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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

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


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


There are also conditional 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-out for a certain type 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,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 

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

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.

C. Legitimacy of taxation: Other investment protection standards


In instances where treaties do not exclude taxation measures from other investment protection standards, some tribunals have considered whether States’ taxation measures are in breach of national treatment40 or fair and equitable treatment41 obligations under relevant treaties.


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


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.49


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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