Wednesday, June 25, 2008

A cozy agreement

As I suspected from the outset, Canada in cahoots with US over trust tax.

The fraudulent notion of tax leakage would never “go down” in the US, since they still have a vigilant press and endless legislative checks and balances that prevent such conspiracy theories from ever being enacted into legislation, see Writing and Enacting Tax Legislation

Meanwhile we learn of this cozy agreement:

NAFTA Safety Valve Comes to the Rescue
Embassy, June 25th, 2008

By Luke Eric Peterson

Lately, the North American Free Trade Agreement has seemed like the electrified third rail of North American politics.

We've seen sparks flying over proposals for a so-called NAFTA Super-Highway as well as a media firestorm over a leaked diplomatic memo that cast doubt on Barack Obama's true feelings about the NAFTA.

Yet the U.S. and Canadian governments have managed to reach across the border and come to an agreement on one thorny NAFTA dilemma: In a little-noticed exchange of diplomatic letters this past April, the two governments have agreed that Americans investing in Canadian income trusts are not entitled to sue Canada for "expropriating" those investments.

This diplomatic accord comes in the aftermath of the 2006 decision by the Harper government to slap a tax on many types of income trusts. You'll recall that that move drew howls of outrage from Bay Street, as well as from foreigners who had long sunk money into these lightly-taxed investment vehicles.

One pair of Chicago-based investors went so far as to announce last year that they would sue Canada under NAFTA for the "massive destruction" inflicted on their personal stock portfolios. The couple, Marvin and Elaine Gottlieb, have set up a website to encourage other similarly-affected U.S. investors to join them in a class-action type lawsuit against the Government of Canada.

However, that lawsuit suffered a set-back in late April when the governments of Canada and the United States quietly agreed—in a formal exchange of letters—that the taxation of income trusts does not amount to an "expropriation" for which U.S. investors need be compensated under NAFTA. In reaching such an agreement, the two sides effectively vetoed any bid by U.S. investors to sue Canada for expropriating their income trust holdings.

What exactly constitutes an "expropriation" under NAFTA has long been a contentious question. Although the NAFTA provides strong legal protections to businesspersons and companies investing in another North American country, the extent of such protections remains unclear.

If a NAFTA government were to nationalize an industry—say the oil or steel sector—the trade-pact obliges the government to compensate affected foreign-owners. But what happens when a government introduces new regulations or tax measures which impose a heavy new financial burden on foreign-owned businesses, without going so far as to confiscate or nationalize those businesses?

The question may seem academic until you consider that the answer will determine when the public could be on the hook for writing hefty compensation cheques to affected foreigners.

In the income trust spat, the Gottliebs alone are threatening to sue for $6.5 million in losses; thousands of other claimants could join the Chicago couple in suing Canada for hundreds of millions.

Ultimately, it falls to panels of arbitrators to determine whether a given government law or policy is so destructive that it amounts to an expropriation. But with the NAFTA itself offering little guidance as to how to resolve such expropriation cases, arbitrators can find themselves in the same position as U.S. Supreme Court Justice Potter Stewart, who famously wrote that he might not know how to define "obscenity", but he knew it when he saw it.

For anxious governments not eager to leave things up to the discretion of arbitrators, the NAFTA does contain a little-noticed safety valve. If a foreign investor has a beef with tax policy—as opposed to other types of government policies—NAFTA governments can confer amongst themselves and determine whether the tax in question crosses the line. Arbitrators are then obliged to respect any such joint-determinations.

And that's exactly what happened recently when U.S. and Canadian officials got together to agree that the new tax on income trusts—while certainly having a financial impact on trust owners—cannot be likened to an "expropriation".

While the decision by Canada and the U.S. strikes a fatal blow to any NAFTA expropriation claim mounted against the income trust tax, U.S. investors remain free to argue that the tax violated other NAFTA protections.

In fact, in documents filed last year, the Gottliebs also accused Canada of unfairly discriminating against U.S. investors—who held unusually large stakes in the energy income trust sector. It remains open for them, and other U.S. citizens, to continue with their lawsuit against Canada and seek compensation for suffering discrimination and unfair treatment.

For the moment, however, the Gottliebs have not signalled whether they plan to press forward with their claim—and if other U.S. citizens will join them in any such fight. If they do, they will join a lengthening queue of U.S. investors suing Canada under NAFTA for various forms of alleged wrongdoing.

While economists continue to debate how effective the North American trade pact has been in generating trade and employment, the NAFTA is clearly creating a lot of work for lawyers.

Luke Eric Peterson is a columnist for Embassy. He is also the editor of the electronic news service, Investment Arbitration Reporter,

Marvin and Elaine Gottlieb explain why they are launching a NAFTA action against the Harper government

Americans Take on Canadian Prime Minister over Income Trust Injustice - Diane Francis