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, 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 by a State have breached the standards and protections of an investment treaty4 or that taxation measures adopted by a State have breached6 the protection against expropriation.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.10
Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania, ICSID Case No. ARB/05/22 , Award, 24 July 2008, para. 519; Occidental Exploration and Production Company v. Republic of Ecuador (I), LCIA Case No. UN3467 , Award, 1 July 2004, para. 79; Sergei Paushok, CJSC Golden East Company and CJSCVostokneftegaz Company v. The Government of Mongolia, Award on Jurisdiction and Liability, 28 April 2011, para. 258(4); UNCTAD, Fair and Equitable Treatment - UNCTAD Series on Issues in International Investment Agreements II, 2012, p. 39.
Ozgur, U., Taxation of Foreign Investments under International Law: in Context, for Energy Charter Treaty Secretariat, 2015, p. 28.
III. Forms of taxation exclusions
A. Total taxation 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.11 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.
B. Partial taxation exclusions
Partial taxation exclusions except tax matters from applying to certain chapters, provisions aspects of an investment treaty.14 These partial exclusions can take several forms some of which are as follows:
IV. Effect of taxation exclusions in investment arbitration
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 tribunals21 despite clear provisions for taxation exclusions under investment treaties.22
Occidental Exploration and Production Company v. Republic of Ecuador (I), LCIA Case No. UN3467, Award 1 July 2004, para. 200; Archer Daniels Midland and Tate & Lyle Ingredients Americas, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/04/5, Award, 21 November 2011, para. 212-213; Hulley Enterprises Ltd. v. Russian Federation, PCA Case No. 2005-03/AA226, Award, 18 July 2014, para. 1430, 1434.
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.
Dolzer, R. and Schreuer, C., Principles of International Investment Law, 2nd ed., Oxford University Press, 2012
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: in Context, for Energy Charter Treaty Secretariat, 2015.