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Mr. Fernández Antuña Antolín

Arbitrator & Counsel, Managing Partner - Antuña & Partners

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Taxation Exclusions

I. Definition


Investment treaties sometimes specifically preclude or limit some matters from being subject to any dispute resolution mechanism including arbitration under a treaty. One of such matters is the issue of taxation. Many investment treaties are drafted in a way that exclude or carve-out taxation measures either totally or partially from the ambit of the investment treaty.1 

II. Rationale for taxation exclusions


States have the right to tax individuals and corporations under their jurisdiction and have the right to take certain actions or make modifications or amendments to tax laws in their jurisdiction,2 generally referred to as taxation measures. See further State regulatory power.


Taxation measures generally do not have a standardized definition and are wide in scope. They could include the actual imposition of taxes or other measures such as tax evasion investigations, tax assessments, and tax audits.3 See further Taxes, Section III for the definitions of taxation measures.


These taxation measures by a State however could have adverse implications on investors and investments. If an investment treaty does not contain any provisions excluding taxation measures from the scope of the treaty, an investor is not precluded from commencing a claim on any tax matter under the provisions of the investment treaty.4 Investors have instituted claims against States on the basis that taxation measures adopted by a State have breached the standards and protections of an investment treaty5 including the protection against expropriation.6


States on the other hand have argued that their sovereignty may be put in jeopardy7 if their right of taxation and freedom to change tax policy becomes the subject of international arbitration.8


In practice, States tend to protect their sovereignty by ensuring that taxation is excluded either fully or partially from the ambit of an investment treaty.9 Several States would rather have matters of taxation dealt with in separate treaties such as Double Taxation Agreements to maintain their economic sovereignty.10

III. Forms of taxation exclusions


There are generally two main forms of taxation exclusions or carve-outs in investment treaties. These are total (or unconditional) exclusions and partial (or conditional) exclusions.


Taxation exclusions should not be equated with clauses that bar claims with regards to preferential tax treatments not afforded to investors.11

A. Total taxation exclusions

B. Partial taxation exclusions


Partial taxation exclusions except tax matters from applying to certain chapters, provisions and aspects of an investment treaty.13 These partial exclusions can take several forms, some of which are as follows:

1. Exclusion of specific standards of treatment

2. Exclusions of certain types of taxes

3. General tax carve-out followed by various exceptions


Some investment treaties combine different exceptions within taxation exclusions. These exceptions create a sophisticated structure which needs meticulous examination to identify the scope of application of the exclusions.18 These exceptions are also known as Matryoshka clauses. Typical examples are Article 21 of the Energy Charter Treaty (see further Section V for a detailed analysis) and Article 2103 of the North American Free Trade Agreement.


Treaties of this type contain a general carve-out, but claw back the application of standards such as expropriation,19 national treatment,20 most favoured nation treatment21 or fair and equitable treatment (often times debated),22 rendering them applicable to certain taxation measures. Claw-back provisions on expropriation are often subject to a “tax veto” or joint tax consultation mechanism.23 An example is Article 21(2) of the 2012 United States Model BIT.


Some treaties also provide an exception for when the observance and enforcement of an investment agreement concerning matters of taxation is disputed.24 An example is Article 10(2)(c) of the Ecuador-United States BIT.


Standards of protection that are not clawed-back remain unapplicable with regards to taxation measures.25

IV. Burden of proof

V. Example of a partial taxation exclusion: arbitral practice on Article 21 of the ECT


Objections based on Article 21 of the ECT are often raised and addressed during the jurisdictional phase,27 but they have sometimes been joined to the merits.28

A. Measures falling within the general taxation carve-out


Article 21(1) of the ECT provides that “except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations29 with respect to Taxation Measures of the Contracting Parties.” Article 21(7)(a) provides a list of what “taxation measure” entails.30


Tribunals often rely on a two-step analysis to identify if measure qualifies as a “taxation measure” under Article 21: “a characterization under domestic law followed by an application of Article 21's inherent limits.”31 This analysis mandates that tribunals tend to look beyond the measure’s form32 and consider its substance, i.e. whether the taxation measure is established by law, imposes obligations on a group of people and intends to raise revenues for the State for a public purpose.33 See also the related analysis below on the good faith requirement in Section V.B.1.


Examples of measures falling within the scope of Article 21 include taxes on gross income such as the Spanish TVPEE,34 the Italian Robin Hood tax,35 the classification of the investors’ assets as immovable property,36 and the repeal of income tax exemptions.37 Administrative fees and imbalance costs have also been considered to be taxation measures under the ECT by some tribunals38 but not by others.39

B. Exceptions to the taxation carve-out

1. Good faith taxation measures


Although the text of the ECT contains no explicit good faith requirement, some tribunals have held that only bona fide measures are covered by the carve-out in Article 21.40 Other tribunals have refused to read this requirement into the text41 or have considered the good faith of the State arguendo without deciding on whether it constitutes a condition or not.42


The burden of proving that tax measures were made in bad faith falls on the claimant43 and the standard of proof is high,44 considering the sovereign nature of taxation.45

2. Exceptions to the general carve-out


The general tax carve-out provided in Article 21(1) is subject to four exceptions:

  1. According to Article 21(2), Article 7(3) on the transit of energy materials and products is clawed back with regards to taxation measures other than those on income or on capital. This claw-back is subject to two exceptions (see Article 21(2)(a) and (b)).
  2. Similarly, Article 21(4) makes an exception for the trade of energy materials and products when it comes to taxation measures other than those on income or on capital.
  3. Under Article 21(3), taxation measures other than those on income or on capital are subject to the national treatment and most favoured nation standards contained in Articles 10(2) and 10(7).46
  4.  Under Article 21(5), Article 13 on expropriatory and discriminatory taxation is clawed-back.47 However, this exception is subject to the referral of the issue to the “competent tax authority(ies)” by the investor or by the tribunal if the investor failed to do so.48 Although Article 21(7)(c) defines the term “competent tax authority” as the authority designated by a double taxation agreement or the minister (or ministry or authorized representatives) responsible for taxes,49 tribunals have acknowledged its ambiguity in certain circumstances.50 Some tribunals have considered that the investor’s non-respect of this procedure renders the claim inadmissible,51 while others have held that it would not bar the claim52 notably if the consultation would have been futile.53 The non-respect of this procedure may not be a sufficient motive to set aside the award if the State does not suffer any disadvantage.54

VI. Consequences of taxation exclusions in arbitral practice


Taxation measures that fall within the ambit of a tax carve-out are not arbitrable.55 However, taxation exclusions do not prevent tribunals from taking into account taxation measures as factual matters.56


Moreover, a measure that is not a taxation measure at the time of the alleged breach may not retroactively acquire this quality.57 In the same way, a subsequent measure interpreting the covered taxation measure at the time of the alleged breach may not alter its coverage.58 


Measures that are not covered by the taxation exclusion are however subject to review by the arbitral tribunal. See further Taxes, Section IV on the application of different standards of protection to taxation measures.


Burgstaller, M. and Zarowna, A., The Growing Importance of Investment Arbitration in Relation to Tax Measures In The Energy And Natural Resources Sectors, Turkish Commercial Law Review Vol. 4, No. 1, 2018.

Chaisse J., ‘International Investment Law and Taxation: From Coexistence to Cooperation’, E15 Initiative. Geneva: International Centre for Trade and Sustainable Development (ICTSD) and World Economic Forum, 2016.

de Melo Vieira, M., The Regulation of Tax Matters in Bilateral Investment Treaties: A Dispute Resolution Perspective, Dispute Resolution International, Vol. 8, Issue 1, 2014.

Dolzer, R. and Schreuer, C., Principles of International Investment Law, 2nd ed., Oxford University Press, 2012.

Gaukrodger, D., The balance between investor protection and the right to regulate in investment treaties: A scoping paper, OECD Working Papers on International Investment, 2017.

Korzun, V., ‘The Right to Regulate in Investor-State Arbitration: Slicing and Dicing Regulatory Carve-Outs’, 50 Vanderbilt Journal of Transnational Law 355, 2017, 373.

Lim, C., Ho, J. and Paparinskis M., International Investment Law and Arbitration, 1st ed., Cambridge University Press, 2018.

Ozgur, U., Taxation of Foreign Investments under International Law: Article 21 of the Energy Charter Treaty in Context, for Energy Charter Treaty Secretariat, 2015.

Provost, C., Taxes on Trial How Trade Deals Threaten Tax Justice, Transnational Institute and Global Justice Now, 2016.

UNCTAD, “Fair and Equitable Treatment,” Series on Issues in International Investment Agreements II, 2012.

UNCTAD, ‘Taxation’ Series on issues in international investment agreements, 2000.

Uribe, D. and Montes, M., Building a Mirage: The Effectiveness of Tax Carve-out Provisions in International Investment Agreements, South Centre Investment Policy Brief No. 14, 2019. 

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