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IC Power v. Guatemala

IC Power Asia Development Ltd. v. Republic of Guatemala, PCA Case No. 2019-43
Nature of the proceedings:
International
Type of case:
Investor-State
Economic sector:
Electricity, gas, steam and air conditioning supply (energy)
Electricity, gas, steam and air conditioning supply (energy)
Date of introduction:
15 Nov 2019
Status of the case:
Decided in favor of State
Claimant’s country of origin:
Israel
Respondent:
Guatemala
Institution:
PCA (Permanent Court of Arbitration)
Rules of arbitration:
Seat of arbitration:
London
Applicable treaties:
Guatemala - Israel BIT (2...

Documents of the case

profile picture Albert Jan van den Berg President
profile picture Raúl E. Vinuesa Appointed by the State
profile picture Guido Santiago Tawil Appointed by the investor

Lawyers, other representatives, expert(s), tribunal’s secretary

Final Award

LIST OF DEFINED TERMS

2011 Transaction Acquisition of Energuate by Actis from Fenosa in 2011 through a specific form of LBO referred to as a "reverse triangular merger"
Acquisition of Energuate IC Power’s acquisition of Energuate from Actis, which closed on 28 January 2016
Actis Actis LLP
AIG AIG Asia Pacific Insurance Ltd.
Annulment Resolutions Resolutions issued on 13 November 2014 by the SAT nullifying the SAT Hearings Notifications
Arbitration Costs The costs of the arbitration referred in Article 40(2)(a)-(c) and (f) of the UNCITRAL Rules
ASCOED Ascoed, S.A.
ASROED Asroed, S.A.
Audit Reports Reports issued on 12 December 2013 and on 17 February 2014 by the Auditing Teams
Auditing Teams Two teams of auditors appointed by the Head of Taxation Division of Special Taxpayers (Jefe de División de Fiscalización, Gerencia de Contribuyentes Especiales Grandes) through several official notices issued in October and November 2012 to verify whether the Distributors had fulfilled their tax obligations
Binding Tax Opinions Binding tax opinions issued by the SAT on 9 February 2015
CICIG International Commission Against Impunity in Guatemala
Citi Citigroup Global Markets, Inc.
Claim Agreement / Letter Agreement Agreement entered into by Nautilus Inkia Holdings LLC, DEOCSA, DEORSA, IC Power Distribution Holdings, Pte. Ltd. and IC Power on 28 December 2017, whereby IC Power would "continue to retain the right to pursue the Investment Treaty Claims against Guatemala and to retain any proceeds thereof"
Claimant / IC Power IC Power Asia Development Ltd.
Claimant’s Application on Withheld Documents Claimant’s request to the Tribunal to instruct the Respondent to produce documents withheld from document production, submitted on 10 December 2019
Claimant’s Application to Share Documents Claimant’s application pursuant to Order No. 2 to share the withheld documents with specific persons for the purpose of seeking instruction or testimony, submitted on 27 December 2019
Consultation Requests Request submitted by the Distributors to the SAT on 17 October 2016 to obtain a binding opinion pursuant to Article 102 of the Tax Code regarding the entitlement to deduct interest arising from the refinanced debt
Costs of Arbitration The Legal Costs and the Arbitration Costs, collectively
Criminal Complaint Criminal complaint filed on 13 July 2016 by the SAT against the Distributors for alleged tax fraud
Criminal Court Fifth Criminal, Narcotics, and Environmental Crimes Trial Court of the Department of Guatemala. Court which admitted the Criminal Complaint on 22 July 2016
Criminal Proceeding Criminal proceeding against the Distributors currently underway before the criminal courts in Guatemala as a result of the Criminal Complaint filed against them by the SAT
DD Team Due diligence team set up by IC Power and composed of 12 internal members, assisted by a team of 4 external executives, including the former CEO of Chilectra and Ampla, and Mr. Horacio Albín, former CFO of Energuate
DEOCSA Distribuidora de Electricidad de Occidente, S.A.
DEORSA Distribuidora de Electricidad de Oriente, S.A.
Distributors DEOCSA and DEORSA, together
Dutch SPVS Five companies incorporated in the Netherlands and indirectly controlled by Actis. This term refers, collectively, to the following companies: DEOCSA, B.V., DEORSA, B.V., RECSA, B.V., GUATEMEL, B.V. and GENERACION LIMPIA, B.V
Energuate Group of companies formed by the Distributors, Guatemel and Recsa known collectively as Energuate
EY Ernst and Young
FCPA Foreign Corrupt Practices Act
Fenosa Unión Fenosa Internacional, S.A.
FET Fair and equitable treatment
Final version of DD Report Final version of García & Bodán’s due diligence report dated 22 October 2015
First version of DD Report First version of García & Bodán’s due diligence report dated 26 June 2015
Globeleq Globeleq Americas Limited
Government / Respondent The Republic of Guatemala
Guatemalan SPVs Together, ASCOED and ASROED
Guatemala-Netherlands BIT Agreement between the Republic of Guatemala and the Kingdom of the Netherlands on the Promotion and Reciprocal Protection of Investments
Guatemel Comercializadora Guatemalteca Mayorista de Electricidad, S.A.
IC Israel Corporation IC Ltd.
Inkia Inkia Energy Limited
ISQ I Squared Capital
Kenon Kenon Holdings Ltd.
LBO Reverse merger leveraged buyout
Legal Costs The legal and other costs referred to in Article 40(2)(d)-(e) of the UNCITRAL Rules
MFN Most-favoured nation
Modified Consultation Requests Modification submission submitted by the Distributors on 21 November 2016 with regard to their Consultation Requests
Non-Binding Tax Opinions Opinions issued by the SAT on 6 December 2016 in response to the Distributors’ Modified Consultation Requests
Payments under Protest Payments made under protest by the Distributors to the SAT for the alleged tax deficiencies for tax years 2011 to 2015 and which, according to the Claimant, amounted to a total of US$ 75 million
PwC PricewaterhouseCoopers
Recsa Redes Eléctricas de Centro America, S.A.
Rectification Payments Series of rectification payments submitted by the Distributors on 19 February 2015 in relation to their tax declarations for the years 2011 to 2013
Respondent’s Application to Strike Respondent’s request to the Tribunal to exclude from the record specific sections of the Claimant’s Rejoinder on Jurisdiction, the second witness statement of Mr. Urbina, the third report of Deloitte, and an exhibit, submitted on 3 April 2020
Sale Sale by IC Power Distribution Holdings Pte. Ltd. and Inkia of IC Power’s assets in Latin America to Nautilus Inkia Holdings LLC, Nautilus Distribution Holdings LLC, and Nautilus Isthmus Holdings LLC (subsidiaries of ISQ). The sale was effected by a Stock. Purchase Agreement dated 24 November 2017 and closed on 31 December 2017
SAT The Guatemalan Superintendence of Tax Administration (Superintendencia de Administración Tributaria)
SAT Hearings Notifications Notifications issued on 27 March 2014 by the Taxation Division of SAT (División de Fiscalización, Gerencia de Contribuyentes Especiales Grandes) to the Distributors notifying that, as a result of the Tax Audit, the SAT had formulated certain adjustments that could be challenged within thirty working days from such notification
SAT Internal Reports SAT internal reports to the SAT’s Chief of the Audit Division for Special Large Taxpayers dated 21 September 2015 which recommended an audit of the Distributors’ Rectification Payments in relation to the fiscal years 2011 to 2013
SAT Law Law of the Superintendence of Tax Administration
SAT Rectification Payments Minutes SAT’s Minutes of meetings held on 27 February 2015 by a representative from the Distributors with SAT officials of the Taxation and Collection Departments to discuss the Rectification Payments. Such minutes reflect certain statements made by the Distributors’ representative to the effect that the Rectification Payments were made taking into account the Binding Tax Opinions
SPAs Two share purchase agreements signed on 19 May 2011 in New York: pursuant to the first SPA, Fenosa sold its shares in the Target to the Dutch SPVs. Following the conclusion of the first SPA, DEOCSA, B.V. and DEORSA, B.V. sold their shares in the Distributors to the Guatemalan SPVs under the second SPA
Supplemental Agreement Supplemental agreement entered into by IC Power and ISQ on 19 December 2019 whereby they clarified their original intention in entering the Claim Agreement
Syndicated Loans Series of syndicated loans managed by Banco Agromercantil and signed by the Guatemalan SPVs on 19 May 2011, pursuant to which they received a joint sum of US$ 220 million
Target DEORSA, DEOCSA, Generación Limpia Guatemala, S.A., Guatemel and Recsa
Tax Audit Inclusion of the Distributors within the audit schedule of SAT in 2012 to determine whether they had properly performed their tax obligations
Tax Code Decree Law 6-91 of the Guatemalan Congress, Tax Code
Tax Deductions Two tax deductions which, according to the Claimant, were generated during the 2011 Transaction, namely: (i) the amortization of the goodwill obtained by the Distributors as a result of the Transaction; and (ii) a deduction for interest expenses on the loans used to acquire the Distributors
Tax Opinion Requests Requests submitted on 5 February 2015 by the Distributors to the Consulting Department of the SAT seeking binding tax opinions regarding the deductibility of interest payments and goodwill amortization arising from the 2011 Transaction
Treaty Agreement Between the Government of the State of Israel and the Government of the Republic of Guatemala for the Reciprocal Promotion and Protection of Investments of 7 November 2006
UNCITRAL Rules UNCITRAL Arbitration Rules, as revised in 2013
VCLT Vienna Convention on the Law of Treaties

I. INTRODUCTION

A. The Parties

1.
The Claimant in this arbitration is IC Power Asia Development Ltd. ("IC Power" or the "Claimant"), a private company with limited liability, incorporated under the laws of the Israel, with its address at 45 Rothschild Boulevard, Tel-Aviv, 6578403, Israel. The Claimant is represented in these proceedings by Jonathan C. Hamilton, Rafael Llano, Jaime M. Crowe, and Michelle Grando of White & Case LLP, 701 Thirteenth Street N.W., Washington, D.C. 20005, United States, and Torre del Bosque - PH, Blvd. Manuel Avila Camacho, 24, 11000 CDMX, Mexico.
2.
The Respondent in this arbitration is the Republic of Guatemala, a sovereign State (the "Government" or the "Respondent"). The Respondent is represented in these proceedings by Lic. Jorge Luis Donado Vivar, Lcda. Ana Luisa Gatica Palacios, and Lcda. Lilian Elizabeth Nájera Reyes of the Procuraduría General de la Nación of the Republic of Guatemala; by Ministro Robert Antonio Malouf Morales, Viceministro Alba Edith Flores Ponce de Molina, Alexander Salvador Cutz Calderón, Jorge Luis Godinez Aguirre, and Karla Estefanía Liquez Aldana of the Ministerio de Economía of the Republic of Guatemala; by Eduardo Silva Romero, José Manuel García Represa and Catalina Echeverri Gallego of Dechert (Paris) LLP, 32 Rue de Monceau, Paris, 75008, France; and by Juan Felipe Merizalde, Dechert LLP, 1900 K St. NW, Washington DC, 20006, United States.

B. The Background of the Dispute

3.
A dispute has arisen between IC Power and the Government in respect of which the Claimant commenced tírese arbitration proceedings. The subject matter of the dispute concerns the Claimant’s investment in the energy distribution market of Guatemala through the purchase of two Guatemalan companies, Distribuidora de Electricidad de Oriente, S.A. ("DEORSA") and Distribuidora de Electricidad de Occidente, S.A. ("DEOCSA" and, together with DEORSA, the "Distributors") and the measures taken by the Government with respect to back taxes allegedly owed by the Distributors. The subject matter of the dispute further concerns Binding Tax Opinions issued by the Government, prior to the Claimant’s acquisition of the Distributors, in respect of the amortization of goodwill generated from a prior acquisition of the Distributors, carried out by way of a reverse merger.

C. The Arbitration Agreement

4.
These proceedings were commenced pursuant to the Agreement between the Government of the State of Israel and the Government of the Republic of Guatemala for the Reciprocal Promotion and Protection of Investments of 7 November 2006 (the "Treaty"). Article 8 of the Treaty provides as follows:

ARTICLE 8

SETTLEMENT OF INVESTMENT DISPUTES BETWEEN A CONTRACTING PARTY AND AN INVESTOR

1. Any investment dispute between a Contracting Party and an investor of the other Contracting Party shall be settled by negotiations.

2. If a dispute under paragraph 1 of this Article cannot be settled within six (6) months of a written notification of this dispute, it shall be on the request of the investor settled as follows:

(a) by a competent court of the Host Contracting Party; or

(b) by conciliation; or

(c) by arbitration by the International Center for the Settlement of Investment Disputes (ICSID), established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature at Washington, D.C. on [M]arch 18, 1965, provided that both Contracting Parties are Parties to the Convention; or

(d) by arbitration under the Additional Facility Rules of ICSID, provided that only one of the Contracting Parties is a Party to the ICSID Convention; or

(e) by an ad hoc arbitration tribunal, which is to be established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). Unless otherwise agreed, all submissions shall be made and all hearings shall be completed within six (6) months of the date of selection of the Chairman, and the arbitral panel shall render its written and reasoned decisions within two (2) months of the date of the final submissions or the date of the closing of the hearings, whichever is later.

3. Each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration in accordance with the provisions of this Article. This consent and the submission by a disputing investor of a claim to arbitration shall satisfy the requirements of:

(a) Chapter II of the ICSID Convention or the Additional Facility Rules of ICSID for written consent of the parties;

(b) Article II of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 ("The New York Convention"), for an agreement in writing.

4. The choice of one dispute settlement mechanism will exclude any other. Notwithstanding the above, an investor who has submitted the dispute to national jurisdiction may have recourse to the arbitral tribunals mentioned in paragraph 2 of this Article so long as a judgment has not been delivered on the subject matter of the dispute by a national court.

5. The award shall be final and binding. Each Contracting Party shall carry out without delay the provisions of any such award and provide in its territory for the enforcement of such award.

D. The Applicable Law

5.
The applicable law for the interpretation of this Treaty is public international law. The Tribunal considers the relevant rule on the interpretation of treaties to be embodied in Article 31 of the Vienna Convention on the Law of Treaties (the "VCLT"). The supplementary means of interpretation of treaties is set out in Article 32 of the VCLT.1 Articles 31 and 32 provide as follows:

ARTICLE 31. GENERAL RULE OF INTERPRETATION

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:

(a) Any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;

(b) Any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.

3. There shall be taken into account, together with the context:

(a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;

(b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;

(c) Any relevant rules of international law applicable in the relations between the parties.

4. A special meaning shall be given to a term if it is established that the parties so intended.

ARTICLE 32. SUPPLEMENTARY MEANS OF INTERPRETATION

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:

(a) Leaves the meaning ambiguous or obscure; or

(b) Leads to a result which is manifestly absurd or unreasonable.

6.
As a result of the Tribunal’s application of public international law, the results it reaches in the interpretation and application of the treaty may differ from the results that would be reached through the application of domestic law in the courts of Guatemala.

E. The Constitution of the Tribunal

7.
The Tribunal is composed of Professor Albert Jan van den Berg, Professor Guido S. Tawil, and Professor Raúl Emilio Vinuesa, with Professor van den Berg serving as the President of the Tribunal.
8.
The Claimant appointed Professor Tawil as a co-arbitrator on 15 June 2018. The Respondent appointed Professor Vinuesa as a co-arbitrator on 13 July 2018. In keeping with the Parties’ Procedural Agreement of 26 April 2019, Professor van den Berg was appointed, and the Tribunal deemed constituted, on 14 November 2019.

F. The Applicable arbitration Rules

9.

Pursuant to the Parties' Procedural Agreement of 26 April 2019, the arbitration rules applicable to these proceedings are the UNCITRAL Arbitration Rules, as revised in 2013 (the "UNCITRAL Rules").

G. The Seat of the Arbitration

10.
Pursuant to the Parties' Procedural Agreement of 26 April 2019, the legal seat (or place) of the arbitration is London, England.

H. The Language of the arbitration

11.
Pursuant to the Parties’ Procedural Agreement of 26 April 2019, the languages of the arbitration are English and Spanish. The Parties further agreed with respect to language as follows:

5.1. Submissions. Correspondence may be sent in either of the two procedural languages without the need for a translation. The main documents constituting written submissions (pleadings, witness statements, and expert reports ("Main Documents")) shall be submitted in one procedural language on the Filing Date (as defined below), with a translation into the other language on the Supplemental Filing Date (as defined below). Documentary evidence and legal authorities ("Supporting Documents") may be submitted in English or Spanish. Any Supporting Documents presented in a language other than English or Spanish shall be translated into English or Spanish as to the relevant part thereof. The Tribunal may require a complete translation.

5.2. Governing Language and Translations. The governing language of documents shall be the original language of the document. Translations need not be certified unless there is a dispute as to the content of a translation. Any material disagreement in relation to translations will be decided by the Tribunal following comments by the Parties.

5.3. Orders, Decisions, Award. The Tribunal shall render any order, decision, or award in one procedural language, with a translation into the other procedural language provided within a reasonable time period.2 (emphasis omitted)

II. PROCEDURAL HISTORY

A. Initiation of the arbitration and the parties’ Procedural agreement

12.
On 20 February 2018, the Claimant served on the Respondent its Notice of Arbitration.
13.
On 22 March 2018, the Respondent provided its Response to the Notice of Arbitration.
14.
On 26 April 2019, the Parties reached a Procedural Agreement (the "Procedural Agreement") to structure the schedule for submissions and the timing of the constitution of the Tribunal, bearing in mind the restrictions provided for in the Treaty.
15.
On 15 June 2018, the Claimant appointed Professor Guido S. Tawil as co-arbitrator.
16.
On 13 July 2018, the Respondent appointed Professor Raúl Emilio Vinuesa as co-arbitrator.

B. First Written Submissions and Document production

17.
On 16 May 2019, the Claimant submitted its Statement of Claim.
18.
On 16 September 2019, the Respondent submitted its Statement of Defence.
19.
On 11 October 2019, the Parties submitted their respective document production requests.
20.
On 28 October 2019, the Parties submitted their respective responses to document production requests.
21.
On 7 November 2019, the Parties submitted their replies to responses to document production requests.

C. Tribunal Constitution and Initial Procedural Steps

22.
On 14 November 2019, with the appointment of Professor van den Berg, the Tribunal was constituted.
23.
On 15 November 2019, a procedural consultation between the Parties and the Tribunal was held via telephone conference.
24.
On 19 November 2019, the Tribunal issued its decisions on the Parties’ respective document production requests.
25.
On 20 November 2019, the Parties were requested to provide at their earliest convenience hard copies of their submissions to certain members of the Tribunal as well as to provide the PCA with an electronic and a hard copy of the full record of the proceedings to date.
26.
On 27 November 2019, the Claimant informed that it had shipped copies of the materials requested in the PCA’s letter of 20 November 2019. By e-mail of the same date, the Respondent informed that it had mailed printed and electronic copies of documents pursuant to the PCA’s letter of 20 November 2019.
27.
On 5 December 2019, the Tribunal (i) circulated a draft version of the Terms of Appointment and a draft Order No. 1, inviting the Parties’ comments thereon by 12 December 2019; (ii) provided a Spanish translation on the Tribunal’s decisions on the Parties’ respective requests for the production of documents; and (iii) advised the Parties of Professor Tawil’s updated contact details.
28.
On 9 December 2019, the Parties conveyed their agreement to extend certain deadlines for subsequent written submissions and advised the Tribunal of their agreement to a Confidentiality Supplement to the Procedural Agreement, dated 4 December 2019.
29.
On 10 December 2019, the Claimant requested the Tribunal to instruct the Respondent to produce documents withheld from document production (the "Claimant’s Application on Withheld Documents").
30.
On 11 December 2019, the Tribunal invited the Respondent’s comments on the Claimant’s Application on Withheld Documents.
31.
On 13 December 2019, the Respondent provided its comments on the Claimant’s Application on Withheld Documents.
32.
On the same date, the Parties submitted their respective comments on the draft Terms of Appointment, draft Procedural Order No. 1, and draft procedural timetable provided by the Tribunal.
33.
On 19 December 2019, the Tribunal issued Order No. 2, containing its Decision on the Claimant’s Application on Withheld Documents as follows:

1. The Claimant’s request that the Respondent produce the Withheld Documents is granted, subject to the directions below.

2. The Parties shall treat as confidential the Withheld Documents, in accordance with paragraph 9.4 of the Procedural Agreement dated 26 April 2019, as amended by the Confidentiality Supplement to Procedural Agreement dated 4 December 2019.

3. The Withheld Documents shall further be designated as "attorney’s eyes only", meaning that:

(i) the Withheld Documents are to be produced to Claimant's counsel of record for their review only, by Friday, 20 December 2019;

(ii) Claimant’s counsel of record ("White & Case") may only provide the Withheld Documents to its attorneys, paralegals and other staff whose involvement in the conduct of these proceedings is reasonably considered to be necessary;

(iii) For the avoidance of doubt, Claimant’s counsel of record may not share the Withheld Documents with anyone not directly employed by White & Case, which thus prohibits disclosure to representatives of the Claimant, or any expert or witness in these proceedings, subject to any future directions by the Tribunal;

(iv) Each copy of the Withheld Documents shall be marked clearly on each page: "CONFIDENTIAL - RESTRICTED ACCESS - FOR USE IN PCA CASE 2019-43 ONLY";

(v) Claimant’s counsel of record shall take reasonable measures to ensure compliance with the restrictions set out in the present Order and Claimant’s counsel of record can be held liable for any violation of those restrictions;

(vi) Should Claimant wish to introduce the Withheld Documents into the record, or share them with specific persons for the purpose of seeking instructions or witness/expert testimony, it may make an application to the Tribunal as necessary;

(vii) Either Party may apply for an amendment to, or a derogation from, this Order upon a showing of good cause; and

(viii) Any dispute arising from this Order during the pendency of the present proceedings shall be resolved by this Tribunal. (emphasis omitted)

34.
Also on 19 December 2019, the Tribunal circulated a finalized version of the Terms of Appointment for the Parties’ signature and an updated draft of the Tribunal’s Order No. 1 for the Parties’ further comments.
35.
On 21 December 2019, the Claimant conveyed the Parties’ agreement to adjust the procedural calendar for written submissions.
36.
On 23 December 2019, the Respondent confirmed its agreement with the above-mentioned communication and confirmed that it had provided a response pursuant to Order No. 2.

D. Further Written Submissions and Further Issues of Document Production

37.
On 27 December 2019, the Claimant submitted its Statement of Reply and Response to Jurisdictional Objections. Spanish translations were submitted on 3 January 2020.
38.
On 27 December 2019, the Claimant made an application pursuant to Order No. 2 to share the withheld documents with specific persons for the purpose of seeking instruction or testimony (the "Claimant’s Application to Share Documents").
39.
On 28 December 2019, the Tribunal invited the Respondent’s comments on the Claimant’s Application to Share Documents.
40.
On the same date, the Tribunal provided an updated draft Procedural Timetable for the Parties’ comments and circulated a Spanish translation of Order No. 2.
41.
On 31 December 2019, the Respondent provided its comments on the Claimant’s Application to Share Documents.
42.
On 2 January 2020, the Claimant provided signature pages of the Terms of Appointment and its comments on the procedural timetable and draft Order No. 1.
43.
On 6 January 2020, the Tribunal issued the finalized version of its Order No. 1 (in English and Spanish).
44.
On the same date, the Tribunal issued Order No. 3 containing a Decision on the Claimant’s Application to Share Documents as follows:

1. The Claimant shall provide, by Thursday, 9 January 2020 (i) its explanation of the substantive basis for its Application; (ii) its identification of the persons with whom the Withheld Documents would be shared; and (iii) a draft confidentiality agreement to be signed by those persons.

2. The Respondent may provide any further comments on the Claimant’s Application by Tuesday, 14 January 2020.

3. The Tribunal will decide upon the Claimant’s Application promptly thereafter.

4. Any application to admit the Withheld Documents into the record should be made by Tuesday, 21 January 2020. The Respondent may comment on any such application by Friday, 24 January 2020. The Tribunal will rule on any such application shortly thereafter.

5. Subject to the Tribunal’s decision on the Claimant’s Application and any application to admit the Withheld Documents, any comments by the Claimant on the Withheld Documents, and any witness or expert evidence with respect thereto, shall be filed by Thursday, 30 January 2020, on the understanding that such submissions and/or evidence shall be limited to comments on the Withheld Documents.

6. The Respondent may respond to any submissions and/or evidence in relation to the Withheld Documents together with its Rejoinder submission, due on 21 February 2020. (emphasis omitted)

45.
On 9 January 2020, the Tribunal circulated a Spanish translation of Order No. 3.
46.
By letter of the same date, pursuant to Order No. 3, the Claimant identified the persons with whom it planned to share the withheld documents, provided a draft confidentiality agreement to be signed by said persons and the substantive basis for its application to share such documents.
47.
On 10 January 2020, the Parties provided signed copies of the Terms of Appointment.
48.
On 14 January 2020, the Respondent indicated that it did not object to the exhibition of documents to the persons identified in the Claimant’s communication and requested an amendment to the proposed confidentiality agreement.
49.
On 16 January 2020, the Tribunal issued Order No. 4 containing a further Decision on the Claimant’s Application to Share Documents, as follows:

1. The Claimant’s application to share the Withheld Documents with Mr. Saúl Augusto Donado Rodríguez, Mr. Juan Rodolfo Pérez Trabanino, Mr. Walter Martínez, and Mr. Robert Rosen is granted.

2. Before receiving the Withheld Documents, the individuals identified above shall each give the following confidentiality undertaking:

I, ________, confirm that I have reviewed this Confidentiality Undertaking and expressly undertake to be bound by the provisions hereof, and that I can be held liable for any violation of this undertaking.

I agree to treat as confidential the Withheld Documents produced to me on the date hereof and to not disclose such documents, unless I am duly required by any court or governmental authority of competent jurisdiction to do so. In such case, I shall immediately give notice thereof to Counsel for IC Power Asia Development Ltd. in the referenced proceedings, and shall reasonably cooperate with any lawful effort to protect such Annex 1 Documents from further disclosure.

The Withheld Documents that I will receive shall be used for the sole purpose of this Arbitration and will be destroyed at the termination of the referenced proceedings.

The confidentiality obligations undertaken hereof shall remain in full force and effect notwithstanding the termination of the referenced proceedings.

3. The Claimant shall provide the Respondent with copies of the confidentiality undertaking signed by each of the aforementioned persons, as well as an indication of which of the Withheld documents were shared with each individual. (emphasis omitted)

50.
On 23 January 2020, the Claimant provided executed confidentiality undertakings and an indication of the withheld documents which were shared with the client representative and experts, and "confirmed that it [would] make a concise supplemental submission and introduce therewith certain Withheld Documents".
51.
On 24 January 2020, the Tribunal noted that it had not yet granted leave to the Claimant to introduce the Withheld Documents, considered the Claimant’s letter of 23 January 2020 to be an application to admit the Withheld Documents into the record under paragraph 4 of Order No. 3, and invited the Respondent’s comments on said application.
52.
On 27 January 2020, the Respondent provided its comments on the Claimant’s application.
53.
On 28 January 2020, the Claimant submitted comments in response to the Respondent’s letter.
54.
On the same date, the Tribunal invited the Claimant to provide any comments on the Respondent’s letter.
55.
On 28 January 2020, the Claimant provided its comments on the Respondent’s letter dated 27 January 2020.
56.
On 29 January 2020, the Tribunal issued Order No. 5 containing its Decision on the Introduction of Withheld Documents, as follows:

1. The Claimant’s application to introduce the Withheld Documents and to provide comments and expert evidence thereon is granted.

2. The deadline for the introduction of the Withheld Documents and any accompanying comments or expert statements remains Thursday, 30 January 2020.

3. As set out in Order No. 3, the Claimant’s submissions and/or evidence shall be limited to comments on the Withheld Documents.

4. The Withheld Documents, as well as the Parties’ continents and any witness or expert evidence in respect thereof, shall remain designated as "attorney’s eyes only" and shall not be shared by Claimant’s Counsel with anyone except for:

(a) persons directly employed by White & Case;

(b) Mr. Saúl Augusto Donado Rodríguez, Mr. Juan Rodolfo Pérez Trabanino, Mr. Walter Martínez, and Mr. Robert Rosen;

(c) Members of the Tribunal and assistants employed directly by them;

(d) Officials of the Permanent Court of Arbitration;

5. The Tribunal and PCA will ensure that the Withheld Documents will be used for the sole purpose of this arbitration and will be destroyed at the termination of the proceedings.

6. To facilitate the maintenance of the confidentiality regime applicable to the Withheld Documents, the Respondent’s response to the Claimant’s submissions and evidence on the Withheld Documents, to be submitted in conjunction with its Rejoinder submissions on 21 February 2020, shall be set out in a separate document from the Rejoinder itself and marked as "attorney’s eyes only" (emphasis omitted).

57.
On 30 January 2020, the Claimant submitted its Comments to the Withheld Documents and accompanying documents and expert statements.
58.
On 13 February 2020, the Respondent requested the Tribunal to order the Claimant to produce certain documents (the "Respondent’s Application for Further Document Production").
59.
On 15 February 2020, the Tribunal invited the Claimant’s comments on the Respondent’s Application for Further Document Production.
60.
On 18 February 2020, the Claimant provided its comments on the Respondent’s Application for Further Document Production.
61.
On 20 February 2020, the Tribunal issued Order No. 6, denying the Respondent’s Application for Further Document Production.
62.
On 21 February 2020, the Respondent submitted its Rejoinder on the Merits and Reply to the Jurisdictional Objections (including an attorney’s eyes only version).
63.
On 9 March 2020, the Tribunal issued Spanish translations of Orders Nos. 4, 5, and 6.

E. The Coronavirus Pandemic and the Timing of the Hearing

64.
On 11 March 2020, the Tribunal invited the Parties to confer in relation to the implications of the novel coronavirus pandemic for the hearing anticipated for April 2020.
65.
On 17 March 2020, through a joint communication, the Parties suggested to hold a conference call to discuss procedural steps.
66.
On 20 March 2020, the Parties conveyed their agreement to extend the submission date for the Claimant’s Rejoinder on Jurisdiction.
67.
On 23 March 2020, a teleconference between the Parties and the Tribunal was held, during which all participants concurred that it was impossible as a practical matter to proceed with an in-person hearing in April 2020. The Parties indicated that they could agree to postponing the hearing to July 2020, with the understanding that the hearing would proceed by videoconference in the event that the public health situation continued to render an in-person hearing impossible.
68.
On 25 March 2020, the Claimant submitted its Statement of Rejoinder on Jurisdiction. Spanish translations of the Rejoinder on Jurisdiction and accompanying documents were submitted on 1 April 2020.
69.
On 26 March 2020, the Tribunal circulated a draft version of Order No. 7 for the Parties’ review and comments.
70.
On 1 April 2020, the Parties reverted with regard to the draft Order No. 7 and recorded their agreement that "that the global pandemic justifies on the basis of force majeure the suspension of a hearing as originally scheduled and the corresponding procedural adjustments set forth herein, to which the parties do not and will not object."
71.
On 2 April 2020, the Tribunal issued Order No. 7, deciding as follows:

1. The hearing scheduled to take place on 20-24 April 2020 is postponed to take place on 14-18 July 2020.

2. The Tribunal will confer with the Parties on 27 April 2020 with respect to the developing global health situation and the feasibility' of conducting the July 2020 hearing in person in London, England.

3. In the event that an in person hearing does not appear feasible, the Tribunal will coordinate with the Parties with respect to the organization of the hearing by videoconference.

4. The procedural timetabled adopted as Annex 1 to the Tribunal’s Order No. 1 is revised according to the timetable set out as Annex 1 to this Order. (emphasis in original)

72.
On the same date, the PCA informed the Parties that it had shifted the logistical arrangements to the July dates.
73.
On 3 April 2020, the Respondent requested the Tribunal to exclude from the record specific sections of the Claimant’s Rejoinder on Jurisdiction, the second witness statement of Mr. Urbina, the third report of Deloitte, and an exhibit (the "Respondent’s Application to Strike").
74.
On 6 April 2020, the Tribunal invited the Claimant to provide any comments on the Respondent’s Application to Strike.
75.
Also on 6 April 2020, the Tribunal circulated a Spanish translation of Order No. 7 and an executed version of the Terms of Appointment.
76.
On 13 April 2020, the Claimant provided its comments in relation to the Respondent’s Application to Strike.
77.
Also on 13 April and on 14 April 2020, the Parties simultaneously submitted their notifications of witnesses and experts called for cross-examination at the hearing.
78.
On 20 April 2020, the Respondent submitted its reply in respect of Respondent’s Application to Strike.
79.
On 24 April 2020, the Claimant submitted its rejoinder on the Respondent’s Application to Strike.
80.
On 27 April 2020, the Tribunal held a teleconference with lead counsel concerning developments with the coronavirus pandemic and technical arrangements to possibly conduct the July hearing by videoconference.
81.
On 11 May 2020, the Tribunal issued Order No. 8, deciding on the Respondent’s Application to Strike as follows:

1. The Respondent’s request that the Tribunal strike from the record (a) Section II.A and para. 32 of the Rejoinder on Jurisdiction; (b) the second witness statement of Mr. Urbina; (c) Section II.B and para. 34 of the Rejoinder on Jurisdiction; and (d) Deloitte’s third report is denied.

2. The Respondent’s request that the Tribunal strike from the record Annex C-639 is granted.

3. The Respondent’s request that the Tribunal declare inadmissible the Claimant’s characterization of its investment as a "claim[] to money, goodwill and other assets and any claim having an economic value" is denied. However, the Respondent’s may provide any written response in wishes to make to this argument in a brief further submission by no later than Monday, 1 June 2020. (emphasis in original)

82.
On 14 May 2020, the Parties submitted a joint draft hearing plan.
83.
On the same date, a procedural videoconference was held to discuss virtual hearing considerations.
84.
On 18 May 2020, the Tribunal circulated a Spanish translation of Order No. 8.
85.
On 1 June 2020, pursuant to Order No. 8, the Respondent submitted a Complementary Submission on the State’s Objections to Jurisdiction (in Spanish). On 9 June 2020, the Respondent submitted an English translation of such submission.

F. The Hearing and Post-Hearing Submissions

86.
On 3 June 2020, the Tribunal circulated a draft version of Order No. 9 in respect of arrangements for a videoconference hearing for the Parties’ comments.
87.
On 15 June 2020, the Parties provided their respective comments on draft Order No. 9.
88.
On 21 June 2020, the Parties submitted joint supplemental procedural comments.
89.
On 24 June 2020, the Tribunal issued Order No. 9 regarding the Conduct of the Hearing by Videoconference.
90.
On 26 June 2020, the Parties provided a provisional indication of the location from where their participants would join the hearing by videoconference.
91.
On 30 June 2020, the Tribunal circulated a provisional agenda for the pre-hearing videoconference scheduled to take place on 2 July 2020.
92.
On 2 July 2020, the pre-hearing videoconference was held.
93.
On the same date, a Spanish translation of Order No. 9 was circulated to the Parties.
94.
From 13 to 18 July 2020, the Tribunal convened a hearing with the Parties by videoconference. Participating in the hearing were the following:

Arbitral Tribunal
Professor Albert Jan van den Berg (President) Professor Guido S. Tawil Professor Raúl Emilio Vinuesa
Claimant Respondent
Jonathan C. Hamilton Rafael Llano Michelle Grande Jaime Crowe John Dalebroux Sandra Huerta Paulo Maza Sophia Castillero Antonio Nittoli Nadia Navarro Martinez White & Case Rob Rosen David Kay Party Representatives Yoav Doppelt Javier Garcia Daniel Urbina Horacio Albin Witnesses Yvette Austin Smith Darrell Chodorow Alexis Maniatis Brattle Group Saúl Donado Juan Rodolfo Pérez Walter Martinez Experts Ing. Roberto Malouf Licda, Edith Flores de Molina Lic. Alexander Cutz Lic. Jorge Luis Godínez Licda. lvannia Ponce Licda. Giselle Rodriguez Licda. Karla Liquez Ministerio de Economía de Guatemala Licenciado Jorge Luis Donado Vivar Licenciado Mario Antonio de Jesús Morales Licenciada Ana Luisa Gatica Licenciado Mario René Mérida Licenciado Julio Eduardo Santiz Licenciada María Gabriela Hernández Jose Velasquez Mario Lutín Procuraduría General de la Nación Eduardo Silva Romcro José Manuel García Represa Juan Felipe Merizalde Catalina Echeverri Ruxandra Esnau Federico Arata Ana Durán Laura Arboleda Gutierrez Santiago Soto García Anne Driscoll Melina Mirambeaux Hernandez Mateo Mezzera Sofia de Murard Jean-Philippe Nguyen Dechert LLP
Javier Novales María José Alcazar Alexander Morales Reyes Novales Abogados David Muñóz Witness Marcelo Shoeters Gustavo De Marco Alan Rozenberg Compass Lexecon Ángel Menéndez Edvin Montoya Legal Experts Pedro Legris Carla Calá Team Compass Lexecon
Registry
Mr. Garth Schofield, Senior Legal Counsel Mr. José Luis Aragón Cardiel, Legal Counsel Ms. Elena Laura Álvarez Ortega, Assistant Legal Counsel Ms. Vilmante Blink, Case Manager
Interpreters
Ms. Silvia Colla Mr. Daniel Giglio
Court Reporters
Mr. Trevor McGowan Ms. Georgina Vaughn Mr. Dante Rinaldi
Law in Order
Mr. Jason Aoun

95.
On 7 August 2020, the Parties each submitted a post-hearing brief.
96.
On 18 August 2020, the Parties each submitted a submission on costs. The Parties submitted updated versions of their submissions on costs on 30 September and 29 September, respectively.

III. FACTUAL RECORD

97.
This section sets out the main events relayed by the Parties in their submissions in order to provide an overview of the factual background regarding the dispute at stake in this arbitration.
98.
The Parties advance different interpretations or views concerning certain important events. Their differing views are noted in the following paragraphs where relevant.
99.
This overview, however, does not purport to be exhaustive of all the events and circumstances laid out by the Parties in their submissions nor their diverging views thereon.

A. Main Actors

1. The Claimant and Related Entities

100.
The Claimant is IC Power Asia Development Ltd., a company incorporated in Israel. IC Power was established on 13 January 2010 by Israel Corporation Ltd. ("IC") as a wholly owned subsidiary.3
101.
In January 2015, IC transferred its shares in IC Power to Kenon Holdings Ltd. ("Kenon"), a company incorporated in Singapore.4 In turn, in March 2016, Kenon transferred its interest in IC Power to IC Power Pte. Ltd., also incorporated in Singapore.5
102.
In 2016, the Claimant acquired an indirect shareholding in two Guatemalan companies: (i) Distribuidora de Electricidad de Occidente, S.A., and (ii) Distribuidora de Electricidad de Oriente, S.A., both of which are principally dedicated to the distribution of electrical power in Guatemala.6 At the time of the acquisition, the Distributors were controlled by Actis LLP, a UK-based investment fund ("Actis").7
103.
The Distributors are the two largest electricity distribution companies in Guatemala.8 As of 2015, the Distributors operated over 70,000 km of distribution lines in Guatemala (about 84 per cent of all lines) and served around 55 per cent of Guatemala’s regulated customers.9
104.
Comercializadora Guatemalteca Mayorista de Electricidad, S.A. ("Guatemel") is an electricity trading company whose activities involved 58 unregulated customers, and Redes Eléctricas de Centro América, S.A. ("Recsa") is a transmission company which operated 31 kilometres of transmission lines and eight sub-stations.10 Together with the Distributors, Guatemel and Recsa formed part of a group of companies known collectively as Energuate ("Energuate").11
105.
The Claimant entered into in an insurance contract with AIG Asia Pacific Insurance Ltd. ("AIG") in relation to certain representations and warranties included in the agreement whereby it acquired the Distributors.12

2. Governmental Bodies

106.
The main State organ involved in the events leading to this dispute is the Guatemalan Superintendence of Tax Administration (the "Superintendencia de Administración Tributaria", or "SAT").
107.
The SAT was established by Law of the Superintendence of Tax Administration (the "SAT Law") as "a decentralized state entity with competence and jurisdiction in all the national territory for the fulfilment of its objectives, [and] shall have the attributions and functions assigned by the current law. It shall enjoy functional, economic, financial, technical and administrative autonomy, as well as its own legal personality, budget and resources".13
108.
The SAT is empowered to issue binding opinions under Article 102 of the 1998 Tax Code (the "Tax Code"), which reads:

[t]he Tax Administration shall respond to questions formulated by whoever has a personal and direct interest over the concrete tax situation, with respect to the application of this Code and the tax laws... The opinion does not have the character of a resolution, is not susceptible to challenge or any appeal and has a binding effect on the Tax Administration, with respect to the concrete case specifically consulted...14 (emphasis omitted)

B. The 2011 Transaction

109.
Actis acquired Energuate from Unión Fenosa Internacional, S.A. ("Fenosa") in 2011 through a specific form of reverse merger leveraged buyout ("LBO") referred to as a 'reverse triangular merger’ (the "2011 Transaction").15
110.
A reverse triangular merger typically involves three entities: the target company, the acquirer, and a wholly owned subsidiary of the acquirer. The wholly owned subsidiary is often an entity created for the specific purpose of the transaction. This vehicle entity merges with the target company, with the latter becoming the surviving entity. In so doing, the target company becomes a wholly owned subsidiary of the acquirer.16
111.
Actis retained Ernst & Young ("EY") to perform "certain tax structuring services in connection with [its] contemplated acquisition of [DEORSA], [DEOCSA], Generación Limpia Guatemala, S.A., [Guatemel] and [Recsa] ("Target")".17
112.
The strategy recommended by EY included incorporating five companies in the Netherlands that would be indirectly controlled by Actis (together, the "Dutch SPVs").18 Three of those companies would acquire Generación Limpia Guatemala, S.A., Guatemel and Recsa, respectively.19 The remaining two Dutch SPVs, DEOCSA, B.V. and DEORSA, B.V, would acquire the Distributors.20
113.
On 5 April 2011, DEOCSA, B.V. and DEORSA, B.V. incorporated two companies in Guatemala: Ascoed, S.A. ("ASCOED") and Asroed, S.A. ("ASROED", and, together with ASCOED, the "Guatemalan SPVs").21 ASCOED and ASROED would obtain the financing necessary to acquire the Distributors.22 According to EY’s advice, the "ultimate purpose of BidCos 1 & 2 [ASROED & ASCOED] is to merge into DEORSA and DEOCSA".23
114.
On 19 May 2011, the envisaged structure was set up and almost simultaneously the acts described as follows took place.
115.
On 19 May 2011, two Share Purchase Agreements ("SPAs") were signed in New York. Pursuant to the first SPA, Fenosa sold its shares in the Target to the Dutch SPVs.24 Following the conclusion of the first SPA, DEOCSA, B.V. and DEORSA, B.V. sold their shares in the Distributors to the Guatemalan SPVs under the second SPA.25
116.
On the same date, the Guatemalan SPVs signed a series of syndicated loans managed by Banco Agromercantil (the "Syndicated Loans"),26 receiving a joint sum of US$ 220 million.27 On the same date, those assets were transferred to Fenosa.28
117.
On 3 October 2011, ASCOED and ASROED were absorbed respectively by DEOCSA and DEORSA.29 The Distributors were the surviving companies of the merger.30 After the merger, the Distributors became liable for the financing obtained by ASCOED and ASROED, including the bank debt.31

C. Tax Implications of the 2011 Transaction

1. Tax Regulations in Guatemala

118.
According to the Claimant, the 2011 Transaction generated two tax deductions: (i)the amortization of the goodwill obtained by the Distributora as a result of the Transaction; and (ii) a deduction for interest expenses on the loans used to acquire the Distributors (the "Tax Deductions").32
119.
The Respondent considers that the Tax Deductions were not allowable under Guatemalan law: the 2011 Transaction did not imply any contribution of money, assets, or experience to the Distributors and was structured with the sole purpose of "fabricating a tax credit in Guatemala".33

(a) Reverse Triangular Merger

The Claimant's Position

120.
According to the Claimant, LBOs have been widely used by private equity firms to invest in the infrastructure sector, and the reverse triangular merger has been referred to as the "most commonly used acquisition technique".34
121.
In conducting the 2011 Transaction, the Claimant notes, Actis was advised by "leading tax and legal professionals", including Clifford Chance, EY and Guatemala’s Consortium Legal (or RACSA).35 The Claimant also notes that the banks that were approached to provide the necessary financing "expressed comfort with the transaction".36
122.
The Claimant rejects the Respondent’s contention that the 2011 Transaction was designed to "fabricate" the Tax Deductions, and refers in this regard to (i) the advice provided by Consortium Legal, which notes that a reverse merger was required to maintain the operating license of the Target;37 (ii) the testimony of Mr. Albín (former CFO of the Distributors), according to whom the 2011 Transaction sought to maintain the conditions imposed to obtain the necessary bank loan, which required the reverse merger so as to transfer the debt to the Distributors;38 and (iii) the opinion of its expert, the Brattle Group, positing that the survival of the Distributors was necessary due to the significant number of contracts, licenses, permits or real estate deeds that they required to operate.39
123.
Similarly, the Claimant rejects the notion that EY was retained to advice on how to "fabricate" the Tax Deductions, and notes that EY examined the potential tax implications of the 2011 Transaction in determining that the proposed transaction was legally sound.40

The Respondent's Position

124.
According to the Respondent, the 2011 Transaction was unlawful under Guatemalan law. This alleged unlawfulness does not lie solely in the fact that it was structured through an LBO;41 rather, its illegality lies in the manner in which Actis structured the Transaction to fabricate "unjustified and exorbitant" tax deductions in favour of the Guatemalan SPVs, and to the detriment of the Guatemalan tax authorities.42
125.
In particular, the Respondent avers that the sole purpose of the May 2011 SPAs was to allow "the Guatemalan SPVs to record in their accounting books a line item for an intangible asset called 'Goodwill’", which was calculated as the difference between the price of the shares acquired in the 2011 Transaction and the shares’ nominal value.43 Such recording of goodwill would later allow the creation of a purported tax deduction corresponding to its amortization.44 In turn, the reverse triangular merger would serve to transfer the ownership of the Tax Deductions to the Distributors.45

(b) Allowable Deductions in Guatemala

The Claimant's Position

126.
According to the Claimant, Guatemalan law permitted deductions for interest expenses and the amortization of goodwill in calculating taxable income.46 Those deductions were applicable to the Distributors’ "incurred interest expense" and the goodwill asset obtained as a result of the 2011 Transaction.47
127.
According to the Claimant, the purpose of the Syndicated Loans "was to invest in stock and generate income for the shareholders, and considering that interest is paid from the cash flow generated by the company in the ordinary course of business, it can be technically and legally concluded that such interest is associated with taxable income in Guatemala."48

The Respondent's Position

128.
According to the Respondent, Actis led the Distributors to record exorbitant Tax Deductions in their books to defraud taxes,49 while the 2011 Transaction did not generate any of the expenses or costs which may give rise to tax deductions.50
129.
The Respondent notes that taxpayers registered in the Tax System for Gainful Activities, as is the case of the Distributors, are required to pay income tax calculated on the basis of their taxable income.51 Guatemalan tax law allows taxpayers to deduct from their gross income duly documented costs and expenses which are "useful, necessary, relevant or indispensable to produce or preserve the source of taxable income" in Guatemala.52 The Respondent refers to domestic and comparative case-law as requiring a causal link between a deductible expense and the production of income.53
130.
Furthermore, the Respondent notes that taxpayers must maintain full accounting records in accordance with the provisions of the Tax Update Law in order to deduct costs and expenses.54 Accordingly, taxpayers must provide the documents and means of support required by the Tax Update Law with regard to deductions, which must meet the accounting criteria set out in the Commercial Code.55
131.
The Respondent acknowledges that Guatemalan law allows deductions of interest payments. However, to be deductible, the loans in question must have been used in transactions that generate taxable income for the taxpayer.56
132.
The Respondent also acknowledges that Guatemalan law allows the deduction of depreciation and amortization of a taxpayer’s intangible assets, which include goodwill actually incurred.57 It notes, however, that such possibility is also conditioned to their use for the generation of taxable income.58
133.
As to the specifics of the 2011 Transaction, the Respondent notes, first, that goodwill corresponds to 96% of the 2011 Transaction's value.59 The Respondent’s expert, Compass Lexecon, considers that such percentage is "clearly exaggerated when compared to the reasonable ratios that can be justified in a similar transaction".60 Such percentage is even more "scandalous", in the Respondent’s view, considering the absence of documentation justifying goodwill, which is a fundamental requirement under Guatemalan tax law for its deductibility.61 In the Respondent’s view, such absence suggests that the difference in value was artificial and its only purpose was to generate a large asset that could be used to record amortization costs reducing income tax.62
134.
The Respondent also refers to the Distributors’ 2015 correction of their goodwill calculations, which was based on a dividend discount model63 and resulted in goodwill amounting to 60% of the price paid in the 2011 Transaction. According to the Respondent, such percentage is still above the ratio expected in similar transactions.64
135.
In addition to the goodwill asset being undocumented, the Respondent submits that the Claimant has also failed to establish how "a supposed asset created using a mere arithmetic operation based on arbitrarily established premises[] was able to generate taxable income in Guatemala", which, as noted above, is a legal requirement for its deductibility.65
136.
In relation to the interest payment deductions, the Respondent affirms that the Syndicated Loans were only used as consideration for Fenosa’s shares in the Target.66 In the Respondent’s submission, the Distributors attempted to disguise this fact by indicating to the SAT that "the credit was used to finance a going concern";67 however, the Guatemalan SPVs never generated any taxable income in Guatemala.68
137.
Finally, the Respondent notes that the Claimant has initiated an arbitration against its insurer, AIG, for breach of representations and warranties by Actis. In particular, the Claimant invoked the representations that the Distributors were in compliance with all laws and that all due taxes had been paid.69

2. Tax Audit of the Distributors by SAT

138.
The SAT is responsible for inspecting tax collection in accordance with the internal regulations governing the Tax Audit Planning and Execution Procedure, the Tax Code and the Organic Law of the SAT.70
139.
In April 2012, the Distributors filed with the SAT their financial statements for 2011, which detailed the accounting treatment of the reverse merger.71 According to the Claimant, at the time, the Distributors were completely transparent with the SAT in relation to the 2011 Transaction and the Tax Deductions.72
140.
On 19 April and 25 May 2012, the Head of Management and Collection Division of SAT (División de Recaudación) suggested to the Inspection Supervisor (Intendente de Fiscalización) to include the Distributors within the audit schedule to determine whether they had properly performed their tax obligations (the "Tax Audit").73 Such request was based on the significant decrease in collection for the period January to March 2012 in comparison with the previous tax year.74
141.
By several official notices issued in October and November 2012, the Head of Taxation Division of Special Taxpayers (Jefe de División de Fiscalización, Gerencia de Contribuyentes Especiales Grandes) appointed two teams of auditors to verify whether the Distributors had fulfilled their tax obligations during the period between 1 January and 31 December 2011 (the "Auditing Teams").75
142.
The SAT served several audit information requests to the Distributors in October, November, and December 2012, including requests for information concerning the 2011 Transaction.76
143.
On 19 December 2012, Mr. Albín (as legal representative of the Distributors) and the auditors designated by the SAT held a meeting.77 Mr. Albín recounts that the meeting was held at the Distributors’ request with a view to providing the SAT auditors with all relevant details concerning the 2011 Transaction.78 He asserts that around 20 SAT employees attended the meeting, and that Energuate’s management team was joined by EY, which assisted with a presentation regarding the 2011 Transaction.79
144.
On 21 December 2012, a meeting took place between a representative of DEORSA and the auditors designated by SAT.80
145.
On 8 April 2013, a meeting took place between a representative of DEOCSA and the auditors designated by SAT.81
146.
In March 2013, the Distributors filed their financial statements for the year 2012 with the SAT. Those statements also reflected deductions for interest and goodwill amortization as a result of the 2011 Transaction.82
147.
On 19 September 2013, the Taxation Bureau considered it relevant to extend the Tax Audit to tax year 2012.83 The SAT appointed additional auditors and expanded the scope of the Tax Audit to the period between 1 January 2011 and 31 December 2012.84
148.
In September 2013, the SAT served several information requests to the Distributors in relation to tax years 2011 and 2012.85
149.
On 11 December 2013, a meeting took place between a representative of DEORSA and the auditors appointed by the SAT.86 On 10 January 2014, a meeting took place between a representative of DEOCSA and the auditors designated by SAT.87
150.
On 12 December 2013 and on 17 February 2014, the Auditing Teams issued reports with their findings (the "Audit Reports").88 The teams found several inconsistencies justifying adjustments in the Distributors’ income tax returns and in their value added tax and solidarity tax returns.89 Tn particular, the Auditing Teams concluded that the Tax Deductions for amortization of goodwill and interest payments were inadmissible.90 In relation to the 2011 Transaction, the Auditor Team considered that "[t]he main objective of the taxpayer was to create the intangible asset [i.e., Goodwill] and the loan, to decrease its Taxable Income".91
151.
On 18 February 2014, the SAT reopened the Tax Audit in relation to DEOCSA.92
152.
On 27 March 2014, the Taxation Division of SAT (División de Fiscalización, Gerencia de Contribuyentes Especiales Grandes) notified the Distributors that, as a result of the Tax Audit, the SAT had formulated certain adjustments that could be challenged within thirty working days from such notification ("SAT Hearings Notifications").93 Said adjustments primarily concerned the Distributors’ Tax Deductions for interest and goodwill amortizations.94
153.
In relation to the goodwill amortization, the Taxation Division noted that, in response to the Audit Teams’ requests, the Distributors’ accountant had acknowledged the absence of any feasibility study regarding the acquisition of the ongoing business.95 In such circumstances, the Audit Teams concluded

...that value which the taxpayer indicates it has overpaid for the purchase of the acquired entity’s capital cannot be considered as goodwill, [given that] the same taxpayer acknowledges that it does not have a feasibility study regarding the purchase of business, and that it can neither include nor document the purchase price of said business.96

154.
The SAT Hearings Notifications further noted that the purported goodwill did not meet the requirement of Article 38 of the Income Tax Law to the extent that it was not necessary to produce or preserve the source of taxable income.97 Furthermore, such goodwill had not been "actually incurred" by the Distributors as required by Article 23 of the same law, but by the Dutch SPVs.98
155.
With regard to the interest payments, the Taxation Division informed the Distributors that they could not be deduced from income tax given that the loan had not been intended to produce taxable income in Guatemala, as required by Article 38(m) of the income Tax Law.99
156.
On 14 May 2014, the Distributors filed their objections to the adjustments set out in the SAT Hearings Notifications with the SAT.100
157.
On 18 June and 1 August 2014, the Resolutions Division requested the Department of Legal Affairs to assess the 2011 Transaction and whether there were elements to typify such transaction as tax fraud.101
158.
The Claimant underscores that, in the Resolutions Division’s report of 18 June 2014, the Division expressed the view that there was a "weak administrative case and would likely lose in Court" when conveying the importance of sending the file to the Department of Legal Affairs.102
159.
On the other hand, the Respondent submits that said reports fail to indicate why the administrative proceedings were purportedly "unsustainable" and, in any event, claims that "the merits of the administrative proceedings bear no relationship whatsoever to the merits of the criminal tax proceedings".103
160.
On 14 July and 8 August 2014, the Department of Legal Affairs twice declined to recommend the initiation of a criminal prosecution, noting that at such moment in time "it [wa]s not possible to initiate a criminal prosecution, because the report on the merits does not establish a causal link as required under article 10 of the Penal Code".104
161.
On 12 November 2014, the Resolutions Division analysed the Distributors’ objections and sent a report with its recommendations to the Head of the Taxation Division.105 Such report recommended the annulment of the SAT Hearings Notifications, the notification of a new hearing, and the transmission of the file to the Department of Legal Affairs so that the latter may assess whether on the basis of the new elements a criminal prosecution was possible.106
162.
On 13 November 2014, the SAT issued resolutions nullifying the SAT Hearings Notifications (the "Annulment Resolutions").107 The Annulment Resolutions considered, inter alia, that "in the present case, it is advised that there exists substantial defect in the adjustments, made known to the taxpayer in the aforementioned hearing, which resulted in error in determining the tax obligation of the referenced taxes, which affected the due process and defense rights of the taxpayer"108
163.
The Annulment Resolutions resolved as follows:

1. TO DECLARE THE NULLITY of the Hearing No. [A-2014-21 -01 -000030 / A-2014-21-01-000056, respectively] of 26 March 2014 and its respective notification, carried out on 27 March 2014 to the contributor [DEOCSA /DEORSA, respectively], leaving without effect all procedural steps taken after the notification of the above-referenced hearing, without affecting the efficacy of the evidence rendered in due time by the contributor.

2. To grant a new Hearing according to the legal formalities to the contributor [DEOCSA / DEORSA, respectively].109

164.
The Parties disagree as to the effects of the Annulment Resolutions. The Claimant avers that the resolutions "nullified the entirety of the adjustments, without making any distinction".110 According to the Respondent, the Annulment Resolutions only annulled the SAT Hearings Notifications through which the SAT notified the adjustments to the Distributors but did not affect the actions which took place prior to the SAT Hearings Notifications.111 The Respondent further contends that "the breach of the essential procedural requirements which according to the SAT could entail potential violations of the Distributors’ due process and right to defense had no connection whatsoever with...the Tax Deductions...but rather with the Other Adjustments."112
165.
Also on 13 November 2014, the SAT issued new adjustments that could be challenged within thirty working days from such notification.113 The Claimant notes that the new adjustments did not affirm any deficiency in relation with the Tax Deductions.114 The Respondent, however, recalls that the Tax Deductions had raised the suspicion that a tax fraud crime had been committed, and contends that, as a result, the SAT intentionally drew a distinction115 between adjustments other than income tax adjustments and the Tax Deductions, with regard to which "it was decided to continue evaluating whether it was admissible to file a criminal complaint".116
166.
On 14 November 2014, the Taxation Division issued a report in relation to DEOCSA and recommended to transfer the file to the Department of Legal Affairs for the latter to assess whether there were indications of alleged tax fraud.117 The file was transferred on the same date.118
167.
On 8 December 2014, the Department of Legal Affairs returned the file to the SAT auditors for the administrative proceedings to continue, considering that at such moment in time "it [wa]s not possible to initiate a criminal prosecution..."119

3. Binding Tax Opinions

168.
On 5 February 2015, the Distributors submitted requests to the Consulting Department of the SAT seeking binding tax opinions regarding the deductibility of interest payments and goodwill amortization arising from the 2011 Transaction (the "Tax Opinion Requests").120
169.
The Tax Opinion Requests put the following consults to the SAT:

a. Is it valid, is it technically and legally correct and, thus, applicable, to apply the method of "future discounted dividend" to determine the value of the shares acquired by the Buyer which, as was set out, on the basis of the available information and reasonably and objectively applied, results in a value of...? And, as a consequence, would this be the value to be deducted from the Price in order to determine the amount of goodwill amortization under articles 26 of Decree 26-92 of the Congress of the Republic and its amendments and 33 of Decree 10-2012 of the Congress of the Republic, since its entering into force?

b. Is it deductible the amount of interests paid in relation to the Credit, irrespective of the juridical acts described in section "B" above and as a result of which the Credit has become a passive of the Distributor, within the limits of Articles 38 letter "m" of Decree 26-92 of the Congress of the Republic and its amendments and article 21 section 16 and article 24, of Decree 10-2012 of the Congress of the Republic, since its entering into force?121

170.
On 9 February 2015, the SAT issued the binding tax opinions (the "Binding Tax Opinions").122 The Binding Tax Opinions concluded, in relevant part, as follows:

That, according to the provisions that regulate the Guatemalan tax system, taxpayers shall keep accounting records in accordance with Generally Accepted Accounting Principles so that the discounted future dividend method used by the taxpaying entity, [Deocsa], is not expressly regulated by the tax provisions. However, its use is technically correct within the applicable legal framework as analyzed in the section on Legal Analysis. Consequently, the value of the acquired shares indicated in the query, calculated using the Future Dividend Discount Model, is the value to be deducted from the Price to determine the amount of amortizable goodwill according to articles 26 of Decree 2692 of the Congress of the Republic and amendments (for fiscal years 2011 and 2012), and 33 of Decree 10-2012 of the Congress of the Republic. B) Regarding the interest resulting from credit acquired by the aforementioned entity, pursuant to articles 38, letter m) of Decree number 26-92; and 21, numbers 16 and 24 of Decree number 10-2012, both of the Congress of the Republic, and the limitations established therein, its deduction is appropriate provided that it is supported and documented according to the section on legal analysis.

Pursuant to Article 102 of the Tax Code, the answer to the query made by the interested party cannot be resolved, disputed, or appealed in any way and only has a binding effect for the Tax Administration regarding this specifically consulted case.123

The Claimant's Position

171.
According to the Claimant, the Tax Opinion Requests were submitted by the Distributors because they wanted to obtain "certainty and finality regarding the Deductions".124
172.
In the Claimant’s view, the Tax Opinion Requests were another occasion on which the Distributors provided the SAT with information regarding the 2011 Transaction, of which the SAT was already "fully aware", as was the case with regard to the Tax Deductions on the basis of "extensive information that the Distributors had provided the SAT in response to its information requests, but also because the Distributors and the SAT had discussed the possibility of the Distributors seeking tax opinions from the SAT".125
173.
The Claimant disagrees with the Respondent’s contention that the Distributors concealed information.126 According to the Claimant, had any information been missing, the SAT would have requested it or else it would not have rendered the opinions.127 In particular, the Claimant is of the view that, at that time, such matters were no longer subject to verification or audits and "the audits were annulled as of November 2014, leaving nothing to disclose".128 In any event, the Claimant denies that the Distributors would have had a duty to inform the Consulting Department about such proceedings.129
174.
The Claimant further recalls that the SAT had 10 days to revoke the Binding Tax Opinions, and that, absent such revocation, they became binding for the SAT.130 Further, the Binding Tax Opinions could have been, but were not, revoked through a contentious-administrative procedure initiated within three years of their issuance based on a declaration by the President of Guatemala whereby the act was declared injurious to the national interests.131 Therefore, the Binding Tax Opinions remain valid and unchallenged to date.132
175.
As a result, in the Claimant’s submission, the Binding Tax Opinions confirmed that "the Distributors were legally entitled to interest and goodwill amortization deductions arising from Actis’s 2011 Transaction".133 In this respect, the Claimant’s expert, Mr. Martínez Guzmán, suggests that the Binding Tax Opinions did not condition the deductibility of the Tax Deductions "to the compliance of the legal requisites for its deduction. In fact, an opinion in such sense would be contrary to the purpose of a binding opinion since it would only redirect the taxpayer to what is already on the law".134 Similarly, the Claimant’s expert, Mr. Donado argues that, under Guatemalan law, the Binding Tax Opinions "can indeed relate to events which already occurred".135
176.
Finally, the Claimant notes that the SAT has not brought proceedings against the Distributors alleging tax fraud in relation to the Binding Tax Opinions.136

The Respondent's Position

177.
In the Respondent’s view, the submission of the Tax Opinion Requests was an attempt by the Distributors to eliminate the signs of tax fraud detected by the Taxation Division during the Tax Audit.137
178.
According to the Respondent, the Distributors concealed information in their Tax Opinion Requests and misrepresented the 2011 Transaction.138 In particular, the Distributors allegedly concealed the fact that the Taxation Division had already determined that the Tax Deductions were not permissible.139
179.
The Respondent refers in this regard to Article 102 of the Tax Code, pursuant to which the SAT has no obligation to verify the veracity of the taxpayer’s statements or to consult with other SAT units regarding the existence of any proceedings against the taxpayer in relation to the particular case.140 The Respondent further notes that the Auditing Teams were not aware of the Tax Opinion Requests and had to request a copy of the Binding Tax Opinions from the Legal Affairs Department, which were received on 11 August 2015.141
180.
In any event, the Binding Tax Opinions stated that the deduction of any cost or expense was contingent on it being duly documented and its ability to generate taxable income in Guatemala.142 Thus, the Respondent disputes the Claimant’s allegation that the Binding Tax Opinions authorised or confirmed any entitlement to the Tax Deductions.143
181.
Moreover, the Respondent rejects the Claimant’s assertion that the Binding Tax Opinions have the status of a resolution or are "analogous to a court’s judgement".144 In this respect, Article 102 of the Tax Code establishes that the SAT’s binding opinions "do not have the quality of a ruling".145 Therefore, the Respondent argues, Article 154 of the Tax Code, which regulates the reversal of rulings by the administration, is not applicable to binding opinions.146 Similarly, binding opinions are not susceptible to annulment by judicial review.147

4. Rectification Payments

182.
On 19 February 2015, shortly after the issuance of the Binding Tax Opinions, the Distributors submitted a series of rectifications payments in relation to their tax declarations for the years 2011 to 2013 (the "Rectification Payments").148
183.
On 27 February 2015, a representative from the Distributors met with SAT officials of the Taxation and Collection Departments to discuss the Rectification Payments.149 The SAT’s Minutes of those meetings reflect certain statements made by the Distributors’ representative to the effect that the Rectification Payments were made taking into account the Binding Tax Opinions (the "SAT Rectification Payments Minutes").150
184.
Certain SAT internal reports to the SAT’s Chief of the Audit Division for Special Large Taxpayers dated 21 September 2015 (the "SAT Internal Reports") recommended an audit of the Distributors’ Rectification Payments in relation to the fiscal years 2011 to 2013.151
185.
On 9 November 2015, the Distributors’ files were sent to the General Archive of the SAT’s General Secretary.152

The Claimant's Position

186.
The Claimant notes that the SAT Rectification Payments Minutes do not reflect any disagreement by the SAT officials with the representations made by the Distributors’ representative during the 27 February 2015 meeting.153
187.
The Claimant underscores that SAT officials did not continue the Tax Audit, nor did they open any new administrative procedure against the Distributors.154 Similarly, no requests for clarification were issued to the Distributors.155
188.
The Claimant rejects the Respondent’s contention that the meetings recorded in the SAT Rectification Payments Minutes were irregular; according to Mr. Donado, since its creation the SAT had always had "an open door policy with taxpayers; it was very common to have meetings with 3 or 4 heads of relevant departments."156 Mr. Donado points out that it was not until mid- 2016, after Mr. Solórzano Foppa took office, that meetings of that sort were "virtually forbidden".157

The Respondent's Position

189.
According to the Respondent, the Rectification Payments were calculated arbitrarily by the Distributors and did not follow any established procedure.158 Contrary to the Claimant’s contention that such meetings were common, Mr. Menéndez and Mr. Muñoz assert that in more than two decades in professional practice they have never come across evidence of a similar meeting.159
190.
The Respondent notes that none of the SAT officials who attended such meetings were members of the Auditing Teams, and further states that two of those officials were involved in corruption scandals.160
191.
In the Respondent’s submission, this event was regarded as a sign to determine the commission of a tax crime in the Criminal Complaint against the Distributors (see III.F.1 below).161

D. Acquisition of the Distributors by IC Power

192.
In 2015, IC Power was considering diversifying its business beyond power generation and into distribution "as a new vein for growth within the electric utility activity".162
193.
Mr. García, who was Chief Executive Officer of IC Power from 2011 until 2017, testifies that he learned about Actis’ intention to sell the Distributors in the first half of 2015.163 Being aware that Energuate held a concession contract until 2048, Mr. García asked Citigroup Global Markets, Inc. ("Citi"), which was acting as Actis’ financial advisor, to include IC Power in the bidding process.164 As part of the process, IC Power initiated due diligence and valuation studies.165

1. Due Diligence

194.
In order to conduct its due diligence, IC Power set up a team composed of 12 internal members, assisted by a team of 4 external executives, including the former CEO of Chilectra and Ampla, and Mr. Horacio Albín, former CFO of Energuate ("DD Team").166
195.
The DD Team was advised in relation to tax and legal due diligence by a Guatemalan law firm (García & Bodán, later known as Asensio, Barrios, Flores, Andradre & Asociados, and currently known as Sfera Legal),167 and with regard to financial and accounting due diligence by PricewaterhouseCoopers ("PwC").168
196.
In the first version of their due diligence report dated 26 June 2015 (the "First version of DD Report"), García & Bodán advised as follows:

One of the tax matters that has our important attention are the two "Reverse Mergers" operated [...] Under Guatemala law, all reverse mergers generate a lot of attention within the ranks of SAT. We have information that SAT has acted very drastically in other reverse merger cases, even arguing that the structure was implemented as a mechanism to defraud the Guatemala tax system. In the present case, we were not able to determine if the large tax adjustments referred...above originates as consequence of the reverse merger. The Consultation Procedure referred...above is definitely related to the reverse merger and sets the record straight regarding two aspects of that merger; the deduction of interest for the debt incurred by the parent, and the amortization and calculation of the "goodwill" value of the negotiation. However, many other elements of the merger may also come up in the form of tax adjustments and these will always be against DEORSA and DEOCSA as the surviving entities. We did not identify any specific claims, and can only infer that these two companies are not entirely isolated from future claims derived from the reverse merger.

The Client should request specific information regarding the tax claim and material adverse effects on the situations of those claims... We believe that the tax information available is very poor. An in depth assessment of a tax case can only be done contrasting SAT’s arguments with the corresponding defense, including an analysis of the evidence presented at both administrative and court levels.169

197.
In their final version of due diligence report dated 22 October 2015 ("Final version of DD Report"), García & Bodán advised as follows:

The aspect that relates to the "reverse merger" should also be commented...The effect of this merger also produces a goodwill that must be amortized. Subsequent to the merger a consultation procedure was filed as explained above. SAT responded favourably to both questions leaving no doubt as to the deductibility of the interests, and the amortization of the goodwill. After SAT’s response was delivered, we found no further tax adjustments subsequent to SAT’s nullification of the original 2014 tax notices. We’re almost sure that SAT’s responses clarified the issue to the point that no further adjustments were merited.

Regarding some Tax inquiries sent, the Company confirmed that as a result of the Consulta made to the SAT, the Income Tax Declarations for the fiscal years 2011, 2012, 2013 and 2014 were rectified and the corresponding taxes were paid; however, no documents were presented for our review to verify this affirmation.170

198.
The Parties diverge as to the extent and thoroughness of the due diligence process.

The Claimant’s Position

199.
The Claimant submits that its due diligence was extensive and thorough, including in relation to tax issues:171 it lasted from May 2015 until January 2016,172 and "at all times" the DD Team engaged García & Bodán and put forward "probing" questions to obtain a full understanding of the Binding Tax Opinions.173 In particular, the Claimant denies the Respondent’s allegation that the DD Team sought to have any risks underestimated.174
200.
The DD Team conducted its own review with regard to the Binding Tax Opinions and related documents.175 According to the Claimant, the in-house advisors who developed the tax due diligence were Mr. Daniel Urbina (IC Power’s General Counsel), Mr. Marco Cárdenas (former tax audit manager at EY) and Ms. Angela Grossheim (former lawyer with the Ministry of Economy and Finance of Peru).176
201.
Mr. Albín, former CFO of the Distributors, was one of the Claimant’s external advisors during the due diligence.177 According to Mr. Albín, the DD Team took into consideration tax issues when valuing the Distributors: they concluded that the Binding Tax Opinions allowed the Distributors to deduct interest payments and to amortize goodwill.178
202.
According to the Claimant, the DD Team identified no areas of significant concern.179 Specifically, the DD Team "considered the deductions a non-issue because of the Binding Tax Opinions".180 In Mr. Albín’s words:

Had the due diligence and valuation team had any doubts that the deductions were allowable, we would have brought it to the attention of the IC Power Board. We did not because we had no concerns regarding the deductibility of the interest and goodwill amortization on the loans, given the existence of the Binding Tax Opinions.181

203.
The Claimant further avers that the Binding Tax Opinions and the SAT Audit documents were reviewed by García & Bodán, which prepared a specific memorandum on the matter.182 The Claimant acknowledges that García & Bodán’s initial advice was unclear in this regard, thus prompting a request for clarification.183 In the Final version of DD Report (which was submitted to the Board of IC Power) García & Bodán advised that the Binding Tax Opinions confirmed the deductibility of the Tax Deductions.184
204.
According to the Claimant, García & Bodán’s advice was confirmed by PwC, which was engaged to assist in the analysis (including tax implications) of potential structures for the Claimant’s acquisition of the Distributors.185
205.
The Claimant also submits that Actis confirmed that the Binding Tax Opinions settled the matter and that "[t]he amount on the books today is vetted by SAT."186
206.
As to AIG, which provided insurance coverage for representations and warranties in the SPAs, the Claimant notes that it conducted its own due diligence as part of the process to enter into the insurance policy.187 According to Mr. Urbina, AIG was advised by Simpson Thatcher & Bartlett and by the Guatemalan law firm QIL+4, and had access to the same data room as the Claimant and to its due diligence reports.188 AIG did not convey any doubts concerning the validity of the Tax Deductions.189
207.
Relatedly, the Claimant notes that Foreign Corruption Practices Act issues ("FCPA") were also part of the due diligence.190 García & Bodán also concluded that neither the Distributors nor their employees were mentioned in connection with several corruption scandals, nor were any actions filed in court against Energuate.191 In particular, García & Bodán assessed the very short timeframe within which the Binding Tax Opinions were obtained, and suggested that the Distributors and the SAT might have reached an agreement on the answer beforehand.192 However, they noted that such understanding did not suggest that wrongful payments had been made,193 noting in particular that Energuate made voluntary revisions of fiscal years 2011-2013 on the basis of such opinions that may have generated additional tax payments, which would suggest absence of wrongdoing.194 In any event, the Claimant notes, the Respondent has not established any wrongdoing.195

The Respondent's Position

208.
According to the Respondent, at the time of acquiring the Distributors, the Claimant knew, or at least liad reason to know, that there were irregularities in the Tax Deductions.196 This was evidenced, in the Respondent’s view, by (i) the Audit Report issued by the Taxation Division of SAT, concluding that the Tax Deductions were not allowable;197 (ii) the Binding Tax Opinions, which stated that the deduction of any cost or expense was contingent upon it being duly documented and being indispensable for generating taxable income in Guatemala;198 and (iii) the SAT Rectification Payments Minutes and the existence of various corruption scandals within the SAT, which were indications that "raised doubts about the way the Distributors’ file had been 'resolved’".199
209.
Thus, the Respondent is of the view that the Claimant decided to acquire an asset with "an obvious contingency (i.e., signs of the commission of a tax crime) arising from the undue conduct of its former owner".200
210.
The Respondent further contends that the Claimant did not conduct sufficient due diligence,201 or was at least negligent in conducting it.202 In this respect, the Respondent considers that the Financial Statement Review and Energuate Business Plan Report produced by the DD Team cannot he regarded as "a proper due diligence", since (i)the members of such team were executives with experience on electric power distribution and not experts on tax matters;203 (ii) the analysis of tax aspects was very brief and did not cover all aspects which should have been considered as part of a tax due diligence process;204 and (iii) the factual description "is plagued by inconsistencies and red flags".205
211.
Similarly, the Respondent considers that the memorandum prepared by the DD Team for the Board of Directors of IC Power "deliberately omitted the tax risks".206 In this regard, Mr. García-Burgos and Mr. Albín acknowledge that tax risks was not included for consideration by the Board of Directors because the team "had no concerns regarding the deductibility of the interest and goodwill amortization on the loans, given the existence of the Binding Tax Opinions."207
212.
With respect to the report prepared by PwC, the Respondent notes that it was prepared "in two days, based on the review of a scant number of documents and without access to company management."208 In any event, the Respondent notes, PwC recommended performing "tax due diligence to identify and quantify any known or unknown potential tax exposures you may be assuming should you proceed with this transaction."209
213.
Finally, the Respondent argues that the DD Team ignored the warnings from García & Bodán concerning "red flags" in relation to the extremely short timeframe within which the Binding Tax Opinions were issued and their recommendation to conduct an "enhanced scrutiny".210
214.
Furthermore, according to the Respondent, every time that García & Bodán attempted to discuss the risks inherent to the Tax Deductions, "the DD Team sought to have said risks underestimated, in the words of one of the DD Team members, so as not 'to generate more concerns than we should.’"211 In the Respondent’s view, the DD Team "attempted to conceal the evidence of the warning in order to rapidly complete the operation".212
215.
The Respondent notes that, in response to the First version of DD Report, Ms. Roxana Guzmán sent an e-mail to other members of the DD team in which she proposed to examine why the reverse triangular merger would be contingent.213 Later, she sent another message enclosing a version with comments of the First version of DD Report where she suggested, in relation to the Tax Deductions, to "ask for the information to draw our own tax conclusions: include rep in the SPA".214 Nevertheless, the Respondent submits, IC Power did not request such information, nor was any representation included in the share purchase agreement which would allow the Claimant to claim against Actis if the Tax Deductions were not allowable.215
216.
Similarly, the Respondent notes that, in a draft memorandum concerning an FCPA analysis, García & Bodán stressed that the celerity with which the Binding Tax Opinions were issued "may raise red flags".216 Instead of inquiring into the matter, Ms. Grossheim—who was coordinating the preparation of the FCPA memorandum—suggested that certain statements be included in the memorandum to the effect that no proceedings had been brought against officials or employees in that connection.217 The following day, García & Bodán provided a revised version, indicating in the cover e-mail: "I think I have interpreted your request, but if you still want to tone down the matter, I’ll do it."218 García & Bodán, however, continued to stress that complementary information in relation to the tax adjustments was necessary.219
217.
On the same day, Mr. Urbina put some questions to García & Bodán also concerning FCPA issues.220 In response, they did not develop a legal analysis, but instead provided some comments "with a certain logic of an inspector" and suggested to "address the point with the lawyers with whom they ha[d] a good relationship" in order to dispel any doubts.221 Mr. Urbina expressed his concern that addressing those points would "generate more concerns than [they] should."222
218.
The Respondent notes that, in any event, the final version of the FCPA report continued to recommend "to submit the tax 'consultation procedures’ filed in February of this year to an enhanced scrutiny".223 Hence, the Respondent concludes that it is not true that the Tax Deductions were a "non-issue".224
219.
Finally, the Respondent asserts that the Claimant has not provided evidence to establish that AIG and its advisors reached that same conclusion.225

2. Closing

220.
According to the testimony of Mr. Yoav Doppelt, who was a member of IC Power’s Board of Directors at the time, in November 2015, the Board invited the DD Team to give a presentation about Energuate.226 No tax issues of concern were raised.227 Afterwards, the Board of Directors approved the transaction.228
221.
On 28 January 2016, the acquisition of Energuate by IC Power closed: IC Power paid US$ 265 million to Actis in order to acquire Energuate ("Acquisition of Energuate").229 Such consideration consisted in a combination of "cash on hand" and a US$ 120 million loan facility.230
222.
More specifically, the Acquisition of Energuate was effected through IC Power’s acquisition of a 100% shareholding in a holding company which indirectly owned 90.62% of the shares in DEOCSA and 92.68% of the shares in DEORSA, as well as a 100% shareholding of two smaller related businesses (Guatemel and Recsa).231

E. Change of Leadership in SAT

1. Corruption Cases within SAT

223.
In 2015, a wave of corruption scandals in Guatemala232 led to the resignation of President Otto Pérez Molina in September 2015.233 On 14 January 2016, President Jimmy Morales took office.234
224.
On 12 February 2016, the International Commission Against Impunity in Guatemala ("CICIG") unveiled a corruption case known as "Aceros de Guatemala".235 According to the Respondent, this case is "especially relevant" because three of the officials implicated in such case made crucial decisions with regard to the Distributors’ case.236 The Claimant insists that the Respondent has not established the commission of any wrongdoing by those or other officials in relation with the Distributors’ files.237.

2. Change of Leadership in SAT

225.
In March 2016, President Morales appointed Mr. Juan Francisco Solórzano Foppa as the new head of the SAT.238 At his swearing-in, President Morales asserted that an "effort to convert the SAT into an efficient and effective institution capable of increasing taxes in a sustained, honest and transparent manner" was necessary.239
226.
Within one month from the designation of the new Superintendent, the SAT opened investigations in relation to 161 companies mentioned in the so-called Panama Papers.240
227.
The Claimant characterizes the SAT’s actions at the time against companies for alleged tax fraud as "aggressive", and notes that they were frequently reported by the Guatemalan press.241 The Respondent disagrees with the Claimant’s criticisms of Mr. Solórzano Foppa, noting that different press outlets praised his work.242

3. Revision of the Distributors’ Tax Declarations

228.
On 27 April 2016, Mr. Solórzano Foppa sent a memorandum to SAT employees inviting "the auditors and other professionals connected to oversight processes to indicate those files that were resolved at the time, to the detriment of the Tax Administration".243
229.
According to the testimony of Mr. David Muñoz, in June 2016, in response to Mr. Solórzano Foppa’s request, Mr. Luis Argelio Villatoro Cifuentes, Head of the Verifications Department and Mr. Muñoz’s supervisor, allocated around 483 files for revision to a group of employees.244 Mr. Muñoz was assigned the revision of files No. 2012-21-01-44-0001276 and 2012-21-01-44-0001277, concerning the Distributors’ Tax Audit.245
230.
According to Mr. Muñoz, in light of the potential tax underpayment that could be established from the SAT Hearings Notifications, he arranged various meetings with members of the Auditing Teams and with his supervisor.246 He testifies that during such meetings they "noted various acts that constituted signs of commission of the crime of tax fraud described in Article 358 A of the Guatemalan Criminal Code".247

The Respondent's Position

231.
The Respondent avers that the Panama Papers scandal led authorities worldwide to conduct investigations.248 In the context of corruption scandals within the SAT, Mr. Solórzano Foppa took measures to coordinate the revision of certain large taxpayers’ files who could have been granted illegal benefits by SAT employees.249
232.
According to the Respondent, the SAT’s approach to report the possible commission of tax fraud was "duly grounded in fact and in law".250 Within such process, the SAT considered that the Distributors’ files contained signs of a possible tax fraud.251
233.
According to Mr. Muñoz, the officials in charge of the review of the Distributors’ files considered several indications of tax fraud, including certain irregularities in relation to the Rectification Payments, such as the fact that they were made unbeknownst to the Auditing Teams, or the absence of technical and accounting information to assess their correctness.252 Similarly, Mr. Muñoz alleges that the SAT Rectification Payments Minutes and the meetings recorded therein "are completely irregular".253
234.
Mr. Muñoz also testifies that certain decisions from the Criminal Affairs Department (Departamento de Auntos Penales de la Intendencia de Asuntos Jurídicos) also raised suspicion, since they indicated that "for the moment, it is impossible to begin criminal prosecution [against the Distributors], since the causal link regulated in Article 10 of the Criminal Code does not follow".254 In this regard, he states that the Criminal Affairs Department did not have jurisdiction to issue such decision: according to Resolution No. 467-2007, the Verifications Department (Departamento de Verificaciones) was the competent unit to assess whether there was a legal basis for filing criminal charges insofar as the Distributors’ files qualified as "high-impact cases".255
235.
Moreover, the Respondent argues that the brief analysis set out by the Criminal Affairs Department in its decisions lacked merit: under Guatemalan law, the SAT was only required to assess whether there were sufficient indications to file a criminal complaint, and did not need to establish the existence of a causal link as a constituent element of a criminal charge.256 Such analysis would correspond to the criminal judge in the context of a criminal proceeding.257
236.
The Respondent also notes that the decisions were approved by the former Legal Affairs Bureau Chief, who was facing a criminal trial for having influenced the modification of various audit reports in a publicly known corruption scandal.258
237.
According to the Respondent, it was as a result of the above factors, and in accordance with the Executive’s obligations under Guatemalan law, that a criminal complaint against the Distributors and other companies which took part in the 2011 Transaction was submitted.259

The Claimant's Position

238.
According to the Claimant, under its new leadership, the SAT adopted a new approach to tax collection which "disregarded applicable law, precedents and due process".260
239.
The Claimant contends that the SAT started to disregard the appropriate administrative proceedings in favour of criminal proceedings, "using the latter as a shortcut to achieve its goals".261 In the Claimant’s submission, such strategy was known in Guatemala as "tax terrorism".262
240.
Mr. Muñoz’s testimony is characterized by the Claimant as a "cursory review" of the Distributors’ audit file; and notes that it has produced no official documentation to evidence that proper administrative proceedings were followed leading up to the Criminal Complaint.263
241.
The Claimant rejects the Respondent’s criticisms regarding the determinations made by the Criminal Affairs Department of the Legal Affairs Bureau: (i) such department was competent to analyse the matter according to the regulations applicable at the time;264 (ii) the Head of the Legal Affairs Bureau, even if allegedly involved in an unrelated corruption scandal, did nothing but approve the reports that had been prepared by another official, and, in any event, the Respondent has not provided evidence of any wrongdoing in relation with the reports at stake in this case;265 and (iii) the causal link is one of the elements of tax fraud and its analysis was necessary to avoid the criminalization of trivial tax matters.266

F. Criminal Proceeding and Further Tax Audit Against the Distributors

1. SAT’s Criminal Complaint

242.
On 13 July 2016, the SAT filed a criminal complaint for tax fraud against the Distributors (the "Criminal Complaint"), which was admitted on 22 July 2016 by the Fifth Criminal, Narcotics, and Environmental Crimes Trial Court of the Department of Guatemala (the "Criminal Court"), resulting in a criminal proceeding currently underway in Guatemala (the "Criminal Proceeding").267
243.
The Criminal Complaint accused the Distributors of tax fraud in relation to the Tax Deductions for tax years 2011 and 2012.268 The crime of tax fraud is regulated in Article 358 A of the Guatemalan Criminal Code which provides that such crime is committed by:

the person who, through misrepresentation, cover-up, manipulation, trickery, or any other type of deception, leads the Tax Administration to error in the determination or payment of tax obligations, such that it results in detriment to or underpayment in tax collection, commits the crime of tax fraud"269

244.
The Parties are in disagreement as to whether the submission of the Criminal Complaint by the SAT was carried out in accordance with the applicable requirements under Guatemalan law.

The Claimant’s Position