration agreement; (ii) whether the parties

108. Ali Khaled Qtaishat, Choice of Law in International Commercial Arbitration, INDIA L. J.(2007), http://indialawjournal.com/volume3/issue_3/article_by_ali.html.109. BORN, supra note 6, at 629. Other authors identify more types of laws. As one states: “It ispossible to encounter as many as five different legal systems which regulate the status of aparticular arbitration and which may differ in the individual proceedings applicable: (i) the lawapplicable to the capacity of the parties to enter into an arbitration agreement and the lawapplicable to the arbitrability of the dispute; (ii) the law governing the arbitration agreement;(iii) the law governing the arbitral proceedings (lex arbitri); (iv) applicable substantive law (thelaw applicable to the merits of the dispute); (v) the law applicable to the recognition andenforcement of the arbitral award (if a party seeks recognition and enforcement in multiplecountries, the number of applicable legal systems can be higher).” Belohlavek, supra note 44, at265.110. BORN, supra note 6, at 628.111. Id. at 633.112. Id. at 639.113. Id.




made an implied choice of the arbitration agreement; and (iii) in theabsence of express or implied choice, the system of law with which thearbitration agreement has the “closest and most real connection.”Applying these principles, the Court found that the applicable law ofthe arbitration agreement was the law of the country of the seat, i.e.English law. It dismissed the argument that the seat should not berelevant to the “closest connection” test, because Habas’ agents hadexceeded their actual authority when agreeing to London arbitration.114

In the case of the procedural law of the arbitral proceedings, the three-stage inquiry would generally apply the arbitral seat.115 In other words, thearbitral seat could determine the procedural provisions that will apply to aparticular arbitration.116 Even though some jurisdictions allow the parties tofreely select the law governing the proceedings of the arbitration, this is acircumstance that rarely occurs in practice.117

Finally, the arbitral seat may determine the conflict of law rules applied tosolve conflict of laws,118 at least when it is necessary to reconcile laws fromdifferent jurisdictions.119 As noted:

[S]electing each of the bodies of law identified in the foregoing . . .sections—the laws applicable to the merits of the underlying contract ordispute, to the arbitration agreement, and to the arbitral proceedings—ordinarily requires application of conflict-of-laws rules. In order toselect the substantive law governing the parties’ dispute, for example,the arbitral tribunal must ordinarily apply a conflict-of-laws system . . . .An international arbitral tribunal must therefore decide at the outsetwhat set of conflicts rules to apply.120

Needless to say, the arbitral seat could play an important role resolvingchoice of law issues in international arbitration.

F. MANDATORY REQUIREMENTS

Regarding the rules applying to an international commercial arbitration, itis possible to distinguish between dispositive norms “that can be changed by

114. Henry Orsmby, Governing Law of the Arbitration Agreement: Importance of Sulamerica CaseReaffirmed Where Choice of Seat Was Agreed Without Actual Authority, KLUWER ARB. BLOG (Jan.29, 2014), http://kluwerarbitrationblog.com/2014/01/29/governing-law-of-the-arbitration-agreement-importance-of-sulamerica-case-reaffirmed-where-choice-of-seat-was-agreed-without-actual-authority/.115. LATHAM & WATKINS, supra note 31, at 17.116. Id.117. BORN, supra note 6, at 636.118. See id. at 599.119. Choice of Law, USLEGAL, http://definitions.uslegal.com/c/choice-of-law/.120. GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION: COMMENTARY AND

MATERIALS 44 (Transnational Publishers, 2d ed. 2001).




the parties involved”121 and norms that “ ‘purport to apply irrespective of thelaw chosen by the parties to govern their contractual relations,’” known asmandatory norms.122 Mandatory norms impose “important restrictions toparties’ authority to define the arbitration framework” and can varydepending on the arbitral seat.123 For instance, in Chile, it is not possible towaive the right to request interim relief.124 Therefore, despite the debate“regarding the strictness of the actual limits created by mandatory norms onthe parties’ autonomy to set the rules of the arbitration,” it is evident thatthe laws of the arbitral seat could impose mandatory requirements capable ofaffecting the arbitral procedure.125

As noted, the law governing “the law of the seat of arbitration . . . mightimpose mandatory requirements on the parties as to the form and/orcontents of the arbitration agreement.”126 For instance, “the arbitrationagreement might have to be [initialed] or signed, the seat might have to bethat of a governmental party and/or the involvement of an arbitralinstitution might have to be clearly stated.”127 Quite simply, the selection ofa particular arbitral seat could impose mandatory requirements that theparties ought to consider before selection.128

G. SUMMARIZING THE POINTS

A good summary of the most relevant issues affected by the selection ofthe arbitral seat in the field of international arbitration can be found in thefollowing excerpt written by Gary Born:

The arbitration legislation of the arbitral seat governs a number of“internal” and “external” matters relating to arbitral proceedings. The“internal” matters potentially governed by the arbitral seat’s lawinclude: (a) the parties’ autonomy to agree on substantive andprocedural issues; (b) standards of procedural fairness in arbitralproceedings; (c) timetable of arbitral proceedings; (d) consolidation,joinder and intervention; (e) rights of lawyers to appear, and theirethical obligations, in the arbitral proceedings; (f) pleading andevidentiary rules; (g) permissibility and administration of oaths; (h)disclosure, “discovery,” and related issues; (i) confidentiality; (j) rightsand duties of the arbitrators; (k) arbitrators’ remedial powers, includingto grant provisional measures; and (l) form of the award. In addition,

121. Francisco Blavi & Gonzalo Vial, The Burden of Proof in International Commercial Arbitration:Are We Allowed to Adjust the Scales?, 39 HASTINGS INT’L AND COMP. L.R. 41, 57 (2016).122. Id. (citing Andrew Barraclough & Jeff Waincymer, Mandatory Rules of Law in InternationalCommercial Arbitration, 6 MELB. J. INT’L L. 205, 216-17 (2005)).123. Id. at 57.124. Id. at 58.125. See Blavi & Vial, supra note 121, at 59.126. LATHAM & WATKINS, supra note 31, at 22.127. Id.128. See id.




and less clearly, the law of the arbitral seat sometimes governs: (m)conflict of law rules applicable to the substance of the dispute; and (n)quasi-substantive issues, such as rules concerning interest and costs oflegal representation.129

The “external” matters governed by the law of the arbitral seat concernjudicial supervision of the arbitral proceedings by the courts of the arbitralseat. Among other things, this includes:

(a) annulment of arbitral awards; (b) selection of arbitrators; (c) removalof arbitrators; (d) evidence-taking in aid of the arbitration; and (e)provisional measures in support of the arbitration. In most instances,“external” matters entail affirmative actions of the local courts of thearbitral seat, which consider and decide applications seeking judicialintervention in, or support for, the arbitral process (e.g., annulling anaward; selecting an arbitrator).130

V. Conclusion

In the context of an increasing use of international commercial arbitrationfor solving transnational disputes, the consequences flowing from theselection of the arbitral seat are some of the most important aspects to beconsidered when drafting an arbitration agreement. Choosing a particularseat determines issues that have the potential to profoundly affect theoutcome of an arbitration, namely: (a) the recognition and enforcement ofarbitral awards; (b) the courts with supervisory jurisdiction over thearbitration; (c) some procedural rules that could apply to the arbitration; (d)the costs of the procedure; (e) the way in which conflict of laws are solved;and (f) the mandatory norms that could apply to the arbitration.

Therefore, the arbitral seat directly affects the chances of effectivelyobtaining the goals pursued through arbitration. A poor selection couldresult, at the very least, in unenforceable awards susceptible of broadsidedchallenges. If the country where the award was made is not a party to theNew York Convention, it might not be possible to enforce the award in adifferent location where valuable assets may be located. In turn, if the lawsof the seat allows for an extensive review of international arbitral awards, it ismore likely that those decisions will be set aside.

Additionally, the selection of the arbitral seat determines the economicaland practical possibilities of a party participating in international commercialarbitration—affecting the cost and the chance of success of arbitratingwithin a particular framework. For instance, if the selected court does notassist with the appointment of arbitrators, or if the court unduly interfereswith the arbitration, the parties will likely have to spend additional moneyand time on processing the dispute. In light of the aforementioned, it is

129. BORN, supra note 6, at 598-99.130. Id. at 599.




undeniable that seat selection is crucial and might even be outcomedeterminative. Thus it is necessary to make such selection carefully and on acase-by-case basis, tailoring the decision, as much as possible, to theparticular situation.



Senkaku/Diaoyu: Are They Islands?

CONSTANTINOS YIALLOURIDES*

I. Introduction

The Senkaku or Diaoyu islands, as they are respectively known to theJapanese and the Chinese1 (hereafter, “Senkaku/Diaoyu islands”), is a smallgroup of islands lying at the southwestern edge of the East China Sea. Theyare approximately 120 nautical miles (nm) northeast of Taiwan, 200nm eastof China, and 200nm southwest of the Japanese island of Okinawa.2 Theyare comprised of the Uotsurijima/Diaoyu Dao island, four other smallerislets, and three barren rocks; their land amasses to just over six squarekilometers.3 All of the islands are currently uninhabited. Interestingly, sincethe 1970s, when China and Japan formally expressed their territorial claimsover the islands, these small, isolated, and uninhabited offshore features haveserved as the most persistent and explosive bone of contention between thetwo countries.4 The reason lies not in their economic value per se, as no

* Dr. Constantinos Yiallourides is a Teaching Associate at the University of Aberdeen,School of Law. He holds a Ph.D. in International Law, an LL.M. in Oil and Gas Law (withdistinction), both from the University of Aberdeen, and an LL.B. from the DemocritusUniversity of Thrace, Greece. Dr. Yiallourides is also a legal consultant in the energy/naturalresources sector and an associate counsel in commercial litigation (civil and common law). Theauthor would like to thank Professor Tina Hunter, Dr Roy Andrew Partain and Mr. MalcolmCombe for their constructive comments on earlier versions of this paper.

1. Tiaoyu is the Chinese name of the islands in the Latin alphabet. Its Chinese name is alsoknown as “Diaoyu Dao” or “Diao-yu tai.” China calls the islands “Diaoyu Tai” or “DiaoyuDao”. Taiwan uses the same Chinese characters but gives them a different spelling as “Tiao YuTa”’. Japan calls the islands “Senkaku”, “Senkaku Gunto’ or “Sento Shosho”. See Guoxing Ji,The Diaoyudao (Senkaku) Disputes and Prospects for Settlement 6(2) KOREAN J. OF DEF. ANALYSIS

285 (1994); see also Min G Koo, The Senkaku/Diaoyu Dispute and Sino-Japanese Political-EconomicRelations: Cold Politics and Hot Economics? 22(2) THE PAC. REV. 205, 206 (2009).

2. CHOON-HO PARK, EAST ASIA AND THE LAW OF THE SEA 32 (1983).3. Masahiko Asada, Senkaku/Diaoyu Islands, MAX PLANCK ENCYCLOPEDIA OF PUBLIC

INTERNATIONAL LAW (June 2007), available at: http://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e2015?rskey=MAYf0L&result=1&prd=EPIL.

4. The historical and factual evidence advanced by interested states to support theirterritorial title in the disputed features has been widely examined in literature and falls beyondthe scope of this paper, which focuses exclusively on the aspects relevant to the law of the sea.Suffice to say, at this point, China claims the islands on the basis of historic discovery and usagedating back to the Ming Dynasty (AD 1368-1644). While Japan argues that it acquired theislands as terra nullius, in 1895, as they were found to be unoccupied with no signs of formalcontrol. See JI, supra note 1, for an analysis of the customary international law of territorialacquisition and the historical facts of the dispute; Hitoshi Nasu and Donald R Rothwell, Re-Evaluating the Role of International Law in Territorial and Maritime Disputes in East Asia 4(1)ASIAN J. OF INT’L L. 55 (2014); Hungdah Chiu, An Analysis of the Sino-Japanese Dispute Over the




economic activities are currently being conducted on the islands, but ratheron their strategic location near areas where substantial quantities of offshoreoil and gas are thought to be present.5

Under the framework of the 1982 United Nations Convention on theLaw of the Sea (UNCLOS) and customary international law at large,offshore features qualifying as islands, in a legal sense, can generate zones ofmaritime jurisdiction in the same way as any other mainland territory. Thatbeing the case, the suspected presence of vast hydrocarbon deposits in theadjacent waters renders Senkaku/Diaoyu islands intrinsically valuable.6 Thesignificance attached to these islands stems from the perception that theirpossession can potentially generate extensive areas of maritime jurisdictioncapturing the marine resources in the surrounding waters and seabed.7

Obviously, there is a close connection between the islands’ maritimegenerating capacity and the associated sovereign rights over resourcesthereof.8

The possible effect of an island on maritime delimitation presupposes thatthe island is capable of generating maritime projections to be delimited vis-a-vis other states with opposite or adjacent coasts.9 Accordingly, this paper

T’iaoyu Tai Islets (Senkaku Gunto) 15 CHINESE Y.B. OF INT’L L. AFF. 9 (1996); Basic View on theSovereignty over the Senkaku Islands, MINISTRY OF FOREIGN AFFAIRS OF JAPAN (Nov. 9, 2012),www.mofa.go.jp/region/asia-paci/senkaku/position_paper_en.html; Min G Koo, The Senkaku/Diaoyu Dispute and Sino-Japanese Political-Economic Relations: Cold Politics and Hot Economics? 22(2)THE PAC. REV. 205, 213 (2009); JEANETTE GREENFIELD, CHINA’S PRACTICE IN THE LAW OF

THE SEA 127-129 (1992).5. Geologists Emery and Niino first identified the perception that the East China Sea could

potentially be one of the most prolific oil regions in the world in 1961. Their report was largelybased on stratigraphic and oceanographic data gathered by Japanese and American submarinesduring the Second World War. In 1968, a geological study funded by the United NationsEconomic Commission for Asia and the Far East (ECAFE), confirmed that the “continentalshelf between Taiwan and Japan may be one of the most prolific oil reservoirs in the world” and“one of the few large continental shelves in the world that has remained untested by the drill,owing to military and political factors.” See K.O. Emery et al., Geological Structure and SomeWater Characteristics of the East China and the Yellow Sea, 2 TECHNICAL BULLETIN OF THE

ECONOMIC COMMISSION FOR ASIA AND THE FAR EAST 41 (Apr. 30, 1968).6. RALF EMMERS, RESOURCE MANAGEMENT AND CONTESTED TERRITORIES IN EAST ASIA

33 (2013); Sang-Myon Rhee & James MacAulay, Ocean Boundary Issues in East Asia: The Need forPractical Solutions, in Ocean Boundary Making: Regional Issues and Developments 85-86(1988).

7. Clive Schofield, The Trouble with Islands: The Definition and Role of Islands and Rocks inMaritime Boundary Delimitation, in MARITIME BOUNDARY DISPUTES, SETTLEMENT PROCESSES,AND THE LAW OF THE SEA 21 (Seoung-Yong Hong & Jon M. Van Dyke eds., 2008).

8. This connection is amply illustrated in the words of some Japanese scholars who considerthat “the Senkaku Islands fill every condition for being qualified as islands from the viewpoint ofinternational law [hence] Japan has the sovereign right for the exploration of natural resourceson the continental shelf adjacent to the Senkaku Islands.” Toshio Okuhara, The TerritorialSovereignty over the Senkaku Islands and Problems on the Surrounding Continental Shelf, 15JAPANESE ANN. INT’L L. 95, 105 (1971).

9. “In giving special attention to the regime of islands the Convention reflects theimportance of islands in the delimitation of maritime space,” UNITED NATIONS CONVENTION



2017] ARE THEY ISLANDS? 349

examines whether the Senkaku/Diaoyu islands qualify as islands inaccordance with UNCLOS, and as a consequence, generate full maritimezones, before evaluating the possible effect of these islands on maritimeboundary delimitation in the area in question. To that end, the relevantprovisions of UNCLOS are presented and analyzed with a moderate degreeof reference to literature, international jurisprudence and state practice.

II. What is an “Island” in a Legal Sense?

UNCLOS only provides a single article on the regime of naturallyoccurring islands.10 This indicates what geographic formations qualify as“islands” in a legal sense, but also what geographic formations similar toislands cannot be legally considered as such. It also provides for the equaltreatment of islands and other land territories for the purpose of delimitingthe territorial sea, contiguous zone, exclusive economic zone (EEZ), andcontinental shelf. Article 121 of UNCLOS reads as follows:

1. An island is a naturally formed area of land, surrounded by water,which is above water at high tide.2. Except as provided for in paragraph 3, the territorial sea, thecontiguous zone, the exclusive economic zone and the continental shelfof an island are determined in accordance with the provisions of thisConvention applicable to other land territory.3. Rocks, which cannot sustain human habitation or economic life oftheir own, shall have no exclusive economic zone or continental shelf.11

Paragraph 1 of the above Article has adopted, unchanged, Article 10 of the1958 Convention on the Territorial Sea and the Contiguous Zone (1958Territorial Sea Convention).12 In defining an island as a “naturally formedarea of land,” it excludes by definition artificial islands, which come underthe scope of Articles 11, 60, 80 and 147(2) of UNCLOS. Further, theindispensable condition that an island must be “above water at high tide”

ON THE LAW OF THE SEA, 1982: A COMMENTARY VOL. 3 325 (Myron Norquist et al. eds.,1995).

10. U.N. Convention on the Law of the Sea (hereinafter “UNCLOS”), Dec. 10, 1982, Article121, 1833 U.N.T.S. 3.

11. Id. (Article 121 applies to individual islands, not to archipelagic states constituted whollyby groups of islands that are geographically, economically and politically interconnected. Thelatter come under the scope of Article 46 of UNCLOS.).

12. Article 10(1) of the 1958 Territorial Sea Convention provided that “An island is anaturally-formed area of land, surrounded by water, which is above water at high-tide. . .” U.N.Convention on the Territorial Sea and the Contiguous Zone (1958 Territorial Sea Convention),Apr. 29, 1958, 516 U.N.T.S. 205. In its commentary on this article, the International LawCommission noted that low-tide elevations and technical installations built on the seabed, suchas installations for the exploitation of the continental shelf, were not considered islands. Reportof the International Law Commission on the Work of its Eighth Session, 2 Y.B. OF THE INT’L L.COMM’N 253, 270 (1956).




excludes such offshore features as low-tide elevations and drying reefs, whichare dealt with in Article 13 of UNCLOS.13

Paragraph 2 of Article 121 of UNCLOS reaffirms the customary positionof international law that islands can generate the same range of maritimezones as any other land territory and that these zones, namely the territorialsea, EEZ, and continental shelf are to be delimited in accordance toUNCLOS in the same way as applicable to land territories.

Paragraph 3 forms the cornerstone of this Article providing an exceptionto its preceding paragraphs. Paragraph 3 deprives “rocks which cannotsustain human habitation or economic life of their own” of the capacity togenerate EEZs and continental shelf areas, but retains their ability togenerate a territorial sea and contiguous zone.14 In other words, any insularfeature satisfying the conditions of Article 121(1), namely natural formationand permanently above water at high tide, is prima facie entitled to generatefull maritime projections in accordance to UNCLOS. But if such featuremay be classified as “rock,” its capacity to generate EEZ and continentalshelf must be ascertained at a second stage by examining the conditions setforth in Article 121(3), “human habitation” and “economic viability.”15

Interestingly, while Article 121(3) of UNCLOS draws a distinctionbetween “islands” with full zone-generative capacity and “rocks” limited to aterritorial sea, the term “rock” and the phrase “cannot sustain humanhabitation or economic life of their own” receive no further definition.16

This interpretative loophole has given rise to considerable uncertainty,particularly in cases where certain geographical features lie at the borderlinebetween an “island” and a “rock.” In the case under examination, this is theprimary question one has to answer before discussing the possible effect ofthe Senkaku/Diaoyu islands in the maritime boundary delimitation betweenChina and Japan.

Before applying Article 121(3) to the Senkaku/Diaoyu island group, thesubstantial content of this provision must be determined. The starting pointin this regard is Article 31(1) of the Vienna Convention on the Law ofTreaties (1969 Vienna Convention).17 This states that “a treaty should beinterpreted in good faith, in accordance with the ordinary meaning to begiven to the terms of the treaty in their context and in the light of its objectand purpose.” Article 32 of the 1969 Vienna Convention sets out thesupplementary means of interpretation, namely, the preparatory works ofthe treaty and the circumstances of its conclusion.18

13. UNCLOS, supra note 10, art. 13.14. UNCLOS, supra note 10, art. 121.15. Id.16. Lewis M. Alexander, The Identification of Technical Issues of Maritime Boundary Delimitation

within the LOSC Context, in THE UN CONVENTION ON THE LAW OF THE SEA: IMPACT AND

IMPLEMENTATION 273-4 (E.D. Brown & R.R. Churchill eds., 1987).17. Vienna Convention on the Law of Treaties, May 23, 1969, No. 18232, 1155 U.N.T.S.

332.18. Id.




III. What is the Meaning of the Term “Rock”?

From the construction of Article 121 of UNCLOS, it can be safelysuggested that a rock is a peculiar sub-category of island.19 Strictly speaking,there is no substantial difference between a “rock” and an “island” insofar asthey must both constitute “an area of land,” “naturally formed,” “surroundedby water,” and “above water at high tide.”20 Nonetheless, under UNCLOS,rocks are much more disadvantaged than islands since their zone-generativecapacity is substantially reduced.21

UNCLOS does not provide a definition of the term “rock.”22 Assumingthat ordinary definitions of rock apply, this may lead to ambiguitiesregarding the true meaning of the term “rock” and its distinction from othermaritime features.23 For example, the Cambridge English Dictionaryprovides that rocks form “the dry solid part of the earth’s surface or anylarge piece of this that sticks up out of the ground or the sea.”24 Webster’sThird New International Dictionary defines rock as, “a mass of stone lyingat or near the surface of the water.”25 But these descriptions may also holdtrue for other offshore geographical features, such as islands, which aretreated differently under UNCLOS.26 Vice versa, to be considered a “rock,”in a legal sense, it is not always necessary that an offshore feature constitutesa rock in a geological sense. Article 121(3) can also apply to a formationconsisting of sand. Therefore, in the interest of clarity and consistency, itseems reasonable to seek the actual content of the term “rock,” not in itsstrict dictionary definition, but in the meaning which UNCLOS draftersintended to confer in light of the Convention’s objective and purpose.

From the Second Session of UNCLOS III, held in Caracas in 1974, thegeneral perception among states was that islands should be allowed the sametreatment in terms of ocean space as continents.27 According to somedelegations, an island’s maritime space should be determined according to

19. Jon M. Van Dyke et al., The Exclusive Economic Zone of the Northwestern Hawaiian Islands:When Do Uninhabited Islands Generate an EEZ?, 25 SAN DIEGO L. REV. 425, 435 (1988).

20. UNCLOS, supra note 10, art. 121.21. Chris M. Carleton & Clive Schofield, Developments in the Technical Determination of

Maritime Space: Delimitation, Dispute Resolution, Geographical Information System and the Role of theTechnical Expert 3(4) INT’L BOUNDARIES RESEARCH UNIT: MARITIME BRIEFING 35-36 (2002);Clive Schofield, supra note 7, at 25.

22. Alexander, supra note 16.23. Alex G. Oude Elferink, Clarifying Article 121(3) of the Law of the Sea Convention: The Limits

Set by the Nature of International Legal Processes, 2 INT’L BOUNDARIES RESEARCH UNIT:BOUNDARY & SECURITY BULLETIN 58, 59 (1998).

24. Definition of Rock, CAMBRIDGE ENGLISH DICTIONARY, http://dictionary.cambridge.org/us/dictionary/english/rock.

25. WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE

(Philip B. Gove ed., 1993).26. For example, Cotter defines islands as “relatively small fragments of land.” CHARLES H.

COTTER, THE PHYSICAL GEOGRAPHY OF THE OCEANS 59 (1965).27. U.N. SCOR, 2nd Sess., 40th mtg. at 286-7, U.N. Doc. A/CONF.62/C.2/SR.40 (Aug. 14,

1974).




criteria equal to those used for continental landmasses.28 Further, manystates held the view that allowing islands to generate full seaward projectionswas vital to safeguard the interests of their inhabitants which “entirelydepend upon the natural resources of the sea for the livelihood.”29 Thestatement of Cyprus is noteworthy in that regard:

Islands are mutatis mutandis in the same tradition as continentalterritories insofar as rights and obligations under international law areconcerned, and that if any discrimination were to be made, it should bein favor of, not at the expenses of, islands which rely on the resources intheir maritime zones.30

Three far more intriguing issues were: (1) the distinction between islandsand other insular formations, (2) their precise definition, and (3) their effectin maritime boundary delimitation. Some states raised concerns regardingthe “vagueness and generalized nature” of the existing definition of islandscontained in Article 10 of the 1958 Territorial Sea Convention; particularlywhether this broad, generic, and somehow enigmatic definition could meanthat even minor rocks and seabed elevations would qualify as islands in alegal sense.31

In response to the much-criticized 1958 Territorial Sea Convention’sdefinition, Romania submitted a proposal submitted that attempted todifferentiate islands from other geographical formations similar to islets.32

Paragraph 2 of the Romanian proposal read as follows:

An island similar to an islet is a naturally formed elevation of land (orsimply and eminence of the seabed) surrounded by water, which isabove water at high tide and which is more than one square kilometerbut less than (. . .) square kilometers in area, which is not or cannot beinhabited (permanently) or which does not or cannot have its owneconomic life.33

28. See Statements of New Zealand, West Samoa, Trinidad and Tobago and Fiji and Greece atthe 21st, 38th and 39th meetings of the Second Committee, emphasizing the equitabletreatment of island states and islands, generally, and to their entitlement to the same territorialsea and economic zone to be fixed for other land territory. U.N. SCOR, 2nd Sess., 21st mtg.,U.N. Doc. A/CONF.62/C.2/SR.21 (July 31, 1974); see also U.N. SCOR, 2nd Sess., 38th mtg.,U.N. Doc. A/CONF.62/C.2/SR.38 (Aug. 13, 1974); U.N. SCOR 2nd Sess., 39th mtg., U.N.Doc. A/CONF.62/C.2/SR.39 (Aug. 14, 1974).

29. See Denmark’s and Greece’s Statements at the 39th Meeting of the Second Committee.U.N. SCOR 2nd Sess., 39th mtg. at 285, U.N. Doc. A/CONF.62/C.2/SR.39 (Aug. 14, 1974).

30. See Statement of Cyprus at the 20th Meeting of the Second Committee. U.N. SCOR 2ndSess., 20th mtg. at 163-4, U.N. Doc. A/CONF.62/C.2/SR.20 (July 30, 1974).

31. Clive Symmons, THE MARITIME ZONES OF ISLANDS IN INTERNATIONAL LAW 16 (1979);see Statements of Tunisia, Colombia and Spain at the 39th and 40th Meetings of the SecondCommittee. U.N. SCOR 2nd Sess., 39th mtg., U.N. Doc. A/CONF.62/C.2/SR.39 (Aug. 14,1974); U.N. SCOR 2nd Sess., 40th mtg., U.N. Doc. A/CONF.62/C.2/SR.40 (Aug. 14, 1974).

32. Romania: Draft Articles on Definition of and Regime Applicable to Islets and Islands Similar toIslets, U.N. Doc. A/CONF.62/C.2/L.53 (Aug. 12, 1974).

33. Id.




This trend was further advanced by the draft articles of delegations fromAlgeria, Dahomey, Guinea, Ivory Coast, Liberia, Madagascar, Mali,Mauritania, Morocco, Sierra Leone, Sudan, Tunisia, Upper Volta andZambia, which sought to define various categories of insular features such as”islands,” “islets,” “rocks” and “low-tide elevations.”34 Their proposalsadvocated the use of specific criteria such as size, geographical, geologicaland geomorphological configuration, needs and interests of islandpopulation and the living conditions thereof. By contrast, a number ofdelegations opposed the above proposals and reiterated their support for theapplicability of the 1958 Convention’s definition.35

The resulting composite text, as emerged from the second session ofUNCLOS III, was a combination of the alternative definitions put forth bythe delegates during the discussions. The composite text read as follows:

1. An island is a naturally formed area of land, surrounded by water,which is above water at high tide;2. An islet is a naturally formed area of land less than (. . .) squarekilometers, surrounded by water, which is above water at high tide;3. A rock is a naturally formed rocky elevation normally unfit forhuman habitation which is surrounded by water and is above water athigh tide.

Following further refinements, the third session of UNCLOS III, held inGeneva in 1975, led to Article 121 of UNCLOS 1982 as appears in thepresent. This defines islands largely in the same terms as in the 1958Convention.36 Only 121(3) reflects, to some extent, proposals fordifferentiating islands from some other types of insular features, i.e. rocks.In part, this is because of the serious practicalities of finding an alternativedefinition for islands and commonly acceptable distinctions among differenttypes of islands.37 Largely, however, it is due to the realization that byattempting to add detailed rules and complex formulae, such as those basedon size and population analogies,38 there would inevitably be artificial

34. Algeria, Dahomey, Guinea, Ivory Coast, Liberia, Madagascar, Mali, Mauritania, Morocco,Sierra Leone, Sudan, Tunisia, Upper Volta and Zambia: Draft Articles on the Regime of Islands, U.N.Doc. A/CONF.62/C.2/L.62/Rev.1 (Aug. 27, 1974).

35. See Fiji, New Zealand, Tonga and Western Samoa: Draft Articles on Islands, U.N. Doc. A/CONF.62/C.2/L.30 (July 30, 1974); see also Statements of Singapore, Canada, Denmark andTrinidad and Tobago at the 39th Meeting of the Second Committee. U.N. SCOR 2nd Sess.,39th mtg., U.N. Doc. A/CONF.62/C.2/SR.39 (Aug. 14, 1974).

36. Informal Single Negotiating Text, Part II, U.N. Doc. A/CONF.62/WP.8/PartII (Dec. 10,1982).

37. U.N. SCOR 2nd Sess., 40th mtg. at 287-8, U.N. Doc. A/CONF.62/C.2/SR.40 (Aug. 14,1974).

38. For example, Ireland’s draft proposal stated, “. . .account may be taken of an island only ifit is inhabited and if. . .it contains at least one tenth of the land area and population of the Stateconcerned.” Ireland: Draft Article on Delimitation of Areas of Continental Shelf BetweenNeighbouring States U.N. Doc A/CONF.62/C.2/L.43 (Aug. 6, 1974).




ambiguities, resulting in the “very inequity which they purported to avoid.”39

As one commentator observed, “the majority of these proposals were simplysophisticated attempts to protect national interests, and thus, despite thesuperficial appeal of this approach, the absence of any reference to thesecharacteristics of islands. . .comes as no surprise.”40 Therefore, proposals todraw distinctions between islands, rocks and other insular features based oncertain size criteria, fixed population analogies and other geographicalfactors, were considered incredibly complex, and as a consequence, wereexplicitly ruled out. But the introduction of 121(3) indicates a commonunderstanding that emerged during the discussions, that in situations whereoffshore natural resources were vital to the economy of the coastal state andthe livelihood of the islands’ inhabitants, such islands would be entitled tofull maritime zones. Inversely, small, uninhabitable maritime featureswithout any economic life should be excluded from such generating capacity.

IV. “Human Habitation” or “Economic Life of Its Own”

At present, Article 121(3) of UNCLOS stipulates two crucial conditionsfor an insular feature to qualify as “island”: to sustain “human habitation” or“economic life of its own.”41 The inclusion of the grammatical conjunction“or” suggests that these two conditions are non-cumulative, meaning thatthe fulfillment of just one of these conditions is sufficient to prove that aninsular feature has full zone-generative capacity.42 Arguably, Article 121(3)gives rise to several questions of interpretation. How can one say with anycertainty whether a rock is capable of sustaining human habitation or has thecapacity to generate economic life of its own? More importantly, can therebe a category of island, in a legal sense, that can have economic life of itsown but cannot sustain human habitation, or vice versa? Finally, would anisland that had once been inhabited, but has become uninhabited over timedue to persisting adverse economic conditions, for example, be deprived ofits legal status?

In answering these questions, it is necessary to point out that Article121(3) refers to the capacity of sustaining human habitation, not simplyactual habitation. Capacity for habitation is arguably a broader conditionthan actual habitation.43 This suggests that an island must not necessarilybe, or have once been, inhabited to be considered as such. The key is toprove the island’s ability to sustain habitation. Clearly, the first step to provethis ability is to look at the island’s present or past population. Even though

39. Statement of the United Kingdom at the 40th Meeting of the Second Committee. U.N.SCOR 2nd Sess., 40th mtg., U.N. Doc. A/CONF.62/C.2/SR.40 (Aug. 14, 1974).

40. Donald E. Karl, Islands and the Delimitation of the Continental Shelf: A Framework forAnalysis, 71 AM. J. OF INT’L L. 642, 645 (1977).

41. UNCLOS, supra note 10, art. 121.42. Barbara Kwiatkowska & Alfred H.A. Soons, Entitlement to Maritime Areas of Rocks

which Cannot Sustain Human Habitation or Economic Life of Their Own, 21 NETH. Y.B. OF

INT’L L. 139, 163-165 (1990).43. Clive Symmons, THE MARITIME ZONES OF ISLANDS IN INTERNATIONAL LAW 49 (1979).




it is not necessary for an island to actually be or have at some point beeninhabited to meet the “sustain human habitation” condition, it will certainlybe easier to argue that an island can actually sustain human habitation if ithad once been inhabited. In addition, the fact that the given population hashistorically made use of the surrounding waters, e.g. for fishing or mining,may be used to establish the island’s legal status.44

Assuming that there are no solid indications that the island is, or used tobe, inhabited, the second step is to examine the island’s capacity to sustainhuman habitation. In that regard, the most vital needs for human survivalare arguably food, fresh water, and shelter. Therefore, it may be suggestedthat the existence of cultivable soil, fresh water and enough space for shelterare the three most critical features of an island that has the ability to sustainhuman life.

The second requirement provided in Article 121(3) concerns the island’scapacity to “sustain economic life of its own.” Similar to the firstrequirement, the phrase “able to sustain” suggests that the existence ofeconomic life is not necessary, but rather it is the presence of resources thatcan sustain such economic life that is crucial to qualify as an island. Be thatas it may, it is submitted that if natural resources such as fisheries or mineralsare known to be present on the island, this alone is enough to reach thethreshold of Article 121(3). This view finds some support in the judgementof the Supreme Court of Norway in Public Prosecutor v. Haraldson et al.,45

where it was held that Abel island, an outlying island in the northeastern partof Svalbard archipelago, was not an uninhabitable rock within the meaningof Article 121(3) of UNCLOS because it was able to support a significantpolar bear hunt, notwithstanding that hunting was prohibited forconservation reasons.46 The existence of physical opportunities on thefeature for sustaining some kind of economic life, such as hunting, wereconsidered enough to grant the feature the legal status of an island. Itshould also be noted that teams of meteorologists and scientists living on theisland did not qualify as a stable population.47 Further, the phrase “of itsown” indicates that the island itself must be capable of generating a sourcefor economic life. But nowhere in the discussions that took place atUNCLOS III was it mentioned that islands must be self-sufficient. As amatter of fact, it would not always be possible for a state, whethercontinental or island, to achieve self-sufficiency at every level, whether

44. Fisheries Case (U.K. v. Nor.), Judgment, 1951 I.C.J. Rep. 116, 127-142. (It is interestingto note that in the Fisheries Case of 1951, Norway contended that waters adjacent to the coastalzone of the various insular formations (known as fjords) were essential to the livelihood of theirinhabitants. The Court acknowledged this and granted Norway full jurisdiction to extensivefisheries zones measured from straight baselines connecting all the aforementioned features.).

45. Robin R. Churchill, Norway: Supreme Court Judgment on Law of the Sea Issues, 11(4) INT’L J.OF MARINE AND COASTAL L. 576 (1996) (citing Public Prosecutor v. Haraldson et al.,Judgment, 1996).

46. Id. at 579.47. Id.




analyzed from the perspective of the economy, energy, food or agriculture.Some external support to fully realize the economic potential of an islandmust be deemed permissible to that end.

State practice and jurisprudence on the issue of an island have beenremarkably unhelpful. International courts and tribunals have failed to offera decisive and authoritative definition of Article 121 of UNCLOS.48 This islargely because in boundary cases involving islands, international courts andtribunals have tended to focus on issues relevant to drawing the delimitationlines rather than specifically interpreting the legal status of the offshorefeatures in question.49

In the Volga Case,50 concerning the release of the Russian-flagged fishingvessel, Volga, which was apprehended by the Australian Navy for illegallyfishing in the Australian EEZ adjacent to Heard and McDonald islands,Judge Vukas raised serious doubts as to the appropriateness of establishingEEZ off the shores of “uninhabitable and uninhabited” islands. In hisseparate declaration, he explained that a crucial factor for establishing anEEZ was the protection of the economic interests of the coastal states, andparticularly of their coastal population. He then went further to observethat these economic interests did not exist with respect to uninhabitedislands, such as Heard and McDonald islands, as they had no “coastal fishingcommunities” and “no permanent habitation.”51 But it is important to notethat neither Russia nor any other member of the Tribunal had challengedAustralia’s right to claim an EEZ around Heard and McDonald islands.52 Itis also interesting to note that this reasoning would imply that actual humanhabitation and economic life must be recorded cumulatively to meet the testof Article 121(3) of UNCLOS. This, however, runs contrary to the wordingof said article, particularly the grammatical conjunction “or” between“human habitation” and “economic life” and the phrase “able to sustain” asopposed to actual habitation and economic life.53 The authoritative value ofJudge Vukas’ independent statement and its potential impact on future caselaw regarding the issue remains to be seen.

The preceding section has examined the meaning of Article 121 ofUNCLOS in light of its negotiating history and the ordinary interpretation

48. Schofield, supra note 7, at 28.49. See Maritime Delimitation in the Black Sea (Rom. v. Ukr.), Judgment, 2009 I.C.J. Rep. 61,

¶184-188. (The Court omitted to respond to the contentions of the parties regarding the statusof Serpents’ Island under Article 121 of UNCLOS, but instead simply observed that Serpents’Island was entitled to a 12nm territorial Sea and it had no impact on the maritime delimitationbetween the two states.).

50. The “Volga” Case (Russ. Fed’n v. Austl), Judgment, (Dec. 23, 2002), available at www.itlos.org/fileadmin/itlos/documents/cases/case_no_11/11_judgment_231202_en.pdf.

51. Id.52. It is noteworthy that Australia enforces its EEZ regime due to Japanese whaling in the

area. See Marko Milanovic, ICJ Decides the Whaling in the Antarctic Case: Australia Wins, EJIL:TALK! BLOG OF THE EUROPEAN JOURNAL OF INTERNATIONAL LAW (June 7, 2016), www.ejiltalk.org/icj-decides-the-whaling-in-the-antarctic-case-australia-wins/.

53. UNCLOS, supra note 10, art. 121(3).




of its terms with regard to its objective and purpose. The following sectionapplies the above analysis to the case of the seven Senkaku/Diaoyu islands inthe East China Sea.

V. Senkaku/Diaoyu: Are They Islands?

The Senkaku/Diaoyu island group consists of seven insular features, all ofwhich have a dry surface permanently above water.54 Only three features arecovered by some vegetation, mostly palm trees, but the rest are totallybarren.55 Despite the fact that they are extremely small, with the largestisland being only about one square kilometer in size, all seem to satisfy theconditions set forth in Article 121(1) of UNCLOS, being naturally formedareas of land permanently above water at high tide.56 On the other hand, itis not entirely clear as to whether they can escape the conditions defined inArticle 121(3) of UNCLOS due to the requirement of being able to supporthuman life or economic activities of their own.57

Though there have been some reports of people living periodically on thelarger island of the group, Uotsurijima/Diaoyu Dao, for example, civiliansprocessing bonito caught in the surrounding waters or fishermen findingshelter during storms, it is highly doubtful that any of the Senkaku/Diaoyuhas ever been permanently inhabited, a fact which may indicate theirincapacity to sustain stable human habitation. Furthermore, as illustrated bythe preparatory works of UNCLOS III, the requirement of humanhabitation cannot be met solely by the infrequent presence of fishermen orother civilians on the islands.58 According to the above-mentioned findings,the human habitability “criterion may not inevitably require that the insularfeature itself be permanently inhabited, but would require, at a minimum,that it provide support for a nearby stable community of persons”59 or “stableresidence of organized human groups.”60 While “[i]nfrequent visits frominterested scientists would not constitute a stable community. . .[h]istoric useof the island as a basis for the purpose of harvesting ‘the surrounding waterscould, however, provide a good indication’” of its capacity to generate fullmaritime projections.61 Indeed, as noted above, if the rationale forattributing extended zones of maritime jurisdiction to islands were to protectthe interests of their local communities which are dependent on theexploitation of the area and the surrounding waters, extended maritimezones should not be accorded to islands that lack such stable community ofresidents.

54. J.R.V. Prescott, Maritime Jurisdiction in East Asian Seas, EAST-WEST ENV’T AND POL’YINST., 52 (1987).

55. Douglas M. Johnson & Mark J. Valencia, Pacific Ocean Boundary Problems 80 (1991).56. See UNCLOS, supra note 10, art 121.57. See id.58. See id.59. Van Dyke et al., supra note 19, at 437.60. Id. at 436, n. 62.61. Id. at 438.




Nonetheless, despite the absence of stable human habitation on a givenisland, its intrinsic capacity to sustain human life should not be totallyexcluded. In order, however, to prove such capacity, it is crucial todemonstrate the presence of other factors on the island, such as fresh water,cultivable soil, and enough space to build shelter. In that regard, while somevegetation is reported on the larger island of the group, it seems doubtfulthat any of them has cultivable soil to enable the production of food tosustain permanent human habitation.62 Further, none of the Senkaku/Diaoyu islands seem to have readily accessible fresh water.63 Hence, ifSenkaku/Diaoyu are deemed to be totally dependent for food and water andevery other human need, they can hardly meet the requirement of being ableto sustain human habitation.

The next and perhaps more complicated question is whether the Senkaku/Diaoyu islands satisfy the other requirement stipulated in Article 121(3)UNCLOS, namely, to be capable to “sustain human habitation or economiclife of their own.”64 Would fishing and production of oil from thesurrounding waters meet this requirement? The fish stocks in the Senkaku/Diaoyu area are reportedly very significant.65 The same holds true forhydrocarbon resources in the surrounding seabed.66 As a consequence, it canbe reasonably assumed that the area could potentially sustain economic life ifthe surrounding seabed and superjacent waters were to be commerciallyexploited.

The question that then arises is whether this form of economic life couldbe considered to be generated by the island “of [its] own” or if the islandplays only a minor role in such economic activities.67 To that end, somecommentators have asked whether it is sufficient for uninhabited islands,such as the islands in question, to have enough strategic economic value dueto their adjacency to valuable seabed resources, even if they have to importfood and supplies from external sources.68 In other words, can a tiny,isolated and uninhabitable feature be considered an island simply due to thefact that vast amounts of commercially exploitable hydrocarbon resourcesare known or suspected to be present in its proximity? Charney suggestedthat even if economic viability has to be realized by some kind of externalsupport, it should be regarded as satisfying the test.69 He also believed thatresources such as hydrocarbons in the adjacent seabed could be included in

62. Johnson & Valencia, supra note 55.63. Id.64. See UNCLOS, supra note 10.65. How Uninhabited Islands Soured China-Japan Ties, BBC NEWS (Nov. 10, 2014), http://www

.bbc.com/news/world-asia-pacific-1134113966. Jonathan I. Charney, Central East Asian Maritime Boundaries and the Law of the Sea, 89(4)

AM. J. INT’L L. 724, 733-34 (1995).67. See UNCLOS, supra note 10.68. 121(3) of the Law of the Sea Convention: The Limits Set by the Nature of International Legal

Processes, 2 IBRU 58, 60-64 (1998); see also Carleton & Schofield supra note 21.69. Charney, supra note 66.




the calculation if the rock is, or has the resources necessary for use as, aneconomically viable base for operations.70

If it is accepted that hydrocarbon resources can justify the requirement of“sustaining economic life,” this means that a barren rock could potentiallyqualify as an island, thus unlocking a marginally bigger maritime spacesimply due to the proven or plausible presence of such resources.71 Butsimply imagine the legal implications if the said hydrocarbons prove to be oflesser quantity or quality than initially expected, hence failing the “economiclife” test. Could it ever be admissible, under international law, that the legalstatus of an insular formation, and the associated maritime entitlements,could be determined solely on the basis of the commercial success, orotherwise, of the resources to which the feature is believed to be adjacent?

International courts and arbitral tribunals have consistently rejected therelevance of purely economic factors, such as oil exploration andexploitation, in the context of assigning maritime entitlements betweendisputing states. In the Tunisia v. Libya case,72 the ICJ rejected the Tunisianarguments about its lack of access to the same mineral resources that Libyacould secure, considering them as “variables” that may change over time.73

It went on to say that “[a] country might be poor today and become richtomorrow as a result of an event such as the discovery of a valuable economicresource.”74 The Guinea/Guinea-Bissau Tribunal concluded that pureeconomic factors could not be taken into account because they relate touncertain and changing factors and they are not thus “permanentcircumstances.”75 Likewise, in the Bahrain v. Qatar case,76 the ICJ held thatit did “not consider the existence of pearling banks, though predominantlyexploited in the past by Bahrain fishermen, as forming a circumstance whichwould justify an eastward shifting of the equidistance line as requested byBahrain.”77 In the Libya/Malta case,78 though it was recognized that naturalresources of the continental shelf “so far as known or readily ascertainablemight well constitute relevant circumstances which it would be reasonable totake into account in a delimitation,” the Court refrained from taking suchfactor into account.79 Finally, in the Jan Mayen case, the ICJ found that JanMayen was clearly an island, notwithstanding the absence of locally based

70. Id.71. Id.72. Continental Shelf (Tunisia v Libya Arab Jamahiriya), Judgment, 1982 I.C.J. 18 ¶ 107 (Feb.

1982).73. Id.74. Id.75. Roberty F. Pietrowski, Jr., Guinea/Guinea-Bissau: Dispute Concerning Delimitation of the

Maritime Boundary, 25(2) I.L.M. 251, 302 ¶ 122 (1986).76. Maritime Delimitation and Territorial Questions (Qatar v. Bahrain), Judgment, 2001

I.C.J. 40 ¶ 236 (Mar. 2001).77. Id.78. Continental Shelf (Libyan Arab Jamahiriya/Malta), Judgment, 1985 I.C.J. 13 ¶ 58 (June

1985).79. Id.




fishing operations and the limited size of its population.80 It noted “theattribution of maritime areas to the territory of a State, which, by its nature,is destined to be permanent, is a legal process based solely on the possessionby the territory concerned of a coastline.”81 Therefore the size of thepopulation and other socio-economic factors should not be taken intoaccount.

Interestingly, at the time of writing the present paper, an ArbitralTribunal constituted under Annex VII of UNCLOS, delivered a historicverdict on the maritime dispute between the Philippines and China in theSouth China Sea.82 As it turns out, this is the first time in the history ofinternational adjudication that an international arbitral Tribunal has eversought to determine the status of several maritime features in the SouthChina Sea within the meaning of Article 121 of UNCLOS. While a detailedanalysis of the Tribunal’s 500-page verdict lies beyond the scope of thispaper, it is nonetheless to crucial to address the key elements of theTribunal’s authoritative interpretation and application of Article 121 ofUNCLOS to the South China Sea insular features.

The Tribunal commenced its analysis by noting that Article 121 ofUNCLOS had not previously been the subject of significant considerationby courts or arbitral tribunals and that the scope of application of itsparagraph 3 was not clearly established.83 Therefore, the Tribunalconsidered it appropriate to examine the meaning of this provision byseparately reviewing the text, its context, the object and purpose of thisprovision, pursuant to Articles 31 and 32 of the Vienna Convention on theLaw of Treaties.84 Having done so, it went on to establish some key findingswith important practical implications for the future interpretation andapplication of Article 121 of UNCLOS. In the words of the Tribunal:

(a) First, the use of the term “rock” does not require that a feature becomposed of rock in the geologic sense in order to fall within the scopeof the provision.(b) Second, the use of the term “cannot” makes clear that the provisionconcerns the objective capacity of the feature to sustain humanhabitation or economic life. Actual habitation or economic activity atany particular point in time is not relevant, except to the extent that itindicates the capacity of the feature.(c) Third, the use of the term “sustain” indicates both time andqualitative elements. Habitation and economic life must be able toextend over a certain duration and occur to an adequate standard.

80. Maritime Delimitation in the Area Between Greenland and Jan Mayen, (Denmark v.Norway), Judgment, 1993 I.C.J. 38 ¶ 80 (June 1993).

81. Id.82. See South China Sea Arbitration (Phil. v. China), Award, 2016 PCA Case Repository

(Perm. Ct. Arb. July 2016).83. Id. ¶ 474.84. Id. ¶ 476.




(d) Fourth, the logical interpretation of the use of the term “or”discussed above indicates that a feature that is able to sustain eitherhuman habitation or an economic life of its own will be entitled to anexclusive economic zone and continental shelf.85

In addition to the above, the Tribunal observed that a rock cannot betransformed into a fully-entitled island through human efforts, e.g. throughland modification, and generally by the introduction of technology andextraneous materials intended to increase its capacity to sustain humanhabitation or economic life of its own.86 According to the Tribunal, thephrase “cannot sustain” means “cannot, without artificial addition, sustain.”87

Key here is the status of a feature in its natural condition. Moreover, asregards the term “human habitation,” the Tribunal noted that this should beunderstood to involve “a stable community of people for whom the featureconstitutes a home and on which they can remain,” regardless of the size ofthis community.88 As far as the “economic life” criterion is concerned, thecourt made the notable observation that any economic activity shouldrevolve around the feature itself and not focus exclusively on the adjacentwaters or seabed.89 To that end, any economic activity that is entirelydependent on external support or exclusively devoted to using a feature as anobject for extractive activities, e.g. as an oil or fishing platform, without theinvolvement of a local island population cannot reasonably be considered toconstitute the economic life of an island as its own.90

Finally, and perhaps most importantly, the Tribunal found that thecapacity of a feature to sustain human habitation or economic life of its ownmust be addressed on a case-by-case basis, having regard to the principalfactors indicating the natural capacity of any given feature to sustain humanhabitation and economic life. These may include, inter alia, “the presence ofwater, food, and shelter in sufficient quantities to enable a group of personsto live on the feature for an indeterminate period of time.”91 But, theTribunal went to great lengths to emphasize that no “abstract test” ofassessing these physical requirements can or should be formulated and thatthe relative contribution of these factors to the natural capacity of a feature

85. Id. ¶¶ 504, 539-42.86. Id. ¶ 559.87. Id. ¶¶ 508-10.88. Id. ¶ 542. (In remote features, a few individuals or even periodic habitation by nomadic

people could well suffice.).89. South China Sea Arbitration, supra note 82 ¶ 500.90. Id. ¶ 417, 543; see also id. ¶ 547 (“A feature that is only capable of sustaining habitation

through the continued delivery of supplies from outside does not meet the requirements ofArticle 121(3). Nor does economic activity that remains entirely dependent on externalresources or that is devoted to using a feature as an object for extractive activities, without theinvolvement of a local population, constitute a feature’s ‘own’ economic life.”).

91. Id. ¶ 546.




will vary from one case to another.92 If for example, an insular “feature isentirely barren of vegetation” and lacks indigenous freshwater resources andall other sources necessary for basic survival, it will be undisputedlyincapable of sustaining human habitation.93 On the other hand, the Tribunalacknowledged that it is not always possible to determine, just by looking atthe physical characteristics of a feature, “where the capacity merely to keeppeople alive ends and the capacity to sustain settled habitation by a humancommunity begins.”94

Having reached the above conclusions, the Tribunal went on to apply itsfindings to the various features that were the subject of the Philippines’submission.95 It found that Scarborough Shoal, Johnson Reef, CuarteronReef, Fiery Cross Reef, Gaven Reef, and McKennan Reef were all “rocks” inthe meaning of Article 121(3) of UNCLOS.96 The evidentiary basis for thisconclusion was that none of these features could sustain human habitation intheir natural state because they had no fresh water, vegetation, or livingspace, despite the fact that some states, such as China, had constructedinstallations, deployed military personnel, and engaged in significantreclamation work on several of these features.97 Concerning the applicationof Article 121 to the disputed Spratly island group, the Tribunal, havingrecognized that most of these features had been significantly modified fromtheir natural condition with land reclamation, construction of installationsetc., it then undertook the herculean task to assess various sources ofhistorical evidence of conditions on the said features, prior to advent ofhuman modification.98 These conditions included the presence of portablefresh water,99 vegetation,100 soil and agriculture,101 historical habitation byfishermen,102 and commercial operations.103 On the basis of this analysis, theTribunal reached a groundbreaking conclusion, that the principal high-tidefeatures in the Spratly islands are in fact “capable of enabling the survival ofsmall groups of people” in the light of their physical characteristics.104 Butthe Tribunal denied their “capacity of a feature to sustain human habitation”on the basis that: a) no stable human community had ever formed on the

92. Id. (In the tribunal’s words, “human habitation entails more than the mere survival ofhumans on a feature and that economic life entails more than the presence of resources.”).

93. Id. ¶ 548.94. Id.95. Id. ¶¶ 554-70.96. South China Sea Arbitration, supra note 82 ¶¶ 554-70.97. Id.98. Id. ¶¶ 580-614.99. Id. ¶ 580.

100. Id. ¶¶ 585-93.101. Id. ¶ 594.102. Id. ¶¶ 597-601.103. South China Sea Arbitration, supra note 82 ¶ 602.104. South China Sea Arbitration, supra note 82 ¶ 602.




Spratly islands;105 and that, in the absence of such community b) alleconomic activities in the Spratly were aimed at utilizing the surroundingresources for the benefit of the populations of Hainan, Formosa, Japan, thePhilippines and Viet Nam, not the features’ local community itself.106 As aresult, the Tribunal found that “none of the high-tide features in the SpratlyIslands, in their natural condition, are capable of sustaining humanhabitation or economic life of their own.”107 Therefore, under Article 121(3)none of these features could generate “exclusive economic zone orcontinental shelf” areas.108

VI. Conclusory Remarks

The application of UNCLOS provisions to the disputed Senkaku/Diaoyuislands raises several important issues. First and foremost, it is notaltogether clear whether these features can be classified as islands in a legalsense. The general assumption is that none of the features would be capableof sustaining human habitation or economic life of their own; beingminuscule, with no natural source of water and very limited vegetation. Butany attempt to precisely define the conditions stipulated in Article 121(3) ofUNCLOS, namely human habitability and economic sustainability, andtheir application to Senkaku/Diaoyu, must, inevitably, involve a discussionon the functions of technology and economics.109 By way of example, thereported lack of fresh water on the islands can be immediately overcomethrough the use of seawater desalination technologies which are increasinglyused by states and private corporations to produce fresh water suitable forhuman consumption or irrigation in places where fresh water is very limitedor absent.110 In addition, rainwater harvesting technologies may be used tocollect, store, and conserve fresh water in places where there is no surfacewater or where groundwater is inaccessible or unfit to drink.111 Moreover, inrelation to the reported absence of cultivable soil on the Senkaku/Diaoyu,greenhouse structures are also well known for their ability to effectivelybypass shortcomings in the quality of the soil or poor weather conditions

105. See Id. ¶ 546; see also id.¶ 618 (“For the Tribunal, the criterion of human habitation is notmet by the temporary inhabitation of the Spratly Islands by fishermen, even for extendedperiods.”); see also id. ¶ 620 (“[M]ilitary or other governmental personnel presently stationed onthe features in the Spratly Islands by one or another of the littoral States suffice to constitute‘human habitation’ for the purposes of Article 121(3).”).106. Id. ¶¶ 622-23.107. Id. ¶ 1203(B)(7)(a).108. Id. ¶ 626.109. Carleton & Schofield, supra note 21.110. Process and Optimization of the Seawater Desalination Plant, CONSULAQUA HAMBURG, http://www.consulaqua.de/projekte-detail/items/41.html (last visited Oct. 14, 2016); see also Akili D.Khawaji, Ibrahum K. Kutubkhanah & Jong-Mihn Wie, Advances in Seawater DesalinationTechnologies, 221 DESALINATION 47 (2008).111. Rainwater Harvesting, WATER AID (Jan. 2013), www.wateraid.org/~/media/Publications/Rainwater-harvesting.pdf. .




and can thereby enable the harvesting of crops or plants even in marginalenvironments.112 Ultimately, how can one argue with certainty that anoffshore feature cannot ever be inhabited in an age when technology hasmade it theoretically possible to sustain human life in space stations onMars?113

As reasonable as the above questions may seem, the phrase “of their own”may be employed to filter down this interpretation in that an island has to,by itself, be able to sustain the inhabitation by providing, at the very least,the basic conditions for inhabitation namely fresh water, cultivable soil, andspace to build shelter.114 This was, in fact, one of the central findings of theTribunal in the South China Sea case as briefly noted above. It is true thatany attempt to create an artificial situation by helping a certain feature tosustain human habitation or economic life would certainly fall short ofmeeting the requirement of human habitability and economic sustainabilitystipulated in UNCLOS.115

Taken in the round, though it is not possible to draw a definitiveconclusion, it is nonetheless highly doubtful that a court would find any ofthe Senkaku/Diaoyu islands capable of sustaining human habitation oreconomic life of their own. In fact, given the lack of solid evidence ofhuman habitability and economic sustainability or viability of the saidfeatures, it would seem contrary to the intention of UNCLOS drafters ifthese isolated maritime formations would ever be accorded the samemaritime zones as larger inhabited islands or continental territories. But anargument can certainly be made that, notwithstanding the most recent SouthChina Sea Award, there has been no absolute rule or consensus on howArticle 121(3) of UNCLOS is to be interpreted and applied.116

Even more so, there is no prescribed method of ascertaining how islandscould affect the delimitation of maritime boundaries. Though an island islegally entitled to an EEZ and continental shelf of its own, it is notaltogether clear whether it will be accorded a full effect in maritimeboundary delimitation. Indeed, it is not unusual in state practice andjurisprudence for proper islands to be granted a significantly reduced effectwhen delimiting the maritime boundary between islands and larger mainland

112. 10 Greenhouse Gardening Benefits, SUNDAY GARDENER, http://www.sundaygardener.net/10-greenhouse-gardening-benefits/ (last visited Oct. 9, 2016).113. You Can Eat Vegetables from Mars, Say Scientists after Crop Experiment, THE GUARDIAN

(June 23, 2016), www.theguardian.com/science/2016/jun/24/you-can-eat-vegetables-from-mars-say-scientists-after-crop-experim.114. See UNCLOS, supra note 10.115. South China Sea Arbitration, supra note 82 ¶¶522-525.116. Brice M. Clagett, Competing Claims of Vietnam and China in the Vanguard Bank and BlueDragon Areas of the South China Sea: Part II, 13 OIL AND GAS L. AND TAX’N REV. 419, 420(1995); see also Alex G. Oude Elferink, Clarifying Article 121(3) of the Law of the Sea Convention:The Limits Set by the Nature of International Legal Processes, 2 IBRU 58, 64 (1998); BarbaraKwiatkowska & Alfred HA Soons, Entitlement to Maritime Areas of Rocks which Cannot SustainHuman Habitation or Economic Life of their Own, NETHERLANDS YEARBOOK OF INT’L L. 176(1990); Van Dyke, supra note 19, at 425, 439, 463.




coasts. In several cases, tiny and geographically isolated islands weredisallowed from generating any areas of ocean space beyond their territorialsea so as to avoid creating a “disparity or disproportion.”117 Yet, in someothers, small and uninhabited islands managed to claim a significantmaritime space of continental shelf and fishery zone against a massiveopposing mainland.118 All in all, even if Senkaku/Diaoyu were to be found toform islands in a legal sense, the impact of these features on future maritimedelimitation would still be rather uncertain.119 All these questions lie at theheart of the Japan/China boundary disputes, and they are questions thatmatter. After all, they have the potential to cause serious discord amongneighbours and act as a trigger for military confrontation.120

117. See Maritime Delimitation in the Area Between Greenland and Jan Mayen, (Denmarkv.Norway), Judgment, 1993 I.C.J. 38 ¶ 61-66 (June 1993); See also Maritime Delimitation andTerritorial Questions (Qatar v. Bahrain), Judgment, 2001 I.C.J. 40 ¶ 246 (Mar. 2001); See alsoDelimitation of the Maritime Areas (Canada v. France), 3 I.L.M. 1145, 1184 ¶18(1992).118. Delimitation of the Maritime Areas, supra note 117 ¶¶43-52.119. Nasu & Rothwell, supra note 4, at 76-77.120. Japan Says Ties with China “Deteriorating” Over Disputed Islands, BBC NEWS (Aug. 9, 2016),www.bbc.co.uk/news/world-asia-37019028.



A Comparative Study of U.S. and ChineseEnvironmental Law with a Focus on the RealEstate Industry

JIHONG WANG AND PAUL KOSSOF*

In our cross-border practice, clients often encounter legal issues stemmingfrom differences between their jurisdictions and target countries.

Experience has shown that clients operating in multiple countries shouldknow the legal atmosphere of target countries at least as well as their own,regardless of whether they are foreign companies in the PRC or Chineseentities going abroad. This article stresses the importance of understandinglocal law and practice by analyzing the implications of U.S. and PRCenvironmental laws on their respective real estate industries.

Part I reviews the environmental administrative laws of the United Statesand China; Part II focuses on related civil liabilities; Part III describescorresponding criminal repercussions; and Part IV briefly discussesenvironmental due diligence.

I. Environmental Administrative Law

Environmental, administrative, civil, and criminal implications areintertwined by the legislative and regulatory documents that create them aswell as alleged actions or omissions that lead to their respective liabilities.This article begins with administrative law as it is often the first area of lawencountered during a real estate project or transaction such as throughenvironmental impact assessments or related licenses and permits.1

* Jihong Wang (Zhong Lun Law Firm, Senior Partner) is an urban construction legal expertwith extensive experience in Chinese environmental law. In addition to representing clients inreal estate, infrastructure, energy and natural resource projects across the globe, Ms. Wang hasadvised the Chinese legislature on related draft legislation, holds several high positions inindustry organizations, and arbitrates for CIETAC. To learn more about Ms. Wang and herpractice, please visit http://www.zhonglun.com/en/lawyer_312.aspx.

Paul Kossof (Zhong Lun Law Firm, Legal Consultant) is an American attorney thatrepresents Chinese companies in large-scale outbound investment and construction projects; heis fluent in English, Italian, Mandarin, and Spanish. Most of his research is free and availablefor download at http://ssrn.com/author=2149200.

1. Environmental Law Alliance Worldwide, Guidebook for Evaluating Mining Project EIAs 19 (1sted. July 2010) (emphasizing the importance of EIAs and their early performance).




A. UNITED STATES

In the United States, environmental administrative laws can be found atthe federal and state levels.2 As detailed below, states typically implementfederal law through local procedural rules, with some states also imposingadditional administrative penalties.3

1. Federal Statutes

The federal environmental protection regime may be categorized by twoprominent acts and the laws that amend them.4 The first act is the ResourceConservation and Recovery Act of 1976 (RCRA).5 The second is theComprehensive Environmental Response, Compensation, and Liability Actof 1980 (CERCLA), commonly referred to as the “Superfund” (referring tothe federal trust fund created by CERCLA for hazardous substance releaseprevention and cleanup).6 Both of these acts have been amended by separatelegislation.

RCRA was amended by the Hazardous and Solid Waste Amendments of1984.7 Since its enactment in 1980, CERCLA has been amended by threesubsequent laws: (1) the Superfund Amendments and Reauthorization Act of1986, (2) the Asset Conservation, Lender Liability, and Deposit InsuranceProtection Act of 1996, and (3) the Small Business Liability Relief andBrownfields Revitalization Act of 2002.8

2. Erin Ryan, Federalism, Regulatory Architecture, and the Clean Water Rule: Seeking Consensuson the Waters of the United States, 46 LEWIS & CLARK ENVTL. L. REV. 101, 110 (2016)(discussing how the Clean Water Act (federal legislation) “stepped into a field formerlyregulated by the states”).

3. See, e.g., New York v. United States, 505 U.S. 144, 167 (1992) (stating “where Congresshas the authority to regulate private activity under the Commerce Clause, we have recognizedCongress’ power to offer States the choice of regulating that activity according to federalstandards or having state law pre-empted by federal regulation.”).

4. Memorandum from Thomas P. Dunne, Acting Assistant Admin’r, U.S. Envtl. Prot.Agency, to Regional Administrators, Regions I-X (Dec. 21, 2005) (on file with author).

5. Resource Conservation and Recovery Act (RCRA) Overview, U.S. ENVTL. PROT. AGENCY,https://www.epa.gov/rcra/resource-conservation-and-recovery-act-rcra-overview (last visitedSept. 18, 2016).

6. Comprehensive Environmental Response, Compensation, and Liability Act, U.S. ENVTL. PROT.AGENCY, https://www.epa.gov/laws-regulations/summary-comprehensive-environmental-response-compensation-and-liability-act (last visited Sept. 18, 2016).

7. See Summary of the Resource Conservation and Recovery Act, U.S. ENVTL. PROT. AGENCY,https://www.epa.gov/laws-regulations/summary-resource-conservation-and-recovery-act (lastvisited Sept. 18, 2016) (explaining that “HSWA - the Federal Hazardous and Solid WasteAmendments - are the 1984 amendments to RCRA that focused on waste minimization andphasing out land disposal of hazardous waste as well as corrective action for releases.”).

8. See The Superfund Amendments and Reauthorization Act (SARA), U.S. ENVTL. PROT.AGENCY, https://www.epa.gov/superfund/superfund-amendments-and-reauthorization-act-sara(last visited Sept. 18, 2016); see also CERCLA Lender Liability Exemption: Updated Questions andAnswers, U.S. ENVTL. PROT. AGENCY, https://www.epa.gov/sites/production/files/documents/lender-liab-07-fs.pdf (last visited Sept. 18, 2016); see also Summary of the Small Business LiabilityRelief and Brownfields Revitalization Act, U.S. ENVTL. PROT. AGENCY, https://www.epa.gov/



2017] COMPARATIVE STUDY 369

In addition to setting the basis for administrative actions, theseenvironmental laws contain causes of action for lawsuits brought by theEnvironmental Protection Agency (EPA), state agencies, and private parties.9

As such, the burdens of proof, defenses, and arguments discussed below arerelevant to both administrative actions and lawsuits.

a. CERCLA

The underlying policy behind CERCLA is to shift the financial burden ofpreventing and cleaning up hazardous substance release from thegovernment to private parties.10 To achieve this goal, CERCLA gives theEPA a wide berth to either order private parties to clean up hazardous wastespills or to recover costs from them.11

i. Potentially Responsible Parties

The private parties that the EPA may order cleanups or recover costs fromare referred to as Potentially Responsible Parties (PRPs), and consist of fourcategories:

1. Current owners and/or operators of the facility where a hazardoussubstance is illegally disposed;

2. Legal persons that arrange for illegal disposal in the facility;3. Legal persons that transport a hazardous substance to the facility for

illegal disposal; and4. Current owners and/or operators of the facility where a hazardous

substance may be released or has been released.12

ii. Joint and Several Liability

To allow a prompt response to dangers associated with hazardous waste,CERCLA establishes joint and several liability on PRPs for financialliabilities related to Superfund sites (unless the harm is divisible).13 Thissignifies that a single PRP may be compelled to pay for the entire cost ofpreventing or cleaning up a spill.14 Of course, the PRP may then seekcontribution from other parties. Federal courts have applied joint andseveral liability to many environmental administrative cases involving real

brownfields/summary-small-business-liability-relief-and-brownfields-revitalization-act (lastvisited Sept. 18, 2016).

9. See Civil Cases and Settlements by Statute, U.S ENVTL. PROT. AGENCY, https://cfpub.epa.gov/enforcement/cases/index.cfm?templatePage=12&ID=4 (last visited Sept. 18, 2016)(providing a database of EPA enforcement cases and settlements by federal statute).

10. See This is Superfund: A Community Guide to EPA’s Superfund Program, U.S. ENVTL. PROT.AGENCY (2011), available at https://semspub.epa.gov/work/11/175197.pdf (stating that “[t]heSuperfund program is administered by the EPA in cooperation with state and tribalgovernments. It allows EPA to clean up hazardous waste sites and to force responsible parties toperform cleanups or reimburse the government for cleanups led by EPA.”).

11. Id. at 4 (describing EPA removal and remedial actions).12. 42 U.S.C. § 9607 (2002).13. See, e.g., United States v. Mottolo, 695 F. Supp. 615, 629 (D.N.H. 1988).14. See, e.g., id.




estate, establishing common law factors for determining the amount ofcleanup costs and fines to impose on a joint tortfeasor.15

iii. Burden of Proof

CERCLA sets a low burden of proof.16 Essentially, a plaintiff need onlyshow that the defendant released hazardous waste at the Superfund site.17

Courts have found that plaintiffs do not need to demonstrate that thehazardous waste addressed by the cleanup is the same type as the defendant’swaste, the defendant’s waste caused the response, or whether the defendant’swaste was cleaned up during the response.18

iv. Defenses

Given that most cases meet the burden of proof, defendants in CERCLAclaims tend to focus on statutory and common law defenses.19

CERCLA only provides three statutory defenses: act of war, act of God,and an act or omission of a third party.20 As would be expected, most casesinvolve the third-party defense, which requires a defendant to adequatelydemonstrate that:

1. There is no relationship, direct or indirect, contractual or otherwise,between the defendant and third party;

2. Upon discovery of the hazardous substances by the defendant andthird party, the defendant exercised due care; and

3. The defendant took precautions against the acts or omissions of thethird party.21

If the defendant purchased land that was allegedly previouslycontaminated, then it could assert the common law innocent landowner

15. See, e.g., S. Florida Water Mgmt. Dist. v. Montalvo, 84 F.3d 402, 407 (11th Cir. 1996)(where a tenant contaminated land with toxic pesticides and, although the landowner did notcause the contamination, the court assessed 25 percent of cleanup costs to the landowner,stating that the landowner was aware of the tenant’s operations and associated environmentalrisks.).

16. See Laurence S. Kirsch & Geraldine E. Edens, Federal Environmental Liability, inENVIRONMENTAL ASPECTS OF REAL ESTATE AND COMMERCIAL TRANSACTIONS: FROM

BROWNFIELDS TO GREEN BUILDINGS 3, 7 (James B. Witkin, ed., 2004) (stating “courts havetended to impose liability on CERCLA defendants who fit into one of the PRP classes and whocannot raise on of the limited defenses set forth in CERCLA.”).

17. Id. (providing “plaintiffs [ . . . ] only [need to prove] that the defendant disposed of thesame type of hazardous substances as those found on the site.”).

18. Id.19. See generally Civil Cases and Settlements by Statute, U.S. ENVTL. PROT. AGENCY (2016),

https://cfpub.epa.gov/enforcement/cases/index.cfm?templatePage=12&ID=4 (last updated Nov.3, 2016). The summaries and mentioned court cases demonstrate the prevalent defenses incurrent EPA enforcement cases.

20. 42 U.S.C. §§ 9607(b)(3).21. Id.




defense.22 The defendant landowner would contend that the previous owner(third-party whom sold the land to the defendant) is responsible, and thatthe defendant was not aware of the illegal activity.23

In the past, some courts ruled that the CERCLA third-party defenserequirement barred the innocent landowner defense.24 According to thesecourts, there was a contractual relationship through the sale of theproperty.25 In response, the Superfund Amendments and ReauthorizationAct of 1986 created an exception that “contractual relationship” does notinclude the sale of land if it is acquired after the disposal of hazardoussubstances.26

v. Parent Liability

A client that owns a PRP may also face financial obligations underCERCLA.27 In United States v. Bestfoods, the Supreme Court clarified thatthere are two theories the government may argue to impose liability on aparent for the actions of a subsidiary PRP.28

First, the government could allege that the parent company managed,directed, or conducted (1) operations specifically related to the pollution or(2) decisions on compliance with environmental regulations.29 Second, acourt may find a parent liable under the common law principle of “piercing

22. See, e.g., Sidhir Lay Burgaard, Landowner Defenses to CERCLA Liability, A.B.A. Y.L.D. PUB.101 PRAC. SERIES, http://www.americanbar.org/groups/young_lawyers/publications/the_101_201_practice_series/landowner_defenses_to_cercla_liability.html (last visited Sept. 23, 2016)(listing the criteria for the innocent landowner defense).

23. Id.24. Laurence S. Kirsch & Geraldine E. Edens, Federal Environmental Liability, in

ENVIRONMENTAL ASPECTS OF REAL ESTATE AND COMMERCIAL TRANSACTIONS: FROM

BROWNFIELDS TO GREEN BUILDINGS 19 (James B. Witkin ed., 3d ed. 2004) (stating that“[a]lthough the third-party defense was contained in the original CERCLA, controversy arosein the early 1980s about whether the statute precluded use of the defense by innocent buyers ofthe previously contaminated land.”).

25. See id. (further stating that “[s]uch a buyer [innocent buyer of previously contaminatedland] might hope to be protected against CERCLA liability by claiming that the presence of ahazardous substance on the property was caused solely by a third party [ . . . . ] But a buyer couldnot rely on the defense because it had a “contractual relationship” with the seller[.]”).

26. 42 U.S.C. §§ 9601(35)(A).27. See, e.g., Structuring Ownership and Control of Real Estate Holdings, TITUS BRUECKNER &

LEVINE PLC (Sept. 30, 2010), http://www.tbl-law.com/structuring-ownership-and-control-of-real-estate-holdings/ (last visited Sept. 16, 2016) (providing that “liability under CERCLA can[ . . . ] arise “indirectly” by virtue of a person’s status as a parent company of the “person” whichacquires, owns and/or operates the facility.”).

28. See United States v. Bestfoods, 524 U.S. 51, 66-67 (1998) (providing that “[t]o sharpen thedefinition for purposes of CERCLA’s concern with environmental contamination, an operatormust manage, direct, or conduct operations specifically related to the leakage or disposal ofhazardous waste, or decisions about compliance with environmental regulations.”).

29. Id.




the corporate veil” by applying the traditional factors such as inadequatecapitalization, pervasive control, and intermingling of assets.30

b. RCRA

Compared to CERCLA, which addresses hazardous waste spills, RCRAsets the federal policies on treatment, storage and disposal of hazardouswaste.31 These policies are the foundation of the related federal laws andregulations enforced by the EPA.32

RCRA affects the real estate industry much less than CERCLA.33

However, there are two important aspects to consider.First, RCRA creates what are referred to as “Cradle to Grave”

requirements.34 Essentially, the EPA must regulate hazardous waste fromgeneration (cradle) to storage or disposal (grave).35 As these requirementsare relatively strict, the EPA in turn implements stringent regulations ongenerators, transporters, and operators.36 The most notable example is thatowners and operators of underground storage tanks have several obligationsincluding notifying the EPA of tanks, detecting leaks, making correctiveactions, and ensuring proper tank performance.37

30. See id. at 55 (writing that “[t]he United States brought this action for the costs of cleaningup industrial waste generated by a chemical plant. The issue before us, under theComprehensive Environmental Response, Compensation, and Liability Act of 1980(CERCLA), 94 Stat. 2767, as amended, 42 U. S. C. § 9601 et seq., is whether a parentcorporation that actively participated in, and exercised control over, the operations of asubsidiary may, without more, be held liable as an operator of a polluting facility owned oroperated by the subsidiary. We answer no, unless the corporate veil may be pierced.”).

31. See Resource Conservation and Recovery Act (RCRA) Laws and Regulations, U.S. ENVTL. PROT.AGENCY, https://www.epa.gov/rcra (last visited Sept. 19, 2016) (providing an overview ofRCRA).

32. See id.33. See Rose-Marie T. Carlisle & Laura C. Johnson, The Impact of CERCLA on Real Estate

Transactions, 4 S.C ENVTL. L.J. 129, 129 (1995) (asserting that “[a]lthough RCRA sets standardsfor the generation, transportation, storage, and disposal of hazardous wastes, it was widelyperceived as inadequate for cleaning up abandoned or inactive hazardous waste sites. CERCLAwas enacted to impose liability for the cleanup of hazardous waste sites on companies andindividuals perceived as having profited from the use or disposal of hazardous substances onthose sites.”).

34. Learn the Basics of Hazardous Waste, U.S. ENVTL. PROT. AGENCY, https://www.epa.gov/hw/learn-basics-hazardous-waste (last visited Sept. 19, 2016) (outlining RCRA Cradle to Graverequirements).

35. See id.36. See, e.g., id. (describing in the “Hazardous Waste Transportation” section that “[a]fter

generators produce a hazardous waste, transporters may move the waste to a facility that canrecycle, treat, store or dispose of the waste. Since such transporters are moving regulated wasteson public roads, highways, rails and waterways, United States Department of Transportationhazardous materials regulations, as well as EPA’s hazardous waste regulations, apply.”).

37. See Resources for UST Owners and Operators, U.S. ENVTL. PROT. AGENCY, https://www.epa.gov/ust/resources-ust-owners-and-operators (last visited Sept. 19, 2016) (providing a guidelinefor RCRA-imposed obligations on underground storage tank operation and maintenance,reporting and recordkeeping, etc.).




Second, owners and operators of hazardous waste facilities that violateRCRA and corresponding regulations may be subject to a daily civil fine ofup to USD 25,000, criminal fines, imprisonment (see III.1.b below), andcorrective action obligations.38

2. State Statutes

State environmental statutes often mirror federal law.39 However, statesmay also legislate beyond the scope of the federal laws discussed above.

Since the 1980s, some U.S. states have instituted “transaction-triggered”statutes that pose additional potential liabilities within the real estateindustry.40 Although the content of these statutes varies,41 their general goalis to promote compliance with federal and state environmental standards byimposing requirements on (1) real estate owners before property istransferred to another party and (2) operators before their related operationsterminate.42

States may also have other environmental laws which affect the real estateindustry. For example, a seller in New Jersey must test its potable waterwells,43 and a seller of waterfront property in New Hampshire is required toperform a site assessment of its septic disposal system.44

B. CHINA

Akin to the United States, China’s environmental laws and regulations arefound on both national and local levels.

First, the National People’s Congress and Standing Committee formulatelaws that lay the foundation for environmental protection; legislationincludes general laws (i.e., the Environmental Protection Law) and subject-

38. Doris K. Nagel, RCRA Enforcement and the Statute of Limitations, 18 ENVTL. L. REP.10431, 10431-32 (1988) (stating that “[f]or violations occurring in states without authorizedRCRA programs, the Administrator may immediately commence a civil action in federal districtcourt, or may issue an order assessing a civil penalty or suspending or revoking any permitsissued under RCRA. Civil penalties are assessable up to $ 25,000 per day of non-compliance foreach violation, and if a violator fails to comply with the order, the Administrator may assess anadditional civil penalty of up to $ 25,000 per day.”); id. at 10432 (further stating that “[t]he U.S.Department of Justice may seek criminal indictments of RCRA violators who “knowingly”violate any of several specified requirements.”).

39. See, e.g., Environmental Law, LEGAL INFORMATION INSTITUTE, https://www.law.cornell.edu/wex/environmental_law (last visited Sept. 20, 2016).

40. See David B. Farer, Transaction-Triggered Environmental Laws and Transfer Notice Laws,www.greenbaumlaw.com/media/publication/26_Transaction_Triggered_2013.pdf (last updatedMar. 2013) (listing state transaction-triggered laws).

41. See generally id.42. See generally id.43. See id. at 19.44. See id. at 49.




specific laws such as for land, water, air, etc.45 Second, the State Council alsocreates environmental regulations (e.g., the Environmental ImpactAssessment Planning Regulations.46 Third, related ministries (primarily theMinistry of Environmental Protection) promulgate environmentalprotection rules such as the Measures for the Reporting of Information onEnvironmental Emergencies.47 Fourth, local governments may alsoimplement regional environmental laws and regulations.48

1. Environmental Administrative Liability

Environmental administrative liabilities can be found in mostenvironmental laws, administrative regulations, local laws, ministry-levelregulations, and local government regulations, while procedures are detailedin the Administrative Penalty Law and Environmental AdministrativePenalty Measures.49

An entity or individual may be subject to an administrative penalty if anintentional or negligent act violates an environmental law or regulation.50

There may also be a damages requirement, depending on the violation athand.51

Similar to the United States, administrative penalties range from fines,confiscation of illegal proceeds, orders to cease and desist, permitrevocation, etc.52

There is a general two-year statute of limitations for administrativepenalties.53 However, this period may be extended by law or regulation forspecific acts, and the time for a continuous act begins to toll when the actceases.54

45. See Environment, CHINA.ORG.CN, http://www.china.org.cn/english/environment/34152.htm (last visited Sept. 20, 2016) (providing a list of official English translations of China’senvironmental national legislation).

46. See, e.g., Environmental Impact Assessment Planning Regulations (promulgated by the St.Council, Aug. 17, 2009, effective Sept. 1, 2009) (China).

47. See, e.g., Measures for the Reporting of Information on Environmental Emergencies(promulgated by the Ministry of Environmental Protection Apr. 18, 2011, effective May 1,2011) (China).

48. See, e.g., Beijingshi Jianshe Xitong Kongqi Zhongwuran Yingji Yuan( ) [Beijing Municipality Building Heavy Air PollutionContingency Plan] (promulgated by the Beijing Municipal Commission of Housing and Urban-Rural Development, Mar. 30, 2015, effective Mar. 30, 2015) (China).

49. See Administrative Penalty Law (promulgated by the Standing Comm. Nat’l People’sCong., Mar. 17, 1996, effective Oct. 1, 1996) (China); see also Environmental AdministrativePenalty Measures (promulgated by the Ministry of Environmental Protection., Jan. 19, 2010,effective Mar. 1, 2010) (China).

50. See Administrative Penalty Law, supra note 49.51. See id. art. 8 (providing the types of administrative penalties, including fines).52. Id.53. Id. art. 29.54. Id.




2. Select Laws

The applicable laws and regulations vary by situation (i.e., type ofpollution and resulting damages). As such, this section briefly introduces thetwo laws that may have the most impact on environmental administrativeactions.

a. Environmental Protection Law

Enacted in 1989, the Environmental Protection Law lays the foundationfor Chinese environmental law.55 It establishes several importantenvironmental protection systems such as the environmental impactassessment system, pollution rectification time limitation system, pollutiondischarge fees system, pollutant overall control system, daily fineaccumulation system, and public participation environmental system.56

The law provides a specific chapter on legal liabilities, most of whichaddress administrative liability.57

b. Environmental Impact Assessment Law

Depending on the impact that a real estate project may have on theenvironment, an environmental impact assessment report, summary, orregistration must be submitted to the related environmental authority.58

Failure to receive the proper approvals may result in administrativeliability. For example, the Environmental Impact Assessment Law providesthat:

[W]here any construction entity fails to submits its environmentalimpact appraisal document of the construction project concerned orfails to submit environmental impact document for examination andapproval anew or for inspection anew according to the provisions ofArticle 24 of this Law and unlawfully starts the construction, it shall beordered by the administrative department of environmental protectionthat is entitled to examine and approve the environmental impactappraisal documents to stop the construction and go through therelevant procedures within a prescribed time period. If it fails to gothrough the relevant procedures within the time period, it may be finednot less than CNY50,000 but not more than CNY200,000, and theperson in-charge and other personnel of the construction entity whoare held to be directly responsible shall be given an administrativepunishment.59

55. Environmental Protection Law (promulgated by the Standing Comm. Nat’l People’sCong., Apr. 24, 2014, effective Jan. 1, 2015) (China).

56. See id. at Chapter VI.57. See id.58. See Environmental Impact Assessment Law (promulgated by the Standing Comm. Nat’l

Peopl’s Cong., Oct. 28, 2002, effective Sept. 1, 2003) (China), art. 8.59. Id. art. 31.




c. Administrative Cases

Although China’s environmental laws are not as strict or severe as in theUnited States, there have been several instances where substantialadministrative liability has been imposed on large-scale environmentalcontamination.60 For example, in the wake of widespread pollution of theTing River by Zijin Mining Group in July 2010, an administrative fine waslevied against the Chinese company for approximately USD 4.6 million,along with other civil and criminal repercussions.61

There are also several environmental administrative cases involving U.S.companies. Perhaps the most well-known is the 2011 Bohai Bay Oil SpillIncident, where ConocoPhillips and China National Offshore Oil Corp.(CNOOC) reportedly entered into an administrative settlement with theMinistry of Agriculture.62 In this settlement:

1. ConocoPhillips would provide approximately USD 154 million incompensation for damage to aquatic organisms and fisheries; and

2. ConocoPhillips and CNOOC would allocate USD 15.4 million andUSD 38.5 million, respectively, for the establishment of oceanicenvironmental and ecological protection funds to be used related toprotecting fisheries.63

II. Civil Liability

Companies acting in both China and the United States should be awarethat environmental law extends beyond administrative actions to the courtsystem. Under civil law, environmental polluters may be subject to damagesas well as court-ordered injunctions or remedial actions.

A. UNITED STATES - COMMON LAW CAUSES OF ACTION

Lawsuits may also be brought independent of or in conjunction withfederal and state environmental law.

Following the English law tradition, the United States allows common lawcauses of action. This section discusses these concepts in relative depth asChinese companies are often unfamiliar with them. We recommend thatany state-specific research also include precedent and corresponding locallaw (if any).

60. JIAHUA PAN, CHINA’S ENVIRONMENTAL GOVERNING AND ECOLOGICAL CIVILIZATION,203 (Springer eds.; 1st ed. 2016 edition).

61. See, e.g., Elaine Kurtenbach, US$4.6 million fine upheld against Zijin over poisoning, MINES

AND COMMUNITIES (May 17, 2011), http://www.minesandcommunities.org/article.php?a=10900.

62. See, e.g., Greg Botelho, ConocoPhillips to pay $191 million more to China over oil spill, CNN(Apr. 27, 2012), http://www.cnn.com/2012/04/27/world/asia/china-oil-spill/.

63. See id.




The most typical common law claims and theories in the real estateindustry are negligence, strict liability, trespass, and nuisance.64

1. Negligence

Regardless of the circumstances, a plaintiff must always prove the fourelements of a negligence claim: duty, breach, causation, and damages:65

1. Duty: Typically, the applicable duty in a negligence claim isdetermined by the “reasonable care” standard.66 A court will decidewhat a reasonable person would have done in the situation at hand byapplying factors that differ by state precedent and/or law. Forexample, the District of Colombia federal district court held thatexpert testimony is a prerequisite for a claim alleging negligentstorage and operation of underground storage tanks.67 A plaintiff maybe able to avoid this standard by arguing that the defendant violated asufficiently related statute (this is called negligence per se).68 Ifsuccessful, the court will presume duty and breach.69

2. Breach: Breach is almost always the easiest element to meet—aplaintiff must simply provide enough evidence to demonstrate adivergence with duty.70

3. Causation: There are two forms of causation in United Statesnegligence theory—actual and proximate—and the plaintiff mustprove both.71 Actual causation requires that a breach of the duty bythe defendant results in injury to the plaintiff.72 Proximate causationhas several tests and many nuances. In a broad sense, proximatecausation generally focuses on whether the event was the cause-in-fact(the damage could not have happened “but for” the event) or whetherit was foreseeable that the event would cause the damage.73

4. Damages: Finally, a plaintiff must show damages.74 Courts normallydo not award punitive damages unless there are personal damages (for

64. SUSAN M. COOKE, THE LAW OF HAZARDOUS WASTE §17.01 (Matthew Bender) (2016).65. See RESTATEMENT (SECOND) OF TORTS § 328A (1965).66. Id. § 293.67. See National Tel. Coop. Ass’n v. Exxon Corp., 38 F. Supp. 2d 1, 10 (D.D.C. 1998).68. See, e.g., Negligence Per Se Law & Legal Definition, USLEGAL, http://definitions.uslegal

.com/n/negligence-per-se/ (last visited Sept. 23, 2016).69. See, e.g., What is “breach of duty”?, ROTTENSTEIN LAW GROUP LLP, http://www.rotlaw

.com/legal-library/what-is-breach-of-duty/ (last visited Sept. 23, 2016).70. Id.71. See, e.g., Elements of a Negligence Case, FINDLAW, http://injury.findlaw.com/accident-

injury-law/elements-of-a-negligence-case.html (last visited Sept. 23, 2016).72. Id.73. See id.74. Id.




environmental cases, damage to property may suffice) and thedefendant exhibits a higher mens rea (e.g., willful or wanton conduct).75

2. Strict Liability

There are many situations in the real estate industry (such as those relatedto safety) that may lead to strict liability. The risk is only compounded byactions with potential environmental law implications.

Strict liability is reserved for activities that are so dangerous or unusualthat there is no mental state requirement (e.g., intent, willful misconduct).76

Under strict liability, a plaintiff must show that its injury was caused by an“abnormally dangerous” or “ultrahazardous” activity attributed to thedefendant.77 Courts apply six factors to determine whether an activity isappropriate for this standard, including likelihood of harm,inappropriateness of where the activity took place, and whether its riskscould have been eliminated through reasonable care.78

Strict liability is often applied relating to the transportation, storage, anddisposal of hazardous materials.79 For example, the court in City ofNorthglenn v. Chevron U.S.A., Inc. applied strict liability to storing over16,000 gallons of gasoline in a residential area.80 Plaintiffs have also wonstrict liability cases related to gasoline tank storage, air conditioning unitdisposal, and nuclear radiation contamination.81

3. Trespass

In the United States, trespass theory historically only required a plaintiffto show intentional entry onto land possessed by the plaintiff.82 “Entry” wasalso confined to people and objects.83 Under modern trespass theory, allstates have added an actual damages requirement through precedent and/or

75. See, e.g., Punitive Damages, THE FREE DICTIONARY, http://legal-dictionary.thefreedictionary.com/Punitive‡amages (last visited Sept. 23, 2016) (providing that “[p]unitive damages willnot be awarded in tort actions based on the defendant’s Negligence alone. The conduct musthave been willful, wanton, or reckless to constitute an intentional offense. Willfulness implies aplan, purpose, or intent to commit a wrongdoing and cause an injury.”).

76. See, e.g., Strict Liability, LEGAL INFORMATION INSTITUTE, https://www.law.cornell.edu/lii/about/about_lii (last visited Sept. 21, 2016).

77. See, e.g., Abnormally Dangerous Activity, FINDLAW LEGAL DICTIONARY, http://dictionary.findlaw.com/definition/abnormally-dangerous-activity.html (last visited Sept. 22, 2016).

78. RESTATEMENT (SECOND) OF TORTS § 293.79. See Christopher J. Grant, Sale or Disposal: The Extension of CERCLA Liability to Vendors of

Hazardous Materials, 23 LOY. U. CHI. L. J. 355, 355 (1992).80. City of Northglenn, Colo. v. Chevron USA Inc., 519 F. Supp. 515, 516 (1981).81. See, e.g., id.82. See, e.g., Trespass, THE FREE DICTIONARY, http://legal-dictionary.thefreedictionary.com/

Trespass (last visited Sept. 22, 2016) (providing a historical account of trespass theory followedby a detailed definition).

83. See id.




statutes, and judicial practice now expands entry to any observable object,including chemicals and particles that cannot be seen by the human eye.84

It is important to note that a possessor is not always an owner. UnderU.S. law, possession is generally established by:

1. Occupancy of land with intent to control;2. If no party currently occupies with intent to control, previous occupancy

of the land without abandoning it; and3. If there is no current or previous occupant with intent to control, the

party with the right against all other persons to occupy the land (i.e., theowner) shall have possession.85

Courts have found for defendants after determining that another partywas the possessor.86 Previous U.S. cases include determinations that tenantsare possessors as well as that a previous possessor is not liable if a lateroccupant possessed the land at time of entry.87 In Busch Oil Co., Inc. v. AmocoOil Co., there was a spill when the land was owned and possessed by Amoco,and Amoco then sold the land to Busch.88 The court determined thatAmoco did not trespass on the land because Amoco, not Busch, was inpossession at the time of entry.89

4. Nuisance

The most obvious distinction between trespass and nuisance is that thelatter cause of action does not require actual entry onto the plaintiff’sproperty.90 Another important difference is that nuisance is actuallycomposed of two independent theories—private and public.91

a. Private Nuisance

To succeed under private nuisance, a plaintiff must demonstrate that anon-trespassory invasion by the defendant caused unreasonable andsubstantial interference with the plaintiff’s enjoyment of its land.92

When determining whether the interference is unreasonable, U.S. courtsapply a balancing test for whether the defendant’s right to enjoy its own landoutweighs the plaintiff’s right to be free of interference (with the right to

84. Bradley v. Am. Smelting & Ref. Co., 104 Wash. 2d 677, 691 (1985); Stevenson v. E.I.DuPont De Nemours & Co., 327 F.3d 400, 406 (5th Cir. 2003); but see Adams v. Cleveland-Cliffs Iron Co., 602 N.W.2d 215, 216 (Mich. Ct. App. 1999).

85. RESTATEMENT (SECOND) OF TORTS § 157.86. See, e.g., Busch Oil Co., Inc. v. Amoco Oil Co., No. 5:94-CV-175, 1996 U.S. Dist. LEXIS

4705 at *30 (W.D. Mich. Feb. 20, 1996).87. See, e.g., id. at *24.88. See id. at *3-5.89. See id. at *28.90. See, e.g., RESTATEMENT (SECOND) OF TORTS § 821.91. See, e.g., Nuisance, THE FREE DICTIONARY, http://legal-dictionary.thefreedictionary.com/

private–uisance (last visited Sept. 22, 2016).92. RESTATEMENT (SECOND) OF TORTS § 821D.




enjoy its land).93 Factors include the social value of the enjoyment, extent ofthe harm, difficulty in avoiding the harm, and the character of thesurrounding community.94

Due to the wide applicability of private nuisance theory, courts havedemonstrated a preference for this non-exhaustive and broad test. Likewise,judges often narrowly interpret the breadth of private nuisance.95 Forexample, it is likely not interference for non-trespassory invasion to reduceproperty marketability or value.96

b. Public Nuisance

Instead of alleging interference with a private right to enjoy land, aplaintiff bringing a public nuisance claim must demonstrate that thedefendant obstructed rights common to the public.97 This cause of actionwas intended for the government to represent public interests.98 However,U.S. legal practice also allows private parties to sue under public nuisance bydemonstrating a peculiar interest (that their interest is sufficiently differentthan that of the general public).99

Courts tend to reject private party claims due to the peculiar interestrequirement.100 For example, it is generally accepted that degree of harm isnot a factor, no matter how egregiously a private plaintiff may be affected.101

Blair v. Anderson is a good example of what judges look for whendetermining whether a private party has a peculiar interest.102 In Blair, theplaintiff was located near a landfill.103 The court found that an obstructionof the plaintiff’s creek was sufficient to meet the pecuniary interestrequirement because the public did not share an interest in the creek.104

B. CHINESE TORT LAW

As discussed above, United States civil environmental liability involvesboth civil statutes and common law theories. In comparison, national-levelChinese civil environmental liability is founded in and interpreted by ahandful of legal documents, namely the:

93. See Frank v. Envtl. Sanitation Mgmt., 687 S.W. 2d 876, 880 (Mo. 1985).94. RESTATEMENT (SECOND) OF TORTS § 827.95. See, e.g., Nat’l Tel. Coop. Ass’n, 38 F. Supp. at 14.96. See id.97. See, e.g., Nuisance, supra note 91.98. Id.99. See, e.g., F. William Brownell, State Common Law of Public Nuisance in the Modern

Administrative State, 24 ABA NAT. RESOURCES AND ENV’T 34, 34 (2010) (discussing the historyof public nuisance theory and its contemporary application).100. See, e.g., Adams v. Ohio Falls Car Co., 131 N.E. 57, 58 (Ind. 1892).101. See id.102. Blair v. Anderson, 570 N.E.2d 1337 (Ind. Ct. App. 1991).103. Id. at 1338.104. Id. at 1340.




1. Environmental Protection Law;105

2. Tort Law;106

3. Civil Procedure Law;107

4. Interpretations of the Supreme People’s Court and the SupremePeople’s Procuratorate on Certain Issues Concerning the Application ofLaw in the Handling of Criminal Cases of Environmental Pollution;108 and

5. Interpretations of the Supreme People’s Court on Issues concerningthe Application of Law in the Trial of Environment-related Civil PublicInterest Lawsuits.109

Of these five documents, the Tort Law and Environmental ProtectionLaw provide the framework for environmental civil liability.

According to the Environmental Protection Law, those who cause damagerelated to “environmental pollution or ecological damage . . . shall beartortious liability in accordance with the relevant provisions of the TortLaw.”110 Chapter eight of the Tort Law is dedicated to addressing liabilityfor environmental pollution.111 As such, this section discusses theramifications of these two laws.

1. Burden of Proof

Chinese courts require a plaintiff in environmental cases to prove that thedefendant discharged pollutants, the plaintiff suffered damages, and therewas a causal relationship between the discharge and damage suffered.112

A people’s court shall ascertain the absence of a causal relationshipbetween the discharge and damage if a polluter provides evidence that: (1) itis impossible for the discharged pollutants to cause the damage in question,(2) the discharged pollutants that may cause the damage in question neverarrived at the site of damage, (3) the damage in question occurred before thedischarge of pollutants, or (4) other scenarios where the court can ascertainthe absence of a causal relationship between the discharge and damage.113

105. Environmental Protection Law, supra note 55.106. Tort Law (promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 26, 2009,effective July 1, 2010) (China).107. Civil Procedure Law (promulgated by the Standing Comm. Nat’l People’s Cong., Aug.31, 2012, effective Jan. 1, 2013) (China).108. Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorateon Certain Issues Concerning the Application of Law in the Handling of Criminal Cases ofEnvironmental Pollution (promulgated by the Sup. People’s Ct., June 17, 2013, effective June19, 2013) (China).109. Interpretations of the Supreme People’s Court on Issues concerning the Application ofLaw in the Trial of Environment-related Civil Public Interest Lawsuits (promulgated by theSup. People’s Ct., Dec. 8, 2014, effective Jan. 7, 2015) (China).110. Environmental Protection Law, supra note 55, art. 64.111. See Tort Law, supra note 106, arts. 65-68.112. Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorateon Certain Issues Concerning the Application of Law in the Handling of Criminal Cases ofEnvironmental Pollution, supra note 108, art. 6.113. Id. art. 7




Parties considering litigation should note that the statute of limitations forcivil environmental liability is three years, calculated from the time when therelevant party first became or should have become aware of the relevantdamage.114

2. Strict Liability

Chinese courts impose a strict liability standard for environmentalpollution.115 Because defendants cannot use lack of mental state as a defense,they often argue that pollution discharge has met standards orcorresponding pollutant discharge fees have already been paid.116

There is a typical misunderstanding here. Even if a company does notviolate environmental laws per se, it may still be liable if it dischargespollutants, such discharge is accompanied by a rise in environmentalpollution, and the company cannot disprove causation (between thedischarge and damage caused by the pollution).117

However, there may be extenuating circumstances that lead a court toexempt a defendant from liability. Specific environmental protection lawsprovide exemptions such as the Marine Environmental Protection Law,118

Water Pollution Prevention Law,119 and the Air Pollution PreventionLaw.120 For example, the Marine Environmental Protection Law allows adefendant to overcome strict liability if there was a force majeure event orthe relevant authorities did not fulfill their responsibilities.121

Finally, co-defendants may be subject to joint and several liability.122 Assuch, a plaintiff may seek the whole amount of damages from one defendant(which may sue the other defendants for contribution).

3. Public Interest Lawsuits

Individual civil lawsuits only result in compensation for personal injuriesand property losses of an individual or company.123 The amount of such

114. Environmental Protection Law, supra note 55, art. 66.115. See Interpretations of the Supreme People’s Court and the Supreme People’sProcuratorate on Certain Issues Concerning the Application of Law in the Handling ofCriminal Cases of Environmental Pollution, supra note 108, art. 1.116. See id.117. See id. art. 7 (note that Chinese court opinions are almost always much shorter thancommon law opinions; researchers may rely on Supreme People’s Court interpretations).118. Marine Environmental Protection Law (promulgated by the Standing Comm. Nat’lPeople’s Cong., Dec. 25, 1999, effective Apr. 1, 2000) (China).119. Water Pollution Prevention Law (promulgated by the Standing Comm. Nat’l People’sCong., Feb. 28, 2008, effective June 1, 2008) (China).120. Air Pollution Protection Law (promulgated by the Standing Comm. Nat’l People’s Cong.,Aug. 29, 2015, effective Jan. 1, 2016) (China).121. Marine Environmental Protection Law, supra note 118, art. 92.122. See Tort Law, supra note 106, art. 67.123. See Yuhong Zhao, Environmental Dispute Resolution in China, 16 ENV. LAW 1, 4.5.1 (2004)(discussing compensation damages).




compensation is quite small and does not include compensation for damagesdone to the environment.124

To further deter environmental pollution, the latest revision of theEnvironmental Protection Law allows designated private organizations tofile public interest lawsuits.125 These organizations may receive assistancefrom government entities such as supervisory agencies and prosecutorialoffices including legal advice, investigations, and assisting with evidencecollection.126

Pursuant to the Supreme People’s Court interpretations on several issuesregarding the Application of Law in Public Interest Environmental CivilLitigation, a defendant may be subject to injunctions, remedial actionorders, and civil liability.127 For ecological cases, a defendant may also berequired to restore the environment to its original state and function.128

After the most recent revision of the Environmental Protection Law, thefirst environmental case was filed on January 1, 2015.129 This public interestlawsuit was filed by two private environmental protection organizations,Friends of Nature and Fujian Green Homes Environmental FriendlyCenter, against four defendants to restore twenty-eight acres of destroyedforest.130

The defendants were found jointly liable and were ordered to restore thedamaged forest, plant trees, and maintain them for three years.131 The courtorder also stated that they would have to pay Ren Min Bi (RMB) 1.1 million(app. USD 172,000) in damages if the vegetation was not restored in threeyears.132 Additionally, the court ordered the defendants to pay RMB 1.27million (app. USD 200,000) to compensate for damages to the environmentduring the restoration period.133

III. Criminal Implications

Corporate clients and their attorneys often focus on potential civilliabilities. However, not only could an individual defendant be imprisonedunder the laws in Part I, but her organization may also be subject to

124. See id.125. Environmental Protection Law, supra note 55, art. 58.126. See id. art. 57.127. Interpretations of the Supreme People’s Court on Issues concerning the Application ofLaw in the Trial of Environment-related Civil Public Interest Lawsuits, supra note 109, art. 18.128. Id.129. See, e.g., Xinhua, China NGOs win landmark environmental lawsuit, CHINADAILY (Oct. 29,2015), http://www.chinadaily.com.cn/china/2015-10/29/content_22312656.htm; see also ChunZHANG, NGOs Win China’s First Public Interest Environmental Lawsuit, THE DIPLOMAT (Nov.14, 2015), http://thediplomat.com/2015/11/ngos-win-chinas-first-public-interest-environmental-lawsuit/.130. See, e.g., NGOs Win China’s First Public Interest Environmental Lawsuit, supra note 129.131. See, e.g., id.132. See, e.g., id.133. See, e.g., id.




substantial fines.134 As discussed in this section, criminal laws in both theUnited States and the People’s Republic of China provide imprisonment forserious environmental infractions.135

A. UNITED STATES

All of the direct federal criminal implications are created by the lawsdiscussed in Part I.136 In practice, federal prosecutors typically baseallegations on these few laws. However, prosecutions may also incorporaterelated federal law.137 For example, Title 18 has various fraud-relatedprovisions that may be tacked on.138 As alluded to above, states may alsoprosecute under their own environmental statutes and related laws.139

As state laws generally reflect their federal counterparts, this sectionprovides a condensed overview of the criminal implications in federalenvironmental laws. Most statutes provide for both fines andimprisonment.140

1. CERCLA

If a hazardous substance is released above the respective quantitythreshold, then the person in charge of the facility may be fined and/orimprisoned if (1) she fails to notify the government, (2) knowingly reportsfalse or misleading information or (3) knowingly destroys or falsifiesspecified reports.141

The maximum statutory fine is USD 25,000 for an individual and USD500,000 for an organization.142 If the statutory maximum is exceeded by anamount that is twice the pecuniary gain or loss, the fine could be increased

134. Resource Conservation and Recovery Act, 42 U.S.C. § 6928(e); Nagel, supra note 38, at10431-32 (stating “[f]or violations occurring in states without authorized RCRA programs, theAdministrator may immediately commence a civil action in federal district court, or may issuean order assessing a civil penalty or suspending or revoking any permits issued under RCRA.Civil penalties are assessable up to $25,000 per day of non-compliance for each violation, and ifa violator fails to comply with the order, the Administrator may assess an additional civil penaltyof up to $ 25,000 per day.”).135. Nagel, supra note 38, at 10432 (stating “Maximum criminal penalties are $ 50,000 per eachday of violation and/or up to two years in prison for knowing violations, or up to $ 250,000 and/or 15 years of imprisonment for knowing endangerment.”).136. Id.137. See, e.g., 18 U.S.C. § 47 (2016).138. See id.139. Captain James P. Calve, Environmental Crimes: Upping the Ante for Noncompliance withEnvironmental Laws, 133 MIL. L. REV. 279, 322 (1991) (stating “[t]his federal-state partnershiprelieves EPA of the impossible task of regulating pollution nationwide and allows states toprotect their environments. Federal supremacy and sovereign immunity limit the ability ofstates to regulate pollution from federal facilities. These limitations should protect federalemployees from criminal liability under state environmental laws.”).140. See, e.g., 42 U.S.C. § 9603(b), (d)(2); see also, e.g., 42 U.S.C. § 6928(d)-(e).141. 42 U.S.C. § 9603(d)(2).142. Id. §§ 9609, 9607(c)(1).




up to that amount.143 Imprisonment could be up to three years for a firstoffense and up to five years for subsequent offenses.144

2. RCRA

The Resource Conservation and Recovery Act (RCRA) imposes fines andimprisonment for the knowing and illegal storage, transportation, ordisposal of hazardous waste.145

Fines for each count are the same as CERCLA, but RCRA also creates adaily fine capped at USD 50,000.146 This means that prosecutors maycircumvent the statutory maximum by demonstrating five days of non-compliance for individuals and ten days for organizations.147 A felonyconviction brings up to five years of imprisonment.148

3. Clean Water Act

Similar to RCRA, the Clean Water Act could impose fines by count ordaily non-compliance.149 The amounts are the same as RCRA, other than aUSD 5,000 minimum for daily non-compliance.150 A defendant could beimprisoned for up to three years.151

The Clean Water Act also includes negligence violations.152 Defendantsmay be fined by count (maximum of USD 100,000), fined by daily non-compliance (USD 2,500 to USD 25,000), or imprisoned for up to oneyear.153

4. Clean Air Act

The violations and fines in the Clean Air Act are similar to those in theClean Water Act other than (1) imprisonment for felony conviction bringsup to five years, (2) imprisonment for knowingly failing to report, submittingfalse reports, or tampering with monitoring equipment is limited to twoyears, and (3) for a negligence violation, the maximum fine for organizationsis USD 200,000.154

The Clean Air Act also includes knowing endangerment, which requiresthat the defendant both knew of the release of a hazardous pollutant and that

143. Alternative Fines Act, 18 U.S.C. § 3571(d) (2012).144. 42 U.S.C. § 9603(b)(3), (d)(2).145. Id. § 6928 (d)-(e).146. Compare 42 U.S.C. § 9609, with 42 U.S.C. § 6928(d)(7)(B).147. See 42 U.S.C. § 6928(d)-(e).148. See id. § 6828(d)(7)(B).149. 33 U.S.C. § 1319(c) (2012).150. Id. § 1319(c)(2)(B).151. Id.152. See id. § 1319(c)(1).153. Id. § 1319(c)(1)(B), (c)(2)(B).154. Compare Clean Air Act, 42 U.S.C. § 7413(c), (d)(1)(C), with Clean Air Act, 33 U.S.C.§ 1319(c).




such release would put another person in immediate danger.155 Knowingendangerment carries some of the highest repercussions in U.S.environmental law.156 Organizations could be fined up to one milliondollars.157 The fine for individuals is capped at USD 25,000, but maximumimprisonment is 15 years.158

B. CHINA

In China, all environmental criminal liabilities are provided under theCriminal Law (articles 338 and 339 specifically pertain to environmentalcrimes) and the liabilities are further explained in the Supreme People’sCourt interpretations.159

1. Environmental Pollution

A criminal defendant may be fined and/or imprisoned up to three yearsfor severely polluting the environment by discharging, dumping, or illegallytreating radioactive waste or waste containing infectious diseases, toxicsubstances, or other hazardous substances.160 A court may also impose anextended imprisonment term of up to seven years if there are “especiallyserious consequences” to the environment.161

Pursuant to the Interpretations of the Supreme People’s Court and theSupreme People’s Procuratorate on Certain Issues Concerning theApplication of Law in the Handling of Criminal Cases of EnvironmentalPollution, there are thirteen specific consequences that qualify as “especiallyserious” (although courts may determine whether other circumstances alsolead to serious environmental pollution):

1. Discharging, dumping or disposing of wastes containingradioactive substances or infectious disease pathogens, or toxicsubstances in the Grade I reserves of drinking water source andthe core areas of nature reserves;

2. Illegally discharge, dumping or disposing of three tons or more ofhazardous wastes;

3. Illegally discharging pollutants containing heavy metals, persistentorganic pollutants and other pollutants that seriously harm theenvironment and damage human health, which exceed thenational standards for the discharge of pollutants or exceed three

155. 42 U.S.C. § 7413(c)(5)(A).156. See id.157. Id. § 7413(c)(5)(A).158. Id.159. See Criminal Law (promulgated by the Standing Comm. Nat’l People’s Cong., Aug. 29,2015, effective Aug. 29, 2015) (China); see also, e.g., Interpretations of the Supreme People’sCourt and the Supreme People’s Procuratorate on Certain Issues Concerning the Applicationof Law in the Handling of Criminal Cases of Environmental Pollution, supra note 108.160. Criminal Law, supra note 159, art. 338.161. Id.




times of the standards for the discharge of pollutants formulatedby provinces, autonomous regions and municipalities directlyunder the Central Government according legal authorization;

4. Discharging, dumping, or disposing of radioactive wastes, wastescontaining infectious disease pathogens, or toxic substances byprivately setting up pipelines or making use of seepage wells,seepage pits, crevices, or karst caves;

5. Receiving two or more administrative punishments due todischarging, dumping, or disposing of radioactive wastes, wastescontaining infectious disease pathogens or toxic substances withintwo years in violation of the state provisions, but recommitting theaforesaid conduct;

6. Resulting in more than 12 hours of interruption of centralizedwater drawing from the drinking water source at or above thetownship level;

7. Resulting in the loss of fundamental functions of or permanentdestructions to five mu or more of basic farmland, protectionforestland or special-purpose forestland, or ten mu or more ofother farmlands, or 20 mu or more of other lands;

8. Resulting in the death of 50 cubic meters or more of forests andother woods, or 2500 saplings or more;

9. Resulting in the loss of public or private property of more than300,00 yuan;

10. Resulting in the evacuation or transfer of 5,000 people or more;11. Resulting in thirty persons or more being poisoned;12. Causing any serious injury, moderate disability or serious

dysfunction due to the damage of organ or tissue to one person ormore; [and]

13. Causing any serious injuries, moderate disability, or seriousdysfunction due to the damage of organ or tissue to one person ormore[.]162

2. Solid Waste

Per the Criminal Law, a criminal defendant may be imprisoned up to fiveyears and/or fined for illegally importing, dumping, piling, or treating solidwaste.163

Imprisonment may be extended up to ten years if the defendant causes amajor environmental pollution incident leading to heavy losses of public orprivate property or serious harm to human health.164 Imprisonment may beextended beyond ten years if the consequences are extremely severe.165

162. Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorateon Certain Issues Concerning the Application of Law in the Handling of Criminal Cases ofEnvironmental Pollution, supra note 108, art. 1.163. Criminal Law, supra note 159, art. 339.164. Id.165. Id.




IV. Due Diligence

The previous sections discuss the possible environmental liabilities in thereal estate markets of the United States and the People’s Republic of China.With this in mind, a party contemplating a real estate transaction withenvironmental implications should make due diligence a top priority.166

It is often necessary to perform an environmental assessment.167 Not onlymay an assessment allow a party to rectify potential problems (thus avoidingliability), but it can also be used in a dispute to demonstrate steps taken tocomply with environmental law.168

In the U.S., CERCLA plays an important role in judicial andadministrative determinations on the adequacy of an environmentalassessment.169 China has a national law governing environmentalassessments—the Environmental Impact Assessment Law170—which isfurther clarified by its Environmental Impact Assessment PlanningRegulations.171

The extent of the due diligence on any given transaction depends onjurisdictional requirements, anticipated amount of participation in thetransaction, and foreseen risks. We generally recommend that clientscollaborate with involved parties (such as an owner working with lenders)and, of course, legal counsel. For the United States, we might also suggestengaging a consultant that exclusively performs environmental duediligence.

V. Think Globally, Work Locally

This article only scratches the surface of environmental law in the UnitedStates and China. These laws vary not only between countries but alsowithin their borders. Thus, their practice is often nuanced and specialized.

Foreign companies in China should be aware of its comprehensive legalreforms along with heightened enforcement of environmental laws, while

166. See SMALL BUS. ENVTL. ASSISTANCE PROGRAM, BASIC ELEMENTS OF PHASE I AND IIENVIRONMENTAL SITE ASSESSMENTS (2014), http://dnr.wi.gov/files/PDF/pubs/am/AM465.pdf (providing “There are numerous risks involved with starting your own business. One thatcan be costly is dealing with hazardous waste contamination discovered on property you haverecently acquired. Performing an environmental site assessment prior to acquiring a propertycan minimize that risk.”).167. See id.168. Id. (providing “Be aware of state, local, or federal regulations outside of CERCLA thathave other site assessment requirements and liability protections.”).169. Id. (providing “Standards for the Phase I and Phase II ESAs have been established by theAmerican Society for Testing and Materials (ASTM) to address the “All-Appropriate-Inquiry”(AAI) aspect to the Comprehensive Environmental Response, Compensation and Liability Act(CERCLA). CERCLA contains national policy and procedures for containing or removinghazardous substances that have been released, and also provides funding and guidance forcleaning up some abandoned and contaminated hazardous waste sites.”).170. See Environmental Impact Assessment Law, supra note 58.171. See Environmental Impact Assessment Planning Regulations, supra note 46.




Chinese businesses in the U.S. would benefit from recognizing its strictprosecution regime and the implications of common law.

As the world’s two largest economic powers become increasinglyinterconnected, it is more important than ever for companies to protectthemselves by engaging qualified legal counsel that appreciates their goalsand requirements.



Cross-Border Insolvency in the U.S. and U.K.:Conflicting Approaches to Defining the Locusof a Debtor’s “Center of Main Interests”

BRYAN ROCHELLE*

I. Introduction

In order to take up a “foreign”1 corporate insolvency case in the UnitedStates (U.S.) or the United Kingdom (U.K.), courts have to determine that a“foreign main proceeding” is pending in a country where the debtor has its“center of main interests” (“COMI”). Unfortunately, neither the U.S.Bankruptcy Code2 nor the U.K. Cross-Border Insolvency Regulation,3 theprevailing laws in each jurisdiction, defines COMI. This lack of clarity hasleft courts on both sides of the proverbial “pond” with the task offormulating definitions of their own.4 U.K. courts, at least, have beenremarkably consistent in this endeavor, reaching the near consensus thatCOMI should be evaluated by asking where a third party, assessing certainobjective factors, would perceive the corporate debtor to conduct the bulk ofits business operations.5 Some U.S. courts, for their part, have reached thesame conclusion.6 However, other U.S. courts have tied COMI to the

* J.D. Candidate 2017, Southern Methodist University Dedman School of Law. Thisarticle is dedicated to the memory of my late grandfather, William J. Rochelle, Jr. I thankJennifer Little and Trevor Spears for their efforts in shepherding this article toward publication.

1. Note that the word “foreign,” for purposes of discussing U.K.-based cross-borderinsolvency proceedings in this paper, means actions brought in the U.K. by parties residingoutside of the European Union (EU). “Foreign” retains a more natural meaning in examiningU.S.-based cross-border bankruptcy cases here, describing cases involving parties andjurisdictions located outside of the U.S.

2. 11 U.S.C. § 101 et seq.3. The Cross-Border Insolvency Regulations 2006, SI 2006/1030 (Gr. Brit.).4. Instead of moving towards a consensus on a definition of COMI in recent years, courts

have exerted considerable effort attempting to ascertain the time at which COMI should bemeasured. Courts have tended to resolve this question in one of two ways. First, as in In reBetcorp, 400 B.R. 266, 290-91 (Bankr. D. Nev. 2009), courts have held that a debtor’s COMIshould be measured as of the date of the petition for recognition instead of the date of theopening of the foreign insolvency proceeding. Second, and by contrast, in In re MilleniumGlobal Emerging Credit Master Fund Ltd., 458 B.R. 63, 74 (Bankr. S.D.N.Y. 2011), aff’d, 2012U.S. Dist. LEXIS 88782 (S.D.N.Y. June 25, 2012), the court held that the proper date tomeasure COMI is the time the foreign insolvency proceeding commenced. While a consensuson the temporal nature of COMI has yet to be resolved, courts appear to be even further behindin terms of arriving at a definition of the term itself.

5. See, e.g., In re Stanford Int’l Bank Ltd. [2010] EWCA 137 (Civ) 184.6. See, e.g., In re SPhinx, Ltd., 351 B.R. 103, 117-18, 351 B.R. 103, 56 (S.D.N.Y. 2006).




debtor’s “nerve center,” or “principal place of business”—its corporateheadquarters.7

The succeeding pages will examine the case law defining COMI in theU.S. and U.K. While the Model Law was created in large measure topromote cooperation in cross-border insolvency cases regardless of theforum in which they were being heard,8 courts have moved away from thisaim, creating discrete definitions of COMI based on the different sourcesemployed to define the term.

II. Legal Background

A. THE EUROPEAN INSOLVENCY REGULATION AND THE

UNCITRAL MODEL LAW

In 1997, the United Nations Commission on International Trade Law(UNCITRAL) adopted the Model Law on Cross-Border Insolvency (the“Model Law”).9 The Model Law was ratified in that same year by theUnited Nations General Assembly, and, as of this writing, has been ratifiedin dozens of states and jurisdictions,10 including the U.S. (2005)11 and U.K.(2006).12 The Model Law’s purpose is to work as a procedural mechanism—to be incorporated into local insolvency laws—through which debtors andcreditors can seek redress in various separate national forums.13 The lawcovers four principal sets of circumstances: (1) “inbound” requests forrecognition and assistance of a foreign insolvency case; (2) “outbound”requests by one country that another country recognize a pending case inthe former; (3) coordination of proceedings occurring simultaneously in twoor more countries; and (4) foreign creditor participation in pending cases.14

7. See, e.g., In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010), decision aff’d, 2011WL 4357421 (S.D.N.Y. 2011), aff’d, 714 F.3d 127 (2d Cir. 2013).

8. Model Law, art. 28.9. G.A. Res. 52/158, U.N. Doc. A/Res/52/158 (Jan. 30, 1998), UNCITRAL MODEL LAW

ON CROSS-BORDER INSOLVENCY WITH GUIDE TO ENACTMENT (MODEL LAW), available athttp://www.uncitral.org/uncitral_texts/insolvency/1997Model.html. The Model Law itself wasbased on a predecessor international law, the EU Insolvency Treaty. See EU Regulation,Council Regulation 1346/2000 European Union Regulation on Insolvency Proceedings, 2000O.J.(L 160), at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32000R1346:en:HTML.

10. The following countries have adopted the Model Law: Australia (2008), Canada (2005),Chile (2013), Colombia (2006), Greece (2010), Japan (2000), Kenya (2015), Malawi (2015),Mauritius (2009), Mexico (2000), Montenegro (2002), New Zealand (2006), Philippines (2010),Poland (2003), Republic of Korea (2006), Romania (2002), Serbia (2004), Seychelles (2013),Slovenia (2007), South Africa (2000), Uganda (2011), Great Britain (2006), United States(2005), and Vanuatu (2013). See UNICTRAL website at http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html.

11. Pub. L. No. 109-8, § 801, 119 Stat. 23 (2005).12. Cross-Border Insolvency Regulation 2006.13. G.A. Res. 52/158, U.N. Doc. A/Res/52/158 (Jan. 30, 1998), MODEL LAW, ¶ 20.14. G.A. Res. 52/158, MODEL LAW GUIDE TO ENACTMENT, supra note 9, ¶ 22.



2017] CROSS-BORDER INSOLVENCY IN U.S & U.K. 393

Just as the Model Law injects order and predictability into cross-borderinsolvency proceedings, its prescriptions are drawn to account for the uniquenature of local laws and procedures.15 Obtaining recognition under theModel Law affords debtors the equivalent of an automatic stay from creditorcollection actions.16 Debtors, however, lose the right to transfer orencumber assets that their creditors hope will serve as the source ofrepayment of debts owed to them.17 Moreover, embedded in the statute area number of exceptions and limitations benefitting creditors, who arepermitted to oppose recognition after the fact.18 Creditors further enjoyenhanced notice of foreign recognition.19 And courts, for their part, maymodify or dispense with relief as permitted by the law.20

B. CROSS-BORDER INSOLVENCY IN THE U.S. AND U.K.

In the U.S., the Model Law took the form of Chapter 15 of the U.S.Bankruptcy Code (the Code).21 Utilizing Chapter 15, a “foreignrepresentative”22 can file for recognition of a foreign insolvency proceedingin a U.S. court under section 1515.23 Under Chapter 15, a U.S. court maycooperate with a foreign counterpart by hearing either a “foreign mainproceeding”24 or a “foreign non-main proceeding.”25 Under section 1502(4)of the Code, a “foreign main proceeding” means one “pending in thecountry where the debtor has the center of its main interests”—commonlyreferred to as its “COMI.”26 The Code specifies, under section 1516(c),that, “[i]n the absence of evidence to the contrary, the debtor’s registeredoffice, . . . is presumed to be the [COMI].”27

As explained in In re Tri-Continental Exchange Ltd., “[i]n effect, theregistered office (or place of incorporation) is evidence that is probative of,and that may in the absence of other evidence be accepted as a proxy for,

15. G.A. Res. 52/158, MODEL LAW, supra note 9, arts. 25-27.16. Id. art. 20.17. Id.18. Id. art. 21.19. Id. art. 14.20. Id. arts. 17(4), 22(3).21. See 11 U.S.C. § 1501(a) (“[t]he purpose of this chapter is to incorporate the Model Law

. . . so as to provide effective mechanisms for dealing with cases of cross-border insolvency”);H.R. Rep. No. 109-31, 109th Cong., 1st Sess. 105 (2005) (Chapter 15 was meant “to provideeffective mechanisms for dealing with cases of cross-border insolvency” and to serve as the“exclusive door to ancillary assistance to foreign proceedings, thus concentrat[ing] control ofthese questions in one court”).

22. Id. at §§ 101(24), 1515.23. Id. at §§ 1504, 1515; see, e.g., United States v. J.A. Jones Const. Group, LLC, 333 B.R. 637,

638-39 (E.D.N.Y. 2005).24. 11 U.S.C. §§ 101(23), 1502(4).25. Id. at § 1521(c).26. Id. at U.S.C. § 1502(4).27. Id. at § 1516(c); see also In re Tri-Continental Exchange Ltd., 349 B.R. 627, 635 (Bankr. E.D.

Cal. 2006).




‘center of main interests.’”28 But “[t]he registered office . . . does nototherwise have special evidentiary value and does not shift the risk ofnonpersuasion, i.e., the burden of proof, away from the foreignrepresentative seeking recognition as a main proceeding.”29 The courtobserved that the legislative history provided additional insight to section1516(c), noting that “the presumption that the place of the registered officeis also the center of the debtor’s main interest is included for speed andconvenience of proof where there is no serious controversy”;30 the presumption“permits and encourages fast action in cases where speed may be essential,while leaving the debtor’s true ‘center’ open to dispute in cases where thefacts are doubtful.”31 But the presumption is not the “preferred alternative”in situations where “a separation between a corporation’s jurisdiction ofincorporation and its real seat” exists.32

Meanwhile, in the U.K., the Model Law was implemented by the Cross-Border Insolvency Regulations 2006 (CBIR).33 Instead of carving out anentirely new statutory section within a previously existing portion of theU.K. insolvency scheme,34 legislators proclaimed that the Model Law would“have the force of law,”35 and appended it to the CBIR,36 albeit “with certainmodifications to adapt it for application in Great Britain.”37 Similar toChapter 15, there is a presumption under the CBIR that the locale of thecompany’s registered office is one and the same as its COMI.38 Again, thispresumption is rebuttable.39

28. Tri-Continental Exchange, 349 B.R. at 635.29. Id.30. See H.R. Rep. No. 31, 109th Cong., 1st Sess. 1516 (2005), U.S. Code Cong. & Admin.

News 2005, pp. 88, 175.31. Jay Lawrence Westbrook, Locating the Eye of the Financial Storm, 32 BROOK. J. INT’L L. 3,

15 (2007).32. Bear Stearns, 374 B.R. at 129; see also Westbrook, Financial Storm, 32 BROOK. J. INT’L L. at

15.33. The Cross-Border Insolvency Regulations 2006, SI 2006/1030 (Gr. Brit.).34. Unlike their counterparts in the United States, courts in the U.K. must navigate not just

one—but four—principle sources of law in order to determine the applicable law in any giveninsolvency case. These sources are: (1) The European Commission Regulation on InsolvencyProceedings (EC Regulation); (2) the Cross Border Insolvency Regulations 2006, whichimplements the Model Law (CBIR); (3) the Insolvency Act of 1986 (Insolvency Act); and (4) thecommon law. See EC Regulation on Insolvency Proceedings (No. 1346/2000); Cross-BorderInsolvency Regulations 2006; The Insolvency Act 1986, s. 426 (Gr. Brit). It is an open questionwhich of these sources will remain instructive in U.K. courts after the “Brexit.”

35. CBIR, SI 2006/1030, § 2(1).36. Id. Schedule 1.37. Id. at § 2(1).38. Id. Schedule 1 (citing Model Law, art. 16(3)).39. Id.




III. Developments and Problems

Courts in the U.S. and U.K. have taken different approaches to definingCOMI: (1) the “nerve center” (or “principal place of business”) test40 and (2)the “objective third party” analysis.41

A. THE “NERVE CENTER” (OR “PRINCIPAL PLACE OF BUSINESS”)TEST

In the U.S., one COMI definition stems from the familiar notion of“principal place of business”—a term that some courts have equated to“center of main interests.”42 From its earliest use, courts have used thecorporate headquarters as the defining feature of the debtor’s COMI. Inone early case, In re Tri-Continental Exchange Ltd., the court used the“principal place of business” test to determine that the COMI of certaindebtor insurance companies was St. Vincent and the Grenadines; it thereforegranted recognition of the case as a foreign main proceeding under Chapter15.43 The court reached this conclusion even though the debtors hadengaged in the vast majority of their fraudulent activities in the U.S. andCanada. More important for the court were other factors, including thedebtors’ organization as international business companies in St. Vincent andthe Grenadines, where they conducted regular business operations at theirregistered offices in Kingstown, St. Vincent. These facts, the court found,suggested that the debtor-insurer’s “principal place of business” was one andthe same as its COMI.44 After the Tri-Continental decision, the “principalplace of business” analysis gained further refinement, but it did not comefrom the bankruptcy courts.

Instead, the U.S. Supreme Court served as the prime mover. In Hertz v.Friend,45 the Court used American legal conceptions of the “principal placeof business” to define it as the corporate “nerve center,” or headquarters. InHertz, the Court considered a class-action suit by certain California citizenswho alleged that a corporation headquartered in New Jersey had violatedCalifornia’s wage and hour laws.46 Ruling for the plaintiffs, the Court heldthat the “principal place of business” in the federal diversity jurisdictionstatute refers to the place where a corporation’s officers “direct, control, andcoordinate the corporation’s activities”—in other words, its “nerve center.”47

40. See, e.g., In re Fairfield Sentry, 440 B.R. 60 (Bankr. S.D.N.Y. 2010).41. See, e.g., In re Stanford Int’l Bank Ltd. [2010] EWCA 137 (Gr. Brit.).42. See, e.g., In re British American Ins. Co. Ltd., 425 B.R. 884, 908-09 (Bankr. S.D. Fla. 2010);

In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 129(Bankr. S.D.N.Y. 2007), aff’d, 389 B.R. 325 (S.D.N.Y. 2008); In re Tri-Continental Exchange Ltd.,349 B.R. 627, 633 (Bankr. E.D. Cal. 2006).

43. In re Tri-Continental Exchange Ltd., 349 B.R. at 629.44. Id.45. See Hertz Corp. v. Friend, 559 U.S. 77, 130 S. Ct. 1181, 175 L. Ed. 2d 1029 (2009).46. Hertz, 559 U.S. at 81.47. Id. at 92-93.




Normally, the Court added, this place should be the locus of thecorporation’s headquarters, so long as the headquarters serves as the “actualcenter of direction, control, and coordination . . . [and] not simply an officewhere the corporation holds its board meetings.”48

Following the Hertz decision, some bankruptcy courts have equated acompany’s COMI with its “nerve center,” or headquarters.49 In onefrequently-cited case, In re Fairfield Sentry Ltd., the court applied thisanalysis to hold that the debtors’ base of operations—its COMI—was theBritish Virgin Islands rather than the U.S.50 Reaching this conclusion, thecourt found that the debtors had effectively quit operating in New Yorkmore than eighteen months before filing the recognition petition in theU.S., and seven months before commencing the foreign insolvencyproceedings.51 Moreover, after ceasing operations, the debtors made most oftheir administrative decisions from the British Virgin Islands.52

B. THE “OBJECTIVE THIRD PARTY” TEST

U.K. courts’ construction of COMI conflicts with that of their U.S.counterparts in large measure because of the legal sources from which theyhave interpreted this term. Rather than understanding COMI as a purelycommon law principle, U.K. jurists have looked to other significantdomestic cross-border insolvency law—the European Union Regulation onInsolvency Proceedings (EC Regulation)—which applies to all EU MemberStates (Member States) except for Denmark.53 Although the EC Regulationdoes not extend beyond EU borders, U.K. courts have considered itpersuasive because it shares certain common assumptions with the ModelLaw, including the COMI concept.54 Much like a “foreign mainproceeding” in the CBIR, in the EC Regulation a “main proceeding” canonly be opened in a Member State if that state is the corporate debtor’sCOMI.55 Unlike the CBIR, the EC Regulation defines COMI as—if not thesitus of the company’s registered office (here, too, a foreign representativemust overcome a rebuttable presumption)—the location a third party wouldperceive as being the center of the debtor’s operations.56 While U.S. courtsdiverge in their construction of COMI, courts in the U.K. presently are of

48. Id. at 93.49. See, e.g., In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010), aff’d, 2011 WL

4357421 (S.D.N.Y. 2011), aff’d, 714 F.3d 127 (2d Cir. 2013).50. In re Fairfield Sentry Ltd., 440 B.R. 60, 64-65 (S.D.N.Y. 2010).51. Id.52. Id.53. EU Regulation, Council Regulation 1346/2000 European Union Regulation on

Insolvency Proceedings, 2000 O.J. (L 160).54. See EC Regulation, arts. 12-14, 17.55. See id. art. 12.56. See EC Regulation, art. 3(1), Preamble ¶ 13; see also Case 341/04, In re Eurofood IFSC Ltd.,

(¶ 33), 2006 E.C.R. I-3813.




one mind in construing the term:57 consistent with the EC Regulation, theyseem more concerned with how the debtor’s pre-insolvency activitiesappeared to third parties.58

The European Court of Justice’s decision in In re Eurofood IFSC Ltd servesas the principal authority through which U.K. courts have subsequentlyapplied the third party test to cases invoking the CBIR.59 In Eurofood, theEuropean Court of Justice held that COMI “must be identified by referenceto criteria that are both objective and ascertainable by third parties,” and that“objectivity and that possibility of ascertainment by third parties arenecessary in order to ensure legal certainty and foreseeability concerning thedetermination of the court with jurisdiction to open main insolvencyproceedings.”60 Seizing on this analysis, the court in In re Stanford Int’l BankLtd. held that an objective observer’s perceptions of the debtor’s activitiesshould be the controlling element in determining COMI for CBIR purposesbecause “it provides certainty and foreseeability for creditors of the companyat the time they enter into a transaction.”61 In so holding, the court reversedits previous ruling in In re Lennox Holdings plc, where it found thatdetermining the “head office” was determinative of COMI.62 The courtpreferred the objective, third party perception test, which it said “provide[d]certainty and foreseeability for creditors of the company at the time theyenter into a transaction.”63 In a later case, In re Kaupthing Capital Partners II,the court observed that it “is to have regard to factors already in the publicdomain, or which would be apparent to a typical third party doing businesswith the body, excluding such matters as might only be ascertained oninquiry.”64

As discussed above, some U.S. courts have interpreted COMI to mean the“principal place of business” or “nerve center” of a corporate debtor;however, another line of U.S. case law both acknowledges and applies theobjective third party analysis set forth in the EC Regulation, Eurofood, and itsprogeny.65 In an early case looking to these U.K. sources in the U.S., In re

57. Notably, some U.K. courts have cast doubt on the appropriateness of a “nerve center” or“head office” test to determine a debtor’s COMI. For instance, in In re Kaupthing CapitalPartners II Master LP, Inc., [2011] B.C.C. 338, 342, the court stated that, “the place where thebody’s head office functions are carried out is only relevant if so ascertainable by third parties.”

58. See, e.g., Kaupthing Capital, [2011] B.C.C. 338.59. Case 341/04 (¶ 33), In re Eurofood IFSC Ltd., 2006 ECR I-3813.60. Id.61. In re Stanford Int’l Bank Ltd., [2010] EWCA (Civ) 137; see also In re Lennox Holdings plc

[2008] EWHC B11 (Ch).62. In re Lennox Holdings plc, [2008] EWHC B11 (Ch).63. Id.64. Id.65. See, e.g., In re British American Isle of Venice (BVI), Ltd., 441 B.R. 713, 720 (Bankr. S.D. Fla.

2010); In re Fairfield Sentry Ltd., 2011 WL 4357421, *4 (S.D.N.Y. 2011), aff’d, 714 F.3d 127 (2d.Cir. 2013); In re Ran, 607 F.3d 1017, 1023, 53 (5th Cir. 2010); In re Millennium Global EmergingCredit Master Fund Ltd., 458 B.R. 63, 76-77 (Bankr. S.D.N.Y. 2011), aff’d, 474 B.R. 88(S.D.N.Y. 2012).




SPhinx, Ltd., the court concluded that while the presumption of the debtor’sCOMI is its place of registration or incorporation, various factors couldnevertheless rebut it, including: the location of the debtor’s headquarters;the location of those who “actually manage” the debtor (which may be oneand the same as the headquarters); the location of the debtor’s primaryassets; the location of the majority of the debtor’s creditors, or of a majorityof creditors; the law of the most applicable jurisdiction; and the perceptionof third parties.66 Other courts subsequently followed.67

Drawing on SPhinx, the court in In re British American Insurance Co., Ltd.found that although the debtor was incorporated in the Bahamas (and itsjudicial manager was appointed there), the Bahamas were not its COMI.68

The court reached this conclusion based in part on the fact that the debtor’sheadquarters were located in Trinidad, where the debtor’s subsidiaryconducted its financial, administrative, actuarial, legal, policy,administration, and claims processing. Further, the subsidiary’s employeesmanaged the day-to-day affairs of the company. Moreover, the majority ofthe debtor’s assets were located in its Eastern Caribbean branches, while itscreditors were located outside of the Bahamas.69 Finally, its policyholdersand creditors were unlikely to perceive that the debtor’s operational hub wasin the Bahamas given that its business was not conducted there.70 Therefore,the Bahamas proceeding did not fall within the definition of a “foreign mainproceeding.”71 In an even earlier case, In re Bear Stearns High-GradeStructured Credit Strategies Master Fund, Ltd., the court used the sameanalysis to reject a foreign main proceeding designation of a “letterbox”limited liability company whose registered office was located in the CaymanIslands.72 The court reached this conclusion because the company had noemployees or managers in the Cayman Islands. Rather, both its investmentmanager and administrator were based in the U.S., along with its books andrecords, and all of the company’s liquid assets.73

By contrast, in In re British American Isle of Venice (BVI) Ltd., the court usedthe aforementioned factors to find that the debtor’s COMI was the British

66. In re SPhinx, Ltd., 351 B.R. 103, 117-18 (S.D.N.Y. 2006).67. See, e.g., In re British American Insurance Co. Ltd., 425 B.R. 884, 909, 52 Bankr. Ct. Dec.

286 (S.D. Fla. 2010). In deciding whether to grant recognition of a foreign main proceeding ofa Chapter 15 petitioner in the Bahamas, the court weighed several non-exclusive factors,including the location of: the debtor’s headquarters; those who “actually manage the debtor,”which may be one and the same as the headquarters; the debtor’s “primary assets”; the majorityof the debtor’s creditors, or a majority of the creditors potentially “affected” by the case; andfinally, the jurisdiction “whose law would apply to most disputes.” In addition, the Courtconsidered the “expectations of third parties with regard to the location of a debtor’s COMI.”

68. Id. at 911-12.69. Id.70. Id.71. Id.72. In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122

(S.D.N.Y. 2007).73. Id.




Virgin Islands because the corporation (as well as its liquidator, who hadmanaged the debtor and its subsidiaries for a year prior to the filing forrecognition) was formed, registered, and headquartered there—along withmore than 80 percent of its total assets, its books and records, and registeredagent.74 In another case, In re Millenium Global Emerging Credit Master FundLimited, the court recognized a foreign main proceeding, holding that thedebtor’s COMI was Bermuda—although some factors “point[ed]” towardother locales.75 The court noted that two of the debtors’ three directorswere located in Bermuda.76 These directors had the right to replace all ofthe debtors’ other agents, and to determine whether to place the funds intoan insolvency proceeding. Moreover, the funds’ bank, their custodian, andauditors also resided there.77 Thus, without management, investors,creditors, or property in Bermuda, the court found that the debtors’ COMIwas Bermuda.78

IV. Conclusion

Agreement has not yet emerged both domestically and internationally onthe proper definition of COMI. While the Model Law was intended tousher in international cooperation in cross-border cases,79 courts in both theU.S. and U.K. have been anything but harmonious in their interpretation ofa key term. The basis for disagreement results primarily from the consciouschoice of individual jurists to adhere to either American common lawnotions like “principal place of business” and the corporate “nerve center,”or the European, statute-based concept of third party perception of objectivefactors. Additional fragmentation may well occur going forward: one has towonder, for example, whether U.K. courts will continue to look to EU lawin light of last year’s “Brexit.”

Regardless of the merits and drawbacks in the current approaches, the lackof agreement on defining COMI goes against the purposes of the ModelLaw. Achieving the uniformity consistent with the Model Law’s aims willultimately require action by the law’s drafters, and by lawmakers in the U.S.and the U.K.

74. In re British American Isle of Venice (BVI), Ltd., 441 B.R. 713, 720 (S.D. Fla. 2010).75. In re Millennium Global Emerging Credit Master Fund Limited, 458 B.R. 63, 77 (S.D.N.Y.

2011).76. Millennium, 458 B.R. at 77.77. Id.78. Id.79. G.A. Res. 52/158, MODEL LAW, supra note 9, art. 28.



AMERICAN BAR ASSOCIATION321 N. CLARK STREETCHICAGO, ILLINOIS 60610

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

VOLUME 50 • NUMBER 2 • 2017

ARTICLES

Increasing Host State Regulatory Flexibility in Defending Investor-State Disputes: The Evolution of U.S. Approaches from NAFTA to the TPP . . . . . . . . . . . . . . David A. Gantz

The Possible Impact of Legal Globalization on the ECJ Decision on Human Embryonic Stem Cell Patents and its Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . Amy Lai

Tax Avoidance, Revenue Starvation and the Age of the Multinational Corporation . . . . . . . . . . . . . . . . . . . . . . . . . Sara Dillon

Influence of the Arbitral Seat in the Outcome of an International Commercial Arbitration . . . . . . . . . . . . . . . . . . . Gonzalo Vial

Senkaku/Diaoyu: Are They Islands? . . . . . . . . . . . . . . Constantinos Yiallourides

A Comparative Study of U.S. and Chinese Environmental Law with a Focus on the Real Estate Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jihong Wang

and Paul Kossof

CASE NOTE

Cross-Border Insolvency in the U.S. and U.K.: Conflicting Approaches to Defining the Locus of a Debtor’s “Center of Main Interests” . . . . . . . . . . . . . . . . . . . Bryan Rochelle

PUBLISHED IN COOPERATION WITH

T H E I N T E RT H E I N T E R N A T I O NN A T I O N A L L A W Y EA L L A W Y E RT H E I N T E R N A T I O N A L L A W Y E R

VO

LU

ME

50

• NU

MB

ER

2 • 2

01

7T

HE

INT

ER

NA

TIO

NA

L L

AW

YE

R

inl50-2_cv_inl50-2_cv 4/21/2017 3:19 PM Page 2

AN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAWTHE YEAR IN REVIEW
