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I. Taxes and investment treaty arbitration


Taxation of foreign investments is a common regulatory exercise in every sovereign State.1 See also Public interest, State regulatory power.


International investment agreements (“investment treaties”) typically provide protections for investors against a host State’s illegal conduct, and it is generally understood that such protections apply to tax measures in the absence of any exclusions to the contrary.2

II. Tax carve-out provisions in investment treaties


A host State may rely on tax carve-out provisions in investment treaties to argue that the arbitrators’ ability to scrutinize its taxation measures should be limited.3 The State may agree to include tax carve-out provisions in investment treaties because they recognize the importance of fiscal sovereignty,4 or because they prefer to deal with tax issues through dispute resolution mechanisms provided under tax treaties.5


See Taxation exclusions, Section III for further analysis on the different forms of taxation carve-outs and Section V for an in-depth analysis on Article 21 of the Energy Charter Treaty.

A. Types of tax carve-out provisions


An investment treaty may completely and unconditionally restrict investors’ rights to bring their investment treaty claims against tax measures.6 


There are also conditional (or partial) limitations where certain standards of protection such as expropriation applies to tax measures, while remaining scope of the treaty generally excludes tax measures.7 


Some investment treaties provide carve-outs for certain types of tax measures, such as income or capital gains.8

B. Other restriction provisions related to tax measures


Some investment treaties require referral to local authorities or joint consultation between tax authorities in both the investor and host States before a challenge can be raised to a tax measure via investment arbitration.9 


The effect of such requirements is a subject of debate. Some tribunals ruled that non-compliance with exhaustion of local remedies or joint tax consultation requirement does not outright ban investor’s tax-related claims, sometimes taking into consideration whether such procedure was futile,10 while others have found investor’s claim inadmissible for not satisfying such requirement.11 Also, some tribunals, while recognizing the mandatory nature of such procedural requirement, considered the non-compliance of such requirement only when determining the cost allocation, without rendering the claim inadmissible.12

III. Definition and scope of “taxes” and “taxation measures” in investment treaties


Arbitral tribunals in the past have considered whether customs duties,13 export duties,14 or indirect taxes such as value-added tax reimbursements, tax deductions, allowances or rebate,15 are a matter of taxation, in order to determine whether such measure is subject to the relevant treaty’s carve-out provisions.


However, only measures falling within the scope of the tax carve-out provision are affected by it. Thus, the applicability of the carve-out depends on the definition and interpretation of the terms used in the provision, notably “tax(es),” “taxation,” “measure(s),” “taxation measure(s),” or “measures of taxation”.

A. “Ordinary” meaning of taxation measure


Some treaties may define the term “measure” as including inter alia laws, regulations, procedures and requirements16 but do not define the term “taxation measures,” “taxation,” or “matters of taxation,”17 leaving it up to arbitral tribunals to interpret it according to the Vienna Convention on the Law of Treaties.18 This interpretation has led tribunals to conclude that:

  1. a measure is considered as “taxes” or “taxation measures”, when four requirements are met: (i) there is a law (ii) that imposes a liability on classes of persons (iii) to pay money to the State (iv) for public purposes.19
  2. acts implementing the tax law (as well as the tax law itself) may be considered as taxation measures.20
  3. not only the provisions of the law which impose a tax but also other aspects of the tax regime which go to determine how much tax is payable or refundable (e.g., deductions, allowances or rebates) are part of the notion of "taxation measures;”21
  4. unless otherwise specified, measures relieving taxation are considered to be taxation measures as well;22
  5. unless otherwise specified, “taxation” covers both direct and indirect taxation;23 and
  6. the tax nature of a measure is to be determined merely by its economic effect, but by its “legal operation.”24 Some tribunals have adopted a more stringent standard, looking into which entities within the State administer or collect taxes, if the relevant measure is commonly used by States and the purpose of the measure.25


Although “taxation” is to be interpreted according to international law,26 some tribunals held that it may be useful to taken into consideration the domestic characterization of a measure.27

B. Treaties defining taxation measures


Other investment treaties define to some extent what taxation measures are. For example, Article 21(7) of the Energy Charter Treaty (ECT) provides that “taxation measure” refers to any tax provisions of the domestic law of the Contracting Parties or the provisions of any international tax conventions by which the Contracting Party is bound.28 However, the same treaty mentions the term “taxes” in Article 21(5) without defining the term or distinguishing it from the term “taxation measure.” To this extent, tribunals have held that the definition of “taxes” cannot be narrower than that of “taxation measures.”29


Absent a comprehensive definition, tribunals constituted under the ECT have referred to the ordinary meaning of taxation measure, defined via the criteria cited above.30 See Taxation exclusions, Section V for further analysis on Article 21 of the ECT.

C. Distinguishing taxation measures from other concepts


Arbitral tribunals have distinguished a “tax dispute” from a “tax-related investment dispute,”31 or “matters of taxation” from “taxation policies”32 when determining whether the tribunals’ jurisdiction is denied by tax carve-out provisions.

IV. Application of standards of protection to taxation measures


Arbitral tribunals in a number of investment arbitration cases33 have reviewed various types of tax measures,34 such as: profit taxes,35 export duties,36 import taxes,37 rebates of excise duties,38 VAT refunds,39 changes to customs duties40 and VAT exemptions,41 sales tax,42 tax on the value of production of electric energy,43 extraction tax,44 windfall levies,45 royalties,46 tax reassessment in a corporate restructuring,47 tax collection,48 arbitrary and unreasonable tax audits,49 exemption of taxation50 or the repeal of such exemptions,51 and the withdrawal of tax concessions or incentives.52 


In analysing investors’ claims, tribunals have stated that the State’s sovereign right to tax establishes a presumption of legitimacy53 and that States do not have “a duty to adapt its tax regime to the best interests of foreign investors.”54 

A. Whether taxation measures may constitute a breach of expropriation standards


Tax measures, by their nature, bear some similarity to indirect expropriation.55 In situations where investment treaties have pitted tax measures against expropriation standards,56 arbitral tribunals have looked at whether the particular treaty claws back taxation measures to expropriation, thereby also supporting the jurisdiction of the tribunal.57 See also Taxation exclusion, Sections III.B.3 and V.B.2.


In the event an arbitral tribunal found its jurisdiction to determine legitimacy of the tax measure (in the absence of a tax carve-out, where the carve-out does not apply or where the carve-out applies but protections are clawed back), it would then determine whether the given tax measure constitutes a legitimate expropriation. Standards for distinguishing expropriatory (or abusive)58 tax measures from legitimate taxation are generally understood to require a high threshold,59 but whether those standards differ from those applied in the context of other non-tax measures is less certain.


Criteria relied on by tribunals to assess whether States’ tax measures are considered expropriatory include inter alia:

  1. whether the taxation measure could be qualified as a bona fide exercise of the State’s police powers;60
  2. the confiscatory, arbitrary, abusive or discriminatory effect of the measure;61
  3. the nature of the tax (i.e. windfall profit taxes are unlikely to impact the investment as a whole causing a substantial deprivation);62
  4. sufficient factual and legal justification for the measures taken by the tax authorities;63
  5. if the State guaranteed rights or exemptions (made specific commitments)64 to investors for a certain time but revoked them before the term of the guarantee;65 or
  6. whether the investor had recourse to the host State’s tax authorities.66

B. Whether taxation measures may constitute a breach of other investment protection standards

1. Application of the national treatment standard

2. Application of the fair and equitable treatment standard


For the fair and equitable treatment (FET) standard, elements considered by tribunals include inter alia:

  1. whether imposition of taxation measures ensured clarity in its meaning, scope, and consistency in its application;72
  2. whether investor’s legitimate expectations were frustrated;73
  3. whether frustration of legitimate expectations upset the stability of the legal or business framework;74
  4. the extent to which a State acted in reasonable manner and in good faith;75
  5. whether the investor carried out proper due diligence with regards to the host State’s tax regime;76 and
  6. if the change to the tax regime had drastic or discriminatory consequences.77


It should be noted, however, that tribunals will often deny investors’ expectation that the tax laws, customs duties, or economic and legal conditions in which investments took place will remain identical and unchanged in the absence of specific commitments.78


Furthermore, a State’s high taxation levels compared to other countries may not suffice in itself to breach the fair and equitable treatment standard.79

3. Application of the non-impairment standard

V. Taxation measures as countermeasures


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

Koppensteiner, F. and Gildemeister, E.E., Taxation Meets Arbitration, Kluwer Law International, 2009, Vol. 7, Issue 3.

Adam, J., International Tax Arbitration: Recent Developments and Forthcoming Improvements, in González-Bueno, C. (ed.), 40 under 40 International Arbitration, 2018.

Burgstaller, M. and Zarowna, A., The Growing Importance of Investment Arbitration in Relation to Tax Measures in the Energy and Natural Resources Sectors, Turkish Comm. L. Rev., Vol. 4, No. I, 2008

Davie, M., Taxation-Based Investment Treaty Claims, Journal of International Dispute Settlement, Oxford University Press, 2015.

Park, W.W., Chapter 10 Arbitrability And Tax, in Mistelis, L. and Berkoulakis, S. (eds.), Arbitrability: International & Comparative Perspectives, 179-205, Kluwer Law International, 2009.

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