Special Tax Zones and the WTO

Abstract

Since the SCM agreement was enacted in 1995, the global leadership in the field of STZs has shifted from the OECD to the WTO. The WTO general agreement includes a broad set of policy goals that goes beyond trade relationships, but its legal framework has been systematically narrowed to the task of assuring market access, non-discrimination, and fairness in trade. Other relevant issues that has impacts on trade, such as for example harmful tax competition or tax base erosion, has not been sufficiently weighted and has been treated as secondary items. As of today, having passed more than 20 years since the enactment of the first WTO agreements, the WTO overall treatment of STZs appears to be inconsistent with the general policy goals of the organization. While service STZs generally remain free from challenge because there are no formal subsidy rules concerning services, manufacturing STZs with substantial activities have been significantly curtailed by the SCM Agreement. The disparity in the treatment of “goods” and “services” has produced a negative impact on developing countries, as they tend to rely more on manufacturing STZs to achieve economic growth, while benefitting developed countries, which to rely more on offshore banking, technology, and financial services STZs in order and attract investment. The fairness and distributional concerns raised by this disparity in treatment has also been placed in a secondary position, on the grounds that the objectives of the WTO are limited to market access, freedom, and non-discrimination in trade. This perspective, however, is not consistent with the rationale and general policy goals of the organization, as provided by the main WTO agreement.