the treatment of tax in investor-state arbitration of expropriation and national treatment protection

313 Pages·2014·2.5 MB·English

THE TREATMENT OF TAX IN
INVESTOR-STATE ARBITRATION OF
EXPROPRIATION AND NATIONAL
TREATMENT PROTECTION

A thesis submitted for the degree of
Doctor of Philosophy

by

Ali Lazem

Brunel Law School
Brunel University
June 2014
Abstract: This thesis examines the treatment of tax in investor-state arbitration of
expropriation and national treatment protection. The root of the study is the special
characterisation of tax in the sovereignty of the state and the consequent sensitivity
of states to have their tax policies being the subject of private adjudication. Tax has
in the past been characterised as a non-arbitrable matter, but that is true only if
states have purposefully deemed them so under the international investment treaties
that they are party to. Tax is generally arbitrable under the expropriation provisions
of international investment treaties, but states are seldom found liable for tax
expropriation. National treatment, on the other hand, is generally not arbitrable
under international investment treaties, but when an investment treaty permits the
arbitration of alleged national treatment tax violations, violations are affirmed in
more cases than not. The reason behind the comparable success rates is the difficulty
in proving the existence of expropriation by taxation whereas national treatment tax
violations are comparatively easier to substantiate. This thesis establishes what
constitutes a tax expropriation, and how the success rate of claims for national
treatment tax violations justifies the general exclusion of the application of national
treatment protection to tax matters for sovereignty retention. In order to achieve the
foregoing, this thesis examines sovereignty and the sovereign power to tax; the
relinquishment of tax sovereignty under international investment treaties; the
arbitrability of tax and the reasoning behind the reluctance of states to submit tax
disputes to arbitration; the capability of tax to be expropriatory; the fundamentals of
the expropriation standard under customary international law and international
investment treaties and how they are applied by arbitral tribunals in tax
expropriation claims; and the fundamentals of the national treatment protection and
how they are applied by arbitral tribunals in claims for national treatment tax
violations.

i
Summary Table of Contents

Acknowledgements ..................................................................................................... vi

Table of Abbreviations ............................................................................................... vii

Table of Legal Instruments .......................................................................................... x

Table of Cases ........................................................................................................... xxi

Chapter 1 Introduction ............................................................................................ 1

Chapter 2 Sovereignty and Foreign Direct Investment as Drivers of Tax and
Arbitration ............................................................................................ 13

Chapter 3 The Treatment of Tax in Expropriation Claims in Investor-State
Arbitration ............................................................................................ 69

Chapter 4 The Treatment of Tax in National Treatment Claims in Investor-State
Arbitration .......................................................................................... 212

Chapter 5 Final Comments ..................................................................................... 268

Bibliography ............................................................................................................. 271

ii
Detailed Table of Contents
Acknowledgements ..................................................................................................... vi
Table of Abbreviations ............................................................................................... vii
Table of Legal Instruments .......................................................................................... x
Table of Cases ........................................................................................................... xxi

Chapter 1 Introduction ............................................................................................ 1
1.1 Research Questions and Methodology .......................................................... 1
1.2 Contribution to Knowledge ........................................................................... 2
1.3 Brief Overview of the Thesis ....................................................................... 3

Chapter 2 Sovereignty and Foreign Direct Investment as Drivers of Tax and
Arbitration ............................................................................................ 13
2.1 Sovereignty and Globalisation ......................................................................... 15
2.1.1 The Sovereign Power to Tax versus the Right to Justice .......................... 15
2.1.2 Sovereignty and Globalisation .................................................................. 17
2.2 International Investment Treaties ..................................................................... 23
2.2.1 The Role of International Investment Treaties.......................................... 23
2.2.2 The Emergence of International Investment Treaties ............................... 23
2.2.3 International Investment Treaties and the Agreement to Arbitrate ........... 26
2.2.3.1 Why Arbitrate? .............................................................................. 26
2.2.3.2 Where Do Investor-State Arbitrations Take Place? ....................... 28
2.2.3.3 Standing Offer to Arbitrate in Domestic Investment Laws ........... 29
2.3 Arbitrability of Tax and Public Policy Considerations .................................... 30
2.3.1 Arbitrability .................................................................................................... 31
2.3.2 Tax Exclusions and Tax Vetoes in International Investment Treaties ...... 34
2.3.3 Enforcement of Awards ............................................................................ 36
2.4 Foreign Direct Investment, International Investment Treaties and Tax
Arbitration ........................................................................................................... 39
2.4.1 Brazil’s Success in Attracting Foreign Direct Investment and Avoiding
International Investment Arbitration ......................................................... 40
2.4.2 The Threat of Arbitration to Tax Sovereignty as a Trade-Off to Attract
Foreign Direct Investment ........................................................................ 45
2.4.2.1 Expansive Jurisdictional Awards ................................................... 47
2.4.2.2 Economic Risk ............................................................................... 48
2.4.2.3 Regulatory Chill ............................................................................. 53
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2.4.2.4 Moral Hazard ................................................................................. 57
2.5 Conclusion ........................................................................................................ 64

Chapter 3 The Treatment of Tax in Expropriation Claims in Investor-State
Arbitration ............................................................................................ 69
3.1 Historical Background and Development ................................................... 77
3.1.1 Pre-Modern Day Literature on Expropriation ...................................... 77
3.1.2 Historical Literature on Tax as Expropriation ..................................... 80
3.1.3 Influential Texts in the Development of Modern Expropriation
Provisions ............................................................................................. 85
3.1.3.1 1950 European Convention on Human Rights .......................... 85
3.1.3.2 1959 Draft Convention on Investments Abroad ........................ 88
3.1.3.3 1961 Draft Convention on the International Responsibility of
States for Injuries to Aliens ................................................... 89
3.1.3.4 1967 Draft Convention on the Protection of Foreign Property . 92
3.1.3.5 Draft Multilateral Agreement on Investment ............................ 93
3.2 Expropriation Provisions in Modern Investment Treaties .......................... 95
3.2.1 ‘Measures’ and ‘Taxation Measures’ ................................................... 95
3.2.2 Different Headings of Expropriation – Under Which Does Tax Fall? 97
3.2.2.1 Tantamount v Equivalent ............................................................ 98
3.2.2.2 Indirect Expropriation v ‘Measures Tantamount’ ...................... 98
3.2.2.3 Expropriation Headings That Taxation Measures Fall Under .. 105
3.2.3 Levels of Deprivation in IITs for Indirect Expropriations and the
Impact on Tax Expropriation Claims ................................................. 107
3.2.4 Inclusions, Exclusions and Vetoes to the Application of Expropriation
in Matters of Taxation ........................................................................ 111
3.3 Direct Expropriation .................................................................................. 113
3.4 Indirect Expropriation ............................................................................... 117
3.4.1 The Form of Measure vs. Impact of Measure .................................... 118
3.4.2 State Intent vs. Effect of State Conduct ............................................. 119
3.4.3 Legitimate and Reasonable Expectations of the Investor .................. 121
3.4.4 Extent of Deprivation ......................................................................... 123
3.4.5 Creeping Expropriation ...................................................................... 126
3.5 Tax as Expropriation in International Investment Arbitration .................. 128
3.5.1 Tax Expropriation Arbitrations .......................................................... 128
3.5.1.1 Feldman ...................................................................................... 128
3.5.1.2 EnCana and Occidental .............................................................. 132
3.5.1.3 Burlington .................................................................................. 137
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3.5.1.4 Archer Daniels, Cargill and Corn Products ............................... 142
3.5.1.5 Link-Trading .............................................................................. 145
3.5.1.6 Goetz I and Goetz II .................................................................. 148
3.5.1.7 El Paso ....................................................................................... 150
3.5.1.8 Yukos ......................................................................................... 152
3.5.2 Tax Arbitration: Form of Measure vs Impact of Measure ................. 162
3.5.3 Tax Arbitration: Direct Expropriation ............................................... 167
3.5.4 Tax Arbitration: Intent vs Effect ........................................................ 173
3.5.5 Tax Arbitration: Legitimate and Reasonable Expectations of the
Investor ............................................................................................... 180
3.5.6 Tax Arbitration: Extent of Deprivation .............................................. 182
3.5.7 Tax Arbitration: Dissenting Pro-Expropriation Opinions .................. 189
3.6 Conclusion ................................................................................................. 206

Chapter 4 The Treatment of Tax in National Treatment Claims in Investor-State
Arbitration .......................................................................................... 212
4.1 Historical Background and Development ................................................. 213
4.1.1 Pre-Modern Day Agreements ............................................................ 213
4.1.2 Interwar Multilateral Agreement Efforts ........................................... 216
4.1.3 Post-War Multilateral Agreement Efforts .......................................... 216
4.2 National Treatment Provisions in Modern Investment Treaties................ 219
4.2.1 National Treatment and Most-Favoured Nation Combined .............. 219
4.2.2 Investors, Investments, and Investments of Investors ........................ 221
4.2.3 Pre-Entry and Post-Entry Application ............................................... 225
4.2.4 The Comparator ................................................................................. 226
4.2.5 Tax-Specific National Treatment Provisions ..................................... 230
4.2.6 National Treatment Tax Exclusions ................................................... 234
4.3 Application of the National Treatment Standard in Tax Arbitrations ....... 244
4.3.1 The ‘Like Circumstances’ Comparator in Tax Arbitrations .............. 244
4.3.2 Less Favourable Treatment and Nationality-Based Discrimination in
De Jure or De Facto Application of Tax Measures ........................... 258
4.4 Conclusion ................................................................................................. 265

Chapter 5 Final Comments ..................................................................................... 268

Bibliography ............................................................................................................. 271
v
Acknowledgements

I would like to express my gratitude to my supervisor Prof. Ilias Bantekas for his
encouragement, support, tutorship, mentorship, professionalism and friendship throughout
my research. His legal knowledge and positive work ethic is like no other and I was fortunate
to have had him as my mentor and supervisor.

I would also like to thank: our Law Librarian, Claire Grover, for acting so quickly to
subscribe the Law School to resources that were previously not available; Amanda Kunicki,
Rahena Begum and Jenny King for making life as researcher a very smooth affair; and Luke
Eric Petersen, editor at Investment Arbitration Reporter, not only for the service provided but
also for personally answering my queries whenever called upon.

To Mr. Eric Inwood, our teacher in academia from the time that we were school children and
who remains our teacher and mentor in life and close friend to date. A man forever instilled
into the hearts and souls of those who have known him, even if only for one conversation.

To my father Fawzi and my mother Manahil, I am thankful for so much that thanking them
here as I wish to would on its own take up the entire word limit of this thesis. In short, I want
to thank them for everything they have done and continue to do for my brothers and I; we are
forever indebted to them. I would like to thank them for inspiring knowledge and for
supporting and encouraging me in this and all of my endeavours.

To my brothers Ahmed, Abas and Hasan, I am grateful for having them as my brothers and
best friends, thankful for the support with this endeavour and for the banter and the amazing
times we had whenever I took time out to visit them in their sunny climate. Let us please live
in the same country again sooner rather than later.

A special thank you goes to Sahar for the amazing company, the laughter, the early morning
wake up calls and all the encouragement which have made completing this research possible.

I am also grateful to all of my friends, especially Sahil, that have been there throughout my
progress.

vi
Table of Abbreviations

General

AEC AEC Ecuador Limited
AFFIMET Affinage des Métaux
ALMEX Almidones Mexicanos S.A. de C.V.
ASEAN Association of Southeast Asian Nations
BFG BaikalFinansGroup
BIT Bilateral Investment Treaty
BTT Bilateral Tax Treaty
CAFTA Central America FTA
CAFTA-DR Dominican Republic-Central America FTA
CAPSA Compañías Asociadas Petroleras
CBI Confederation of British Industry
CEMSA Corporación de Exportaciones Mexicanas, S.A. de
C.V.
COL City Oriente Limited
CPI Corn Products Inc.
CPIng Corn Products Ingredientes
DSB WTO Dispute Settlement Body
DSU WTO Dispute Settlement Understanding
DTT Double Taxation Treaty
EC European Community
ECC European Communities Commission
ECHR European Convention on Human Rights
ECLAC United Nations Economic Commission for Latin
America and the Caribbean
ECT Energy Charter Treaty
ECtHR European Court of Human Rights
EU European Union
EUR Euros
FEZ Free Economic Zone of Chisinau (Moldova)
vii
FDI Foreign Direct Investment
FTA Free Trade Agreement
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
HFCS High Fructose Corn Syrup
ICC International Chamber of Commerce Court of
Arbitration
ICC Code International Chamber of Commerce’s 1949
International Code of Fair Treatment for Foreign
Investment
ICSID International Centre for Settlement of Investment
Disputes
ICSID Convention 1965 Washington Convention on the Settlement of
Investment Disputes between States and Nationals of Other
States
IEPS Impuesto Especial sobre Producción y Servicios
(Mexico’s Special Tax on Production and Services)
IISD International Institute for Sustainable Development
IIT International Investment Treaty
ILA International Law Association
ILC International Law Commission
Iran-USCTR Iran-United States Claims Tribunal
ISDS Investor-State Dispute Settlement
ITRL Internal Tax Regime Law of Ecuador
LCIA London Courts of International Arbitration
LCR PREM Latin America and the Caribbean Region: Poverty
Reduction and Economic Management
McGill L.J. McGill Law Journal
MFN Most-Favoured-Nation
MIT Multilateral Investment Treaty
MNC Multinational Corporation
NAFTA North American Free Trade Agreement
OECD Organisation for Economic Co-operation and
Development
viii
OED Oxford English Dictionary
OEPC Occidental Exploration and Production Company
PCA Permanent Court of Arbitration
PCIJ Permanent Court of International Justice
SCC Stockholm Chamber of Commerce Arbitration Institute
SHCP Secretaría de Hacienda y Crédito Público (Mexico’s
Ministry of Finance and Public Credit)
SRI Sericio de Rentas Internas (Ecuadorian Tax Authority)
TLIA Tate & Lyle Ingredients America
UNCITRAL United Nations Commission on International Trade
Law
UNFCCC United Nations Framework Convention on Climate
Change
USTR Office of the United States Trade Representative
VAT Value Added Tax
WTO World Trade Organisation
WWI World War One
WWII World War Two
YNG OAO Yuganskneftegaz

Journals and Yearbooks

A.J.I.L American Journal of International Law
Am. Econ. Rev. American Economic Review
Australian YIL Australian Yearbook of International Law
B.C.L. Rev. Boston College Law Review
B.U.L. Rev Boston University Law Review
Brit. Y.B. Int'l L. British Yearbook of International Law
Chi. J. Int'l L. Chicago Journal of International Law
Colum. J. Transnat'l L. Columbia Journal of Transnational Law
Eur J Law Econ European Journal of Law and Economics
Harv. J.L. & Pub. Pol'y Harvard Journal of Law & Public Policy
ix