Calvin Thrall won the David A. Lake Award for Best Paper at the 2020 International Political Economy Society conference, the biggest conference for the subfield, for his paper, “Spillover Effects in International Law: The Case of TaxPlanning and Investor-State Dispute Settlement.”
Abstract: Even if their home state has no investment treaty with the host state, investors cangain access to ISDS by investing “indirectly” through a subsidiary located in a thirdstate. It has been claimed that this practice of “proxy arbitration”, which expands thescope of the investment treaty regime as well as the potential legal liabilities faced bycapital-importing states, is driven by investors’ strategic investment treaty-shoppingbehavior. In this paper, I argue that proxy arbitration is actually aspillover effectfrom the international tax treaty regime: firms and individuals are motivated to investindirectly through third state subsidiaries in order to reduce their tax burden by gainingaccess to the bilateral tax treaty network. Once the subsidiaries are created, theycan be repurposed as ISDS claimants if a dispute arises. Using novel data on theownership structures of ISDS claimants as well as several detailed tax data sources, Ifind support for this theory. The results highlight the extent of the interdependencebetween different regimes for regulating global business: firm behaviors incentivizedby one regime may have unintended downstream consequences for other regimes. Thepotential for such spillover effects is magnified by the primacy of the bilateral treatyas a tool for regulating international commerce, as well as private actors’ ability tofragment their ownership chains across several states.