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 

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, generally referred to as taxation measures. 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.²

These taxation measures by a State however could have adverse implications on investors and investments. If an investment treaty does not contain any provisions which do not exclude 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.³ 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 treaty⁴ including the protection against expropriation.⁵

States on the other hand have argued that their sovereignty may be put in jeopardy⁶ if their right of taxation and freedom to change tax policy becomes the subject of international arbitration.⁷

States tend to protect their sovereignty by ensuring that taxation is excluded either fully or partially from the ambit of an investment treaty. Several States would rather have matters of taxation dealt with in separate treaties such as Double Taxation Agreements to maintain their economic sovereignty.⁸

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

Total or Full taxation exclusions in investment treaties except tax matters from the ambit of an investment treaty. There is no reservation left and no claim on any taxation matter can be brought by an investor against the State before any dispute resolution mechanism in the investment treaty.⁹ There are a number of investment treaties and treaty models which have adopted this method of total exclusion such as Article 8(2) of the Hong Kong-New Zealand Bilateral Investment Treaty (BIT) and Article 2.4(ii) of the 2015 India Model BIT.

Partial taxation exclusions except tax matters from applying to certain chapters, provisions aspects of an investment treaty.¹⁰ These partial exclusions can take several forms some of which are as follows:

1. Some investment treaties exclude any matter related to taxation from applying to National Treatment and Most Favoured Nation standards.¹¹ Examples include Article 5 of the United Kingdom-Mexico BIT and Article II (4) (b) of the Bulgaria-Turkey BIT.
2. Some investment treaties exclude any matter related to taxation from applying to Fair and Equitable Treatment Standards.¹² An example is Article 3(3)(b) of the Netherlands-Turkey BIT.
3. Some investment treaties excluded matters related to taxation from applying to specific types of taxes.¹³ These limited taxes are expressly listed in the treaty.¹⁴ An example is Article 21 of the United States-Uruguay BIT. 
4. 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.¹⁵ These exceptions are also known as Matryoshka. A typical example is Article 21 of the Energy Charter Treaty.
5. Some investment treaties apply a ‘tax veto'¹⁶ mechanism on tax measures. An example is Article 21(2) of the 2012 United States Model Bilateral Investment Treaty.

Even though a number of investment treaties contain taxation exclusions, this has not prevented claims from being brought against States on the basis of tax matters that have been excluded under a treaty. There are a number of investment disputes that have arisen and decisions rendered by arbitral tribunals¹⁷ despite clear provisions for taxation exclusions under investment treaties.¹⁸

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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.

Dolzer, R. and Schreuer, C., Principles of International Investment Law, 2^nd 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, 1^st ed., Cambridge University Press, 2018.

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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.