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Interactions between Taxation Measures and International Investment Agreements

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Handbook of International Investment Law and Policy

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Abstract

The treatment of taxation measures in International Investment Agreements (IIAs) is of utmost significance to foreign investors as well as the host state. From the investors’ perspective, fair taxation by the host state is significant because tax measures can significantly affect the profitability of their investment. Particularly harsh tax measures, including measures taken to recover taxes, can at times have a terminal effect on the economic viability of the investments made by foreign investors. At the same time, autonomy over fiscal policies is a core aspect of a state’s sovereignty, which makes it reasonable for a state to jealously guard this autonomy from the dictates of treaties and tribunals. This contribution examines the way taxation measures are treated in modern IIAs. The contribution also details legal principles set out by international tribunals in tax-related investment disputes concerning the interaction between the challenged tax measures and select important treaty disciplines most frequently invoked in such disputes.

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Notes

  1. 1.

    Burgstaller M, Zarowna A (2018) The growing importance of investment arbitration in relation to tax measures in the energy and natural resources sectors. Turkish Commercial Law Rev 4(1):81–95

  2. 2.

    Chaisse J (2016a) International investment law and taxation: from coexistence to cooperation. Think Piece, World Economic Forum (WEF) – E15initiative. Available at https://www.ictsd.org/sites/default/files/research/E15-Investment%20Policy-Chaisse-FINAL.pdf

  3. 3.

    Davie M (2015) Taxation-based investment treaty claims. J Int Dispute Settlement 6(1):202–227; Ji X (2019) The internationalization of tax disputes – issues and options of a standing international tax court. Cardozo Int Comp Policy Ethics Law Rev 2(2):437–474

  4. 4.

    In this regard, it is pertinent to note that states may also use taxation as a tool to fulfil non-revenue related objectives (Ji X (2020) The changing paradigm of international tax dispute settlement: what are the promises and challenges of mandatory arbitration for China? Oregon Rev Int Law 21(1):424–449). For example, a state may attempt to discourage its population from smoking by imposing a particularly high level of tax on cigarettes. In other cases, states may apply different level of taxes to investors from different countries in order to further diplomatic relations with specific countries, or to promote domestic investors (See Davie M (2015) Taxation-based investment treaty claims. J Int Dispute Settlement 6(1):219). Walde and Kolo (2007) have also identified redistribution of wealth and equalization of regional differences as potential motivations for a state to use taxation.

  5. 5.

    Walde T, Kolo A (2007) Investor-state disputes: the interface between treaty-based international investment protection and fiscal sovereignty. Intertax 35(8/9)

  6. 6.

    Chaisse J (2016a) International investment law and taxation: from coexistence to cooperation. Think Piece, World Economic Forum (WEF) – E15initiative, pp 166–167. Available at https://www.ictsd.org/sites/default/files/research/E15-Investment%20Policy-Chaisse-FINAL.pdf

  7. 7.

    Walde T (2008) National tax measures affecting foreign investors under the discipline of international investment treaties: in proceedings of the annual meeting. Am Soc Int Law 102:55–56

  8. 8.

    Walde T (2008) National tax measures affecting foreign investors under the discipline of international investment treaties: in proceedings of the annual meeting. Am Soc Int Law 102:57

  9. 9.

    Burgstaller M, Zarowna A (2018) The growing importance of investment arbitration in relation to tax measures in the energy and natural resources sectors. Turkish Commercial Law Rev 4(1):81–95; Uribe D Montes MF (2019) Building a mirage: the effectiveness of tax carve-out provisions in international investment agreements. South Centre Investment Policy Brief. https://www.southcentre.int/wp-content/uploads/2019/03/IPB14_Building-a-Mirage-The-Effectiveness-of-Tax-Carve-out-Provisions-in-International-Investment-Agreements_EN.pdf. Accessed 28 May 2020; Davie M (2015) Taxation-based investment treaty claims. J Int Dispute Settlement 6(1):202–227; Chaisse J (2016a) International investment law and taxation: from coexistence to cooperation. Think Piece, World Economic Forum (WEF) – E15initiative. Available at https://www.ictsd.org/sites/default/files/research/E15-Investment%20Policy-Chaisse-FINAL.pdf, Chaisse J (2016b) Investor-state arbitration in international tax dispute resolution – a cut above dedicated tax dispute resolution? Virginia Law Rev 35:149–222

  10. 10.

    For example, Article 5(2) of the Argentina-New Zealand BIT, Article 11(3) of the Denmark-Russia BIT, Article 8(2) of the Hong Kong-New Zealand BIT. See also Art. 4 of the ASEAN Comprehensive Investment Agreement (ACIA) as discussed in Chaisse J, Jusoh S (2016) The ASEAN comprehensive investment agreement: the regionalization of laws and policy on foreign investment (Edward Elgar, International Investment Law Series) 265

  11. 11.

    For example, Article II(4)(b) of the Turkey-Bulgaria BIT, Article 7(b) of the Turkey-UK BIT, Article 4 of the France Model BIT.

  12. 12.

    Burgstaller M, Zarowna A (2018) The growing importance of investment arbitration in relation to tax measures in the energy and natural resources sectors. Turkish Commercial Law Rev 4(1):88. See also, Walde T, Kolo A (2007) Investor-state disputes: the interface between treaty-based international investment protection and fiscal sovereignty. Intertax 35(8/9):433

  13. 13.

    For example, Article 7 of the United Kingdom Model BIT, Article 3(3)(b) of the Netherland-Turkey BIT, Article 3(3)(b) of the Denmark-Turkey BIT.

  14. 14.

    For example, Article XII of the United States-Argentina BIT.

  15. 15.

    For example, Article 4 of the Netherland-Laos BIT, Article 21 of the Energy Charter Treaty, Article 3(4)(a) of the ASEAN Comprehensive Economic Agreement.

  16. 16.

    See Burgstaller and Zarowna (2018), p. 89; Uribe D Montes MF (2019) Building a mirage: the effectiveness of tax carve-out provisions in international investment agreements. South Centre Investment Policy Brief. https://www.southcentre.int/wp-content/uploads/2019/03/IPB14_Building-a-Mirage-The-Effectiveness-of-Tax-Carve-out-Provisions-in-International-Investment-Agreements_EN.pdf. Accessed 28 May 2020, p. 2

  17. 17.

    For example, Article XII of the Ecuador-Canada BIT.

  18. 18.

    For example, Article 28(3)–(4) of the Norway Model BIT, Article 21(2) of the United States Model BIT.

  19. 19.

    For example, Article 3.3 of the South Korea-Mexico BIT.

  20. 20.

    Walde T, Kolo A (2007) Investor-state disputes: the interface between treaty-based international investment protection and fiscal sovereignty. Intertax 35(8/9):431

  21. 21.

    See Chaisse J (2016a) International investment law and taxation: from coexistence to cooperation. Think Piece, World Economic Forum (WEF) – E15initiative. Available at https://www.ictsd.org/sites/default/files/research/E15-Investment%20Policy-Chaisse-FINAL.pdf, p. 159

  22. 22.

    The tax carve-out provision in India’s 2015 model BIT (Article 2(4), in relevant part, provides:

    This Treaty shall not apply to:

    (ii) any law or measure regarding taxation, including measures taken to enforce taxation obligations.

    For greater certainty, it is clarified that where the State in which investment is made decides that conduct alleged to be a breach of its obligations under this Treaty is a subject matter of taxation, such decision of that State, whether before or after the commencement of arbitral proceedings, shall be non-justiciable and it shall not be open to any arbitration tribunal to review such decision.

  23. 23.

    Burlington v. Ecuador (2012), para. 392.

  24. 24.

    Burlington v Ecuador (2012), para. 394.

  25. 25.

    Burlington v Ecuador (2012), para. 395.

  26. 26.

    Burlington v Ecuador (2012), paras. 393 and 395.

  27. 27.

    Burlington v. Ecuador (2012), para. 396.

  28. 28.

    Burlington v. Ecuador (2012), para. 399.

  29. 29.

    Burlington v. Ecuador (2012), para. 399.

  30. 30.

    Cargill v Mexico (2009), paras. 366 and 368. See also Perenko v Ecuador (2014), paras. 672 and 673. This tribunal also noted that even when the disputed tax measures are not found to be expropriatory in themselves, they could be found to contribute to expropriation when considered cumulatively with other measures of the host state that adversely affect the aggrieved investor. (Perenko v Ecuador (2014), para. 690)

  31. 31.

    Encana corporation v Ecuador (2006), para. 174.

  32. 32.

    Vincent Ryan and others v Poland (2015), paras. 468 and 472.

  33. 33.

    Burlington v. Ecuador (2012), para. 401.

  34. 34.

    Quasar de Valores v The Russian Federation (2012), para. 48.

  35. 35.

    Quasar de Valores v The Russian Federation (2012), para. 179.

  36. 36.

    Quasar de Valores v The Russian Federation (2012), para. 181.

  37. 37.

    El Paso v Argentina (2011), para. 290. See also RREPF Infrastructure v Spain (2019), para. 186.

  38. 38.

    Encana corporation v Ecuador (2006), para. 183.

  39. 39.

    Encana corporation v Ecuador (2006), para. 194.

  40. 40.

    Encana corporation v Ecuador (2006), f.n. 138 to para. 200.

  41. 41.

    Rosinvest v Russian Federation (2010), para. 275. See also Vincent Ryan and others v Poland (2015), paras. 490 and 491 (stating that “this Tribunal is not sitting in appeal on the decisions of the tax authorities in Poland”. The tribunal noted that it was not for the tribunal to adjudge the correctness of certain challenged determinations of the Polish tax and judicial authorities, but to determine whether Poland breached the expropriation provision through actions by the state authorities using tax proceedings as a guise to expropriate the claimants’ investment. The tribunal found that the burden to establish this inquiry in the affirmative was on the claimant.)

  42. 42.

    Rosinvest v Russian Federation (2010), para. 279.

  43. 43.

    Rosinvest v Russian Federation (2010), para. 496.

  44. 44.

    Burlington v. Ecuador (2012), para. 410.

  45. 45.

    Enron v Argentina (2007), para. 256. The tribunal noted that the content of the FET standard is unclear and imprecise because customary international law on treatment due to foreign citizens, traders, and investors is also not clear and precise. The tribunal, however, also noted that the FET standard “can also require a treatment additional to, or beyond that of, customary law”.

  46. 46.

    Jan Oostergetel v Slovak Republic (2012), paras. 224 and 225.

  47. 47.

    Jan Oostergetel v Slovak Republic (2012), paras. 233 and 236.

  48. 48.

    Jan Oostergetel v Slovak Republic (2012), paras. 224 and 236.

  49. 49.

    Bogdanov and Bogdanov v Moldova (2013), para. 192. One tribunal has held that a stabilization agreement is not a prerequisite for an investor to bring an FET claim against the host state’s taxation measures. That tribunal, however, also found that in that particular case, in the absence of a stabilization agreement, the investor could not establish that it had legitimate expectations that were denied by the challenged tax measures. The tribunal noted that “[a]n investor, without an agreement which limits or prohibits the possibility of tax increases, should not be surprised to be hit with tax increases”. (Sergei Pasushok v Mongolia (2011), paras. 301, 302, and 305). See also JSW Solar v Czech Republic (2017), para. 437.

  50. 50.

    Toto Construzioni Generali v Lebanon (2012), para. 244.

  51. 51.

    Enron v Argentina (2007), para. 261.

  52. 52.

    See JSW Solar v Czech Republic (2017), para. 409.

  53. 53.

    See JSW Solar v Czech Republic (2017), para. 410.

  54. 54.

    Duke v Peru (2008), para. 228.

  55. 55.

    Duke v Peru (2008), para. 215–217.

  56. 56.

    Jan Oostergetel v Slovak Republic (2012), para. 275.

  57. 57.

    Jan Oostergetel v Slovak Republic (2012), para. 273.

  58. 58.

    Jan Oostergetel v Slovak Republic (2012), para. 291.

  59. 59.

    Enron v Argentina (2007), para. 263.

  60. 60.

    Cargill v Mexico (2009), para. 297.

  61. 61.

    Ibid.

  62. 62.

    Conoco Phillips v. Venezuela (2013), para. 304.

  63. 63.

    Conoco Phillips v Venezuela (2013), para. 309.

  64. 64.

    Conoco Phillips v Venezuela (2013), para. 316.

  65. 65.

    Mobil and others v Venezuela (2014), para. 247.

  66. 66.

    Encana corporation v Ecuador (2006), para. 142.

  67. 67.

    Encana corporation v Ecuador (2006), para. 148.

  68. 68.

    Murphy Exploration v Ecuador (2016), para. 159.

  69. 69.

    Murphy Exploration v Ecuador (2016), para. 161. See also Burlington v Ecuador, Decision on Jurisdiction (2010), paras. 162 and 165. This tribunal noted that the challenged measure is a tax for the purposes of the IIA in question if the following four requirements are met: (i) there is a law (ii) that imposes a liability on classes of persons (iii) to pay money to the State (iv) for public purposes.

  70. 70.

    Murphy Exploration v Ecuador (2016), para. 188. It is pertinent to note that one tribunal has also found export duties to satisfy the definition of “taxation measures”. (El Paso v Argentina (2011), para. 292).

  71. 71.

    Rosinvest v Russian Federation (2010), para. 270.

  72. 72.

    Rosinvest v Russian Federation (2010), para. 271.

  73. 73.

    Vincent Ryan and others v Poland (2015), para. 260.

  74. 74.

    Vincent Ryan and others v Poland (2015), para. 262.

  75. 75.

    Vincent Ryan and others v Poland (2015), para. 263.

  76. 76.

    Vincent Ryan and others v Poland (2015), paras. 267 and 268.

  77. 77.

    Vincent Ryan and others v Poland (2015), para. 271. Adjudicating a dispute arising under the Argentina-United States BIT, the tribunal in El Paso v Argentina, stated that Article XII(1) of BIT, which was similar in wording to Article VI(1) of the Poland-United States BIT, created only a best efforts obligation, and generally excludes any review of an FET violation by the tribunal. (El Paso v Argentina (2011), para. 291). The tribunal in Occidental v Ecuador (2004), however, took the opposite view. This tribunal found that the obligation to “strive to accord fairness and equity” in respect of tax policies imposes an obligation on the host state that is not different from the obligation contained in the main FET provision of the treaty in question in that dispute. (Occidental v Ecuador (2004), para. 70).

  78. 78.

    Vincent Ryan and others v Poland (2015), para. 278.

  79. 79.

    Vincent Ryan and others v Poland (2015), para. 279.

  80. 80.

    Vincent Ryan and others v Poland (2015), para. 284.

  81. 81.

    Vincent Ryan and others v Poland (2015), paras. 284–287.

  82. 82.

    Vincent Ryan and others v Poland (2015), para. 311.

  83. 83.

    Vincent Ryan and others v Poland (2015), para. 320.

  84. 84.

    See Vincent Ryan and others v Poland (2015), paras. 313–319.

  85. 85.

    See Burlington v Ecuador, Decision on Jurisdiction (2010), para. 239 (referring to Duke Energy and Encana decisions).

  86. 86.

    Burlington v Ecuador, Decision on Jurisdiction (2010), para. 240.

  87. 87.

    Burlington v Ecuador, Decision on Jurisdiction (2010), para. 243.

  88. 88.

    Burlington v Ecuador, Decision on Jurisdiction (2010), para. 244.

  89. 89.

    See Yukos Universal v Russia, para. 1407 (noting that “the carve-out of [ECT] Article 21(1) can only to bona fide taxation actions, i.e., actions that are motivated by the purpose of raising general revenue for the State”). Whether or not a particular tax measures is bona fide depends on the evidence put forth by the claimant (see Eiser Infrastructure v Spain (2017), paras. 269–272).

  90. 90.

    Quasar de Valores v The Russian Federation, Award on Preliminary Objections (2009), para. 74.

  91. 91.

    Quasar de Valores v The Russian Federation (2012), para. 179.

  92. 92.

    Quasar de Valores v The Russian Federation (2012), para. 179. See also Hulley Enterprises v The Russian Federation (2014), paras. 1430.

  93. 93.

    Hulley Enterprises v The Russian Federation (2014), paras. 1433.

  94. 94.

    Burgsstaller and Zarowna (2018), pp. 85–86

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Authors and Affiliations

  1. Dispute Settlement Lawyer, World Trade Organization (Present), Geneva, Switzerland

    Vatsal Vasudev

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Correspondence to Vatsal Vasudev .

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Editors and Affiliations

  1. School of Law, City University of Hong Kong, Kowloon, Hong Kong

    Julien Chaisse

  2. School of Business and Law, University of Portsmouth, Portsmouth, UK

    Leïla Choukroune

  3. Institute of Malaysia and International Studies, National University of Malaysia, Bangi, Selangor, Malaysia

    Sufian Jusoh

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Vasudev, V. (2021). Interactions between Taxation Measures and International Investment Agreements. In: Chaisse, J., Choukroune, L., Jusoh, S. (eds) Handbook of International Investment Law and Policy. Springer, Singapore. https://doi.org/10.1007/978-981-13-5744-2_28-2

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  1. Latest

    Interactions between Taxation Measures and International Investment Agreements
    Published:
    06 October 2020

    DOI: https://doi.org/10.1007/978-981-13-5744-2_28-2

  2. Original

    Interactions between Taxation Measures and International Investment Agreements
    Published:
    21 August 2020

    DOI: https://doi.org/10.1007/978-981-13-5744-2_28-1

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