I. Taxes and investment treaty arbitration
Taxation of foreign investments is a common regulatory exercise in every sovereign State.1 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
Ozgur, U.E., Taxation of Foreign Investments under International Law: in Context, Energy Charter Secretariat, 2015, p. 12.
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, p. 87; Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction in Resubmitted Proceeding, 10 May 1988, para. 124.
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
A. Types of tax carve-out provisions
Agreement among the Government of Brunei Darussalam, the Republic of Indonesia, Malaysia, the Republic of the Philippines, the Republic of Singapore, and the Kingdom of Thailand for the Promotion and Protection of Investments, 15 December 1987, Article V; Denmark - Russian Federation BIT (1993), 4 November 1993, entered into force on 26 August 1996, Article 11(3); Hong Kong, China SAR - New Zealand BIT (1995), 6 July 1995 entered into force on 5 August 1995, Article 8 (2).
The Energy Charter Treaty, 17 December 1994, Articles 21(1), 21(5)(a); North American Free Trade Agreement, 17 December 1992, Article 2103(6); Agreement on encouragement and reciprocal protection of investments between the Lao People’s Democratic Republic and the Kingdom of the Netherlands, 16 May 2003, Article 4; Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002, para. 187; Ryan and others v. Poland, ICSID Case No. ARB(AF)/11/3, Award, 24 November 2015, para. 289.
B. Other restriction provisions related to tax measures
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,10 while others required the competent authorities to be provided time to reach conclusions upon review of the tax measure at issue11 and in some circumstances have found investor’s claim inadmissible for not satisfying such requirement.12
III. Application of tax carve-out provisions
Arbitral tribunals in a number of investment arbitration cases13 have reviewed various types of tax measures,14 such as: export duties,15 import taxes,16 rebates of excise duties,17 VAT refunds,18 changes to customs duties and VAT exemptions,19 sales tax,20 tax on the value of production of electric energy,21 extraction tax,22 windfall levies,23 royalties,24 tax reassessment in a corporate restructuring,25 tax collection,26 arbitrary and unreasonable tax audits,27 exemption of taxation,28 and the withdrawal of tax concessions or incentives.29
Pope & Talbot v. Government of Canada, Interim Award, 26 June 2000, para. 99; Marvin Roy Feldman Karpa v. United Mexican States, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002, para. 109; Quasar de Valores SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. and ALOS 34 S.L. v. The Russian Federation, SCC Case No. 24/2007, Award on Preliminary Objections, 20 March 2009, para. 74; RosInvestCo UK Ltd. v. The Russian Federation, SCC Case No. 079/2005, Final Award, 12 September 2010, para. 628; Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. 2005-04/AA227, Final Award, 18 July 2014, para. 1407.
RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/30, Decision on Jurisdiction, 6 June 2016, paras. 170, 197; Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Award, 4 May 2017, para. 266; Mr. Jürgen Wirtgen, Mr. Stefan Wirtgen, and JSW Solar (zwei) GmbH & Co.KG v. Czech Republic, PCA Case No. 2014-03, Final Award, 11 October 2017, para. 16.
Perenco Ecuador Limited v. Republic of Ecuador (Petroecuador), ICSID Case No. ARB/08/6, Decision on Jurisdiction, 30 June 2011, para. 235; Perenco Ecuador Limited v. Republic of Ecuador (Petroecuador), ICSID Case No. ARB/08/6, Decision on Remaining Issues of Jurisdiction and on Liability, 12 September 2014, para. 582; Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 137; Sergei Paushok, CJSC Golden East Company and CJSCVostokneftegaz Company v. The Government of Mongolia, Award on Jurisdiction and Liability, 28 April 2011, paras. 263-264.
Mr. Jürgen Wirtgen, Mr. Stefan Wirtgen, and JSW Solar (zwei) GmbH & Co.KG v. Czech Republic, PCA Case No. 2014-03, Final Award, 11 October 2017; Ampal-American Israel Corp., EGI-Fund (08-10) Investors LLC, EGI-Series Investments LLC, BSS-EMG Investors LLC and David Fischer v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Liability and Heads of Loss, 21 February 2017, para. 172; Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Award, 23 September 2003, para. 177.
Antoine Goetz and others v. Republic of Burundi (I), ICSID Case No. ARB/95/3, Award (Embodying the Parties' Settlement Agreement), 10 February 1999; Ioan Micula, Viorel Micula and others v. Romania (I), ICSID Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 24 September 2008, paras. 137, 140; Ioan Micula, Viorel Micula and others v. Romania (I), ICSID Case No. ARB/05/20, Final Award, 11 December 2013, para. 132.
A. Applicability of tax exception
Arbitral tribunals in the past have considered whether customs duties,30 export duties,31 or indirect taxes such as value-added tax reimbursements, tax deductions, allowances or rebate,32 are a matter of taxation, in order to determine whether such measure is subject to the relevant treaty’s carve-out provisions.
In so doing, arbitral tribunals looked at whether there is a law imposing liability on classes of persons to pay money to the State for public purpose.33 Other factors that arbitral tribunals have examined include whether a disputed measure was part of the domestic legal tax regime,34 and the legal operation of the disputed measure.35
EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN3481, Award, 3 February 2006, para. 142; Duke Energy Electroquil Partners and Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19 , Award, 18 August 2008, paras. 174-175; Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Jurisdiction, 2 June 2010, para. 165.
B. Legitimacy of taxation: Expropriation standards
Tax measures, by their nature, bear some similarity to indirect expropriation.36 In situations where Investment Treaties have pitted tax measures against expropriation standards,37 arbitral tribunals have looked at whether the particular treaty claws back taxation measures to expropriation, thereby also supporting the jurisdiction of the tribunal.38
In the event an arbitral tribunal found its jurisdiction to determine legitimacy of the tax measure, it would then determine whether the given tax measure constitutes a legitimate expropriation. Standards for distinguishing expropriatory (or abusive) tax measures from legitimate taxation are generally understood to require a high threshold,39 but whether those standards differ from those applied in the context of other non-tax measures is less certain.
Link-Trading Joint Stock Company v. Department for Customs Control of the Republic of Moldova, Final Award, 18 April 2002, para. 64; EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN3481, Award, 3 February 2006, para. 177; El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Award, 31 October 2011, paras. 290, 295; Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, paras. 375.
C. Legitimacy of taxation: Other investment protection standards
When reviewing taxation measures under national treatment standard, tribunals have looked at factors such as the intent and effects of taxation measures,42 the differences in the period of application of the taxation measures between domestic and foreign companies,43 and the discriminatory effects of disputed measures.44
For the fair and equitable treatment (FET) standard, elements considered by tribunals include whether imposition of taxation measures ensured clarity in its meaning, scope, and consistency in its application,45 whether investor’s legitimate expectations were frustrated,46 whether frustration of legitimate expectations upset the stability of the legal or business framework,47 and the extent to which a State acted in reasonable manner and in good faith.48
Occidental Exploration and Production Company v. Republic of Ecuador, LCIA Case No. UN3467, Final Award, 1 July 2004, para. 187; Mobil Exploration and Development Inc. Suc. Argentina and Mobil Argentina S.A. v. Argentine Republic, ICSID Case No. ARB/04/16, Decision on Jurisdiction and Liability, 10 April 2013, para. 987; Oxus Gold plc v. Republic of Uzbekistan, UNCITRAL, Final Award, 17 December 2015, para. 827.
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.
Davie, M., Taxation-Based Investment Treaty Claims, Journal of International Dispute Settlement, Oxford University Press, 2015.