The treatment of tax as expropriation in International investor–state arbitration

The treatment of tax as expropriation in International investor–state arbitration Domestic tax measures are treated by investment tribunals as a fundamental attribute of sovereignty and constitute lex specialis in relation to the general rule on expropriation under customary international law. Although both direct and indirect expropriation are possible through the imposition of tax measures, in practice such findings are rare and further restricted by joint tax vetoes and tax exclusion clauses in international investment treaties and bilateral tax treaties. This inclination in favour of host states is further confirmed by the requirement that the conduct requirements for expropriation be satisfied, although the role of conduct requirements is to differentiate between lawful and unlawful expropriation. The lex specialis character of tax measures suggests, particularly as a result of cases such as Burlington, that investment tribunals are unlikely to lower the threshold of state liability for expropriation arising from tax measures and are in fact likely to view the substantial deprivation standard very strictly and in a manner that requires a total deprivation of property. A state’s power to tax individuals and entities within its jurisdiction also empowers the state with the tools to take and/or destroy investments within its reach.1 1. INTRODUCTION The regulation of tax in international investment law is hardly straightforward even if, as this article demonstrates, the imposition of arbitrary and discriminatory taxes may amount to both direct and indirect expropriation, as well as a violation of an applicable standard of investor treatment. For one thing, the levying of taxes is an indispensable function of sovereignty, lest states are unable to attain the requisite resources to uphold their sovereignty or survival. This has given rise to a presumption in favour of the validity of tax-related measures under international investment law.2 Moreover, the sovereign power to tax is subject to several (consensual) limitations under international law, particularly trade liberalization agreements, whether in the form of regional free trade agreements (such as the North American Free Trade Agreement (NAFTA))3 or global arrangements such as those set up by the World Trade Organization (WTO). Whereas the restrictions on tariffs (taxes on foreign goods upon entry) and internal taxes4 in the context of trade liberalization treaties are meant to inhibit any undue advantages to similar domestic products (essentially by making the imported goods more expensive),5 the purpose in foreign investment law is to decrease the economic value of the investment in such a manner that its operation is no longer profitable to the investor. These two restrictions on the imposition of (arbitrary) taxes are over-arching and it is not unusual for concerned states to initiate proceedings under the WTO, subsequently followed by submission to investment arbitration.6 Exceptionally, some taxes are far too favourable towards investors which in turn is viewed by other nations as a facilitation of tax evasion and ultimately money laundering. Such tax practices are often subject to multilateral sanctions and other countermeasures, as is the case with the tax practices of tax heavens and countries maintaining fictitious fleets under so-called flags of convenience. As will become evident in the course of this research, the recent spate of bilateral investment treaties (BITs) and free trade agreements (FTAs) specifically address the authority of host states to impose internal taxes. The overall aim of all the aforementioned restrictions is to maintain and enforce a level playing field between investors, imports and local competitors, and goods, while at the same time respecting the host states’ tax powers, chiefly on the basis of mutuality.7 As a result of these considerations, a variety of international legal regimes have arisen concerning the determination as to the legitimacy and regulation of taxes. Trade liberalization, whether regional or global, is one, followed by international law on foreign investment, particularly as regards the assessment of expropriation and the application of appropriate standards of investor treatment. An additional regime is that established under bilateral or multilateral tax treaties, many of which now envisage a specialized arbitration procedure in respect of double taxation8 or other specialized disputes, such as advance pricing agreements.9 Arbitration lawyers would not rush to characterize these processes as akin to arbitration because of their largely public nature as well as the absence of the type of party autonomy usually associated with international commercial arbitration. Nonetheless, they are not straightforward public law procedures and in any event constitute an exception to the general rule whereby tax disputes between a tax payer and the state are not susceptible to third-party determination. Inter-state resolution of tax disputes, the fourth variable identified in this research, is generally non-contentious in the sense that states anticipate relevant issues through bilateral tax agreements, which unlike regular treaties, involve a continuous process of inter-state collaboration that is flexible and readily adapted to changing circumstances without, in any way, implying that disputes do not arise. Typical disputes concern transfer pricing, division of revenues from value added taxes, double taxation, source-based withholding tax on royalties for intellectual property (such as trademarks and copyright) used in one country and paid to enterprises or persons resident in another,10 and others. No doubt, other inter-state disputes can arise in connection to taxes, such as under sovereign financing agreements and regarding the obligation of the borrowing nation to impose and collect unpopular taxes, but such disputes will not normally culminate in contentious litigation or arbitration because the lender can simply refuse to provide debt relief or further financing. The fifth and final variable concerns the human rights dimension of tax, which although individual in nature should be distinguished from the personal entitlement to investment (or other) arbitration affordable to the victim of arbitrary or illegal tax; with the exception of expropriation which is viewed as a deprivation of the right to property, IIA does not perceive other violations against investors through the lens of human rights (eg violation of the national treatment principle as discrimination) nor indeed are the available remedies predicated on human rights considerations. Nonetheless, where an arbitrary and discriminatory tax is considered by an international judicial entity as a violation of the right to property the outcome is equal in legal nature (not necessarily its effects) to expropriation, albeit the range of cases is limited because of the exclusion of states’ tax competence from human rights scrutiny.11 The European Convention of Human Rights (ECHR) only makes reference to tax in the context of the right to property in Article 1(2) of Protocol I to the ECHR and then merely to affirm the tax sovereignty of states. The European Court of Human Rights (ECtHR) has generally been disinclined to encompass tax within the remit of fundamental freedoms under the ECHR, even in situations where the national authorities viewed the tax in question as unconstitutional.12 In Ferrazzini v Italy the Court held that ‘tax disputes fall outside the scope of civil rights and obligations, despite the pecuniary effects which they necessarily produce for the taxpayer’.13 Although the context and claim arising in Ferrazzini is clearly of a human rights nature, namely the undue length of tax assessment proceedings leading to a deprivation of the right to a fair trial, it is unlikely that an investment tribunal would have taken the same stance had the case concerned a foreign investor claiming that the length of such a tax assessment constituted unfair and inequitable treatment. Alas, the ECtHR has reached at some decisions that have largely eroded Ferrazzini, for the same reasons that investment tribunals find the conduct of national tax authorities (including legislators) offensive, whether expropriatory or other. The Court’s ‘lawfulness’ test seeks to strike a fair balance between the state’s interest in enforcing its tax laws and the protection of a person’s right to property. In the Yukos case, tax assessments made against the company in 2004 for the year 2000 fell outside a three-year statutory time-bar set out in Article 113 of the Russian Tax Code,14 but because the tax assessments for the year 2000 were subject to criminal proceedings, a 14 July 2005 decision by Russia’s Constitutional Court changed the interpretation of the rules on statutory time limits to tax assessments subjected to criminal proceedings.15 The Russian authorities made use of attachment, seizure, and freezing orders for the enforcement of Yukos’s tax debt,16 leading to the auction of the company’s main production unit (OAO Yuganskneftegaz (YNG)) in bankruptcy proceedings, ultimately sold at a low price to a sham bidder.17 The ECtHR found that the Russian authorities lacked flexibility in their enforcement of the tax debt18 and ‘given the pace of the enforcement proceedings, the obligation to pay the full enforcement fee and the authorities’ failure to take proper account of the consequences of their actions’, it also held that that the ‘domestic authorities failed to strike a fair balance between the legitimate aims sought and the measures employed’.19 Overall, investors (and their legal counsel) have thus far found no compelling reason to employ human rights arguments or relevant claims in cases concerning tax before investment tribunals even though, as will become evident, domestic tax measures are only rarely viewed as giving rise to expropriation. This strategy is further justified by the fact that if human rights arguments are introduced by investors they will equally have to be admitted for the host states, which possess a much more compelling resonance particularly as regards the obligation of the state to uphold and protect socio-economic rights that are contrary to its foreign direct investment (FDI) obligations. The potential of such claims is, however, significant,20 and although they are not well developed even in the field of commercial arbitration, at least national courts are not disinclined from employing constitutional and human rights arguments. At the very least, as will be shown, several states unilaterally repudiate existing tax concessions by arguing that they are unfair, particularly in economic terms. The human rights dimension of tax is well beyond the scope of this article. The subject matter of this article concerns the specific relationship between investors and host states and the authority of the latter to impose taxes that violate the treatment envisaged in applicable international investment treaties (IITs), FTAs as well as the parties’ contractual arrangements. Equally, it shall explore under what circumstances an internal tax measure may amount to a taking (or expropriation) whether directly or indirectly on the basis of the jurisprudence of investment tribunals under rules largely premised on customary international law. The article will demonstrate that domestic tax measures are considered by investment tribunals as a fundamental attribute of sovereignty and lex specialis that largely overrides the general rule and requirements of expropriation under customary international law. Before entering into this discussion it is perhaps prudent to examine the doctrine of arbitrability as this applies to tax in IIA as well as the legal foundation for tax-related IIA under international law. 2. A QUICK NOTE ON TAX-RELATED INVESTMENT ARBITRABILITY AND PUBLIC POLICY Arbitrability is a concept encountered in the context of commercial arbitration whereby each state may restrict the types of disputes which private parties may validly refer to arbitration on the ground of public interest; as a result, disputes designated as non-arbitrable may only be submitted to litigation. Lack of arbitrability will result in an award being set aside in the seat of the arbitration (lex arbitri) or refused recognition and enforcement by the country where enforcement is sought.21 Although arbitrability has been eroded significantly in the course of the past 20 years,22 tax disputes (other than investment-related) remain firmly grounded within the remit of public authority and at best private disputes concerning tax contributions in complex joint ventures may be submitted to arbitration to assess the appropriate contribution of each participant.23 In equal manner, states in developed nations are increasingly urging taxpayers to settle disputes with the state through statutory (mandatory) arbitration, although the largely public nature of such tax arbitration negates many of the benefits typically associated with party autonomy.24 Arbitrability, as such, does not exist in IIA. Any restrictions curtailing the investor’s freedom to submit a particular dispute to arbitration will be definitively circumscribed by the relevant IIT,25 the parties’ contract or an applicable investment statute with a standing offer to arbitrate, irrespective of conflicting rules in other domestic laws, even if long-standing and otherwise peremptory.26 In commercial arbitration, arbitrability and public policy considerations may appear from thin air to the detriment of the parties’ right to legal certainty and procedural fairness. The very fact that BITs and other multilateral treaties subject the authority of the state to impose taxes to scrutiny as regards its impact on investor entitlements (expropriation or standards of treatment) leads to the obvious conclusion that states have consented to a qualified erosion of this sovereign power, at least in the context of international investment law. In fact, Article 17 of the UN Convention on Jurisdictional Immunities of States and their Properties makes it clear that investment contracts constitute commercial transactions.27 Even so, the 1958 New York Convention remains important because where an investor seeks to enforce an ICSID award in a non-ICSID Member State this may only be achieved through the channels of commercial arbitration whereby the enforcing state may indeed subject the award to its arbitrability legislation. Similarly, an investor seeking to enforce an ICSID Additional Facilities award can only achieve the same under the New York Convention, which is why the Additional Facility rules require the seat of arbitration to be in a New York Convention state.28 Nonetheless, a line should be drawn between the arbitrability of tax disputes and the use of the New York Convention as a mechanism for tax collection. Public policy considerations are not generally taken into consideration by investment tribunals on the ground that internal law should not be used as justification to violate an obligation under a BIT,29 in accordance with the rule set out in Article 27 of the 1969 Vienna Convention on the Law of Treaties (VCLT). It is no wonder, therefore, that legitimate (constitutionally based) human rights claims by host states have been rejected by investment tribunals.30 Given that tax policies are used to finance states’ human rights obligations, such as healthcare and education or their ability to maintain internal and external security, public policy considerations predicated on such grounds will equally fail in investment arbitral proceedings, whereas the case is different in international commercial arbitration even if an agreement to the contrary exists between the parties.31 Even so, an increasing number of commercial arbitration statutes, many predicated on the UNCITRAL Model Law, stipulate that where a state or an instrumentality thereof is a party to international commercial arbitration against a private entity, it may not invoke the prerogatives of its own law to avoid the obligations arising from the award.32 Whatever may be the case in the sphere of international commercial arbitration, it is abundantly clear that states are bound by Articles 27 and 46 VCLT and customary international law as regards the arbitrability (and lack of public policy restrictions) of those tax disputes with foreign investors that amount to expropriation or which constitute a violation of applicable standards of treatment.33 3. THE LEGAL BASIS OF TAX-RELATED INVESTMENT ARBITRATION IN INTERNATIONAL LAW Prior to the introduction of IIA in international relations by the ICSID Convention and later by other multilateral and bilateral agreements, it may be argued that a hybrid institution of tax resolution existed under customary international law. The idea that internal tax measures may violate agreed investment protection principles or be expropriatory in nature was amply recognized in the 20th century,34 despite some (exceptional) later judgments/awards to the contrary,35 even if resolution of relevant disputes was ultimately achieved through diplomatic protection or at the inter-state level. The absence of locus standi in no way reduces the validity of the substantive rule, nor indeed the fact that expropriatory tax claims were few in practice. It is on the basis of this legal framework that the matter was later encompassed in investment-related treaties. The contemporary legal basis for tax-related investment arbitration is largely treaty-based, although exceptionally this may be achieved by means of agreement between the parties or a standing offer in a domestic statute.36 In practice, the latter two are rare37 and so our focus will be on treaty-based tax-related IIA. It goes without saying that a violation of a tax stabilization, discussed in more details in the last two sections of the article, or tax freezing clause in an investment contract triggers the arbitration clause in the contract as regards the resolution of the ensuing tax dispute. The vast majority of BITs or FTAs (with investment provisions, eg NAFTA) do not contain exclusions to the application of expropriation provisions for tax-related claims except for the ability of the tax authorities of the BIT parties to jointly veto the application of expropriation provisions to tax claims on a case-by-case basis38 (joint tax veto). They do, however, widely include exclusions to the application of national treatment and MFN treatment in tax matters. The rationale underlying such tax exclusions is to avoid conflict with existing bilateral tax regimes39 and so that states can retain maximum fiscal sovereignty, such as avoiding regulatory chill from the threat of investor–state arbitration in respect of tax matters relating to national treatment (and MFN) and so that they can grant favourable tax treatment to their nationals or nationals of select third states (which would breach national treatment and MFN, respectively, but for the tax exclusions).40 This explains why investment tribunals have found a violation of applicable standards of treatment and indirect expropriation (in the form of measures with an equivalent effect)41 in BITs that are either silent on such matters or otherwise contain tax exclusions.42 In fact, the draft Multilateral Agreement on Investment (MAI) contained a definition of ‘taxation measures’ which includes ‘any provision relating to taxes of the law of the contracting party or of a political subdivision thereof or a local authority therein, or any administrative practices of the contracting party relating to taxes’ and taxes are taken to include ‘direct taxes, indirect taxes and social security contributions’.43 The MAI Interpretive Notes recognized that some taxation measures are capable of constituting an expropriation, although the general presumption was that if they are ‘within the bounds of internationally recognised tax policies and practices’ they would not.44 Although most of the new generation of BITs and multilateral investment treaties (MITs) contain explicit references to tax exclusions, joint tax vetoes prescribe the ambit of this authority in the field of foreign investment (as well as other fields in the context of all-embracing FTAs, such as competition and customs), very few specifically spell out that tax measures may be expropriatory or in violation of other investor guarantees. Article 21(5)(a) of the Energy Charter Treaty (ECT) is therefore a rarity. It states that the ECT expropriation provision (Article 13) applies to taxes and hence relevant disputes may be submitted to IIA under condition that the joint veto procedure is first exhausted. Subparagraph (b) then goes on to say that a tax may indeed be expropriatory or discriminatory, in which case the full impact of Article 13 is applicable (subject to the joint veto procedure). Some BITs list tax measures among those that may give rise to expropriation. Exceptionally, the US–Egypt BIT does so indicatively, stipulating that: No investment or any part of an investment of a national or a company of either Party shall be expropriated or nationalized by the other Party or a political or administrative subdivision thereof or subjected to any other measure, direct or indirect (including, for example, the levying of taxation, the compulsory sale of all or part of such an investment, or impairment or deprivation of management, control or economic value of such an investment by the national or company concerned), if the effect of such other measure, or a series of such other measures, would be tantamount to expropriation or nationalization45 (emphasis added). Most IITs whether bilateral or multilateral subject their expropriation provisions to the host state’s regulatory measures in the field of tax.46 As a result, investors may validly claim under the treaty that their assets have been taken, directly or indirectly, by a particular tax law or measure. While most IITs, as already explained, contain tax exclusions to the privileges otherwise offered under the national treatment principle, some exceptionally restrict the application of tax measures to expropriation by including tax exclusions to the entire IIT and, therefore, capture expropriation within such exclusion.47 In equal measure, a handful of IITs attempt to block the deliberation of tax in expropriation claims through joint tax vetoes. Tax vetoes allow states to plan their fiscal and tax policies without undue disruption, otherwise they would be reluctant to enter into investment agreements because these would interfere with their tax planning and other bilateral tax obligations. It is not unlikely that in the event of dispute the pertinent states find a political solution (even if the tax measure in question is in fact an act of expropriation) which avoids the embarrassment of IIA.48 Equally, if not for the national treatment and MFN tax exclusions in most IITs, host states would be constantly held to ransom over their tax policies and this is the position all states with a foreign corporate presence would be in, from ‘developed’ capital exporting countries to ‘developing’ capital importing countries. 4. TAX AS EXPROPRIATION In the following sections we shall be discussing in what manner investment tribunals have assessed internal tax measures as giving rise to expropriation, both direct and indirect. It will become evident that although the tribunals are relying on relevant principles of customary international law, they are compelled to balance their assessment of expropriatory conduct with the sovereign entitlement to adopt tax measures. As a result, the standard generally employed is higher in threshold as compared to general expropriation under international law. Although it is beyond the purview of this article (largely because it is only relevant to commercial arbitration and litigation before foreign courts), we take the view that although tax measures fall within the jure imperii authority of states49 they also encompass a limited commercial dimension when a part of investment contracts. The situation in IIA is clear, namely that tax-related investment disputes (giving rise to alleged expropriation or violation of investment guarantees) are arbitrable. In the sphere of civil litigation and commercial arbitration50 the situation is far from concise, but it is generally agreed that foreign courts may not pass judgment on the tax measures of other states, but may only assess whether the contract between the parties is consistent with those tax laws.51 5. TAX MEASURES AND EXPROPRIATION Expropriation provisions in IITs generally require host states to refrain from expropriating investments of other nationals, whether direct or indirect (including measures equivalent to expropriation) unless the expropriation (i) is carried out for a public purpose; (ii) is non-discriminatory; (iii) takes place with due process of law ((i)–(iii) are together referred to as the conduct requirements); and (iv) with prompt, adequate, and effective compensation (the compensation requirement). The majority of IITs do not define ‘measures’ that can give rise to an expropriation but those that do define the term do so broadly, such as ‘any law, regulation, procedure, requirement, or practice’52 of the host state. This broadness encompasses ‘driven actions’ of the state53 that result in expropriation as well as ‘inactions’ (ie the refusal of the state to take action) with the inaction also capable of causing an expropriation.54 Likewise, tax measures are merely ‘measures’ attributable to the host state which relate to taxation. We have already referred to the draft MAI’s definition of ‘taxation measures’ as ‘any provision relating to taxes of the law of the Contracting Party or of a political subdivision thereof or a local authority therein, or any administrative practices of the Contracting Party relating to taxes’ and taxes are taken to include ‘direct taxes, indirect taxes and social security contributions’.55 The tribunal in EnCana56 summarized what taxes, tax measures, and tax laws amount to under international investment law. The EnCana definition confirms that taxes include not only direct taxes (including income tax, corporation tax, capital gains tax) but also indirect taxes (such as excise duties and value added tax (VAT)).57 Other tribunals have confirmed this result by rendering awards in disputes related to taxes other than direct taxes.58 The EnCana tribunal defined tax measures as relating not only to the actual provisions of the law that impose taxes, but all ‘aspects of the tax regime which go to determine how much tax is payable or refundable … ’59 while a taxation law ‘is one which imposes a liability on classes of persons to pay money to the state for public purposes’.60 Measures under expropriation provisions are taxation measures if they ‘are part of the regime for the imposition of a tax’61 and measures providing relief for taxation are also tax measures to the same extent as measures that impose taxes.62 Host states can flex their tax powers to expropriate investments both directly and indirectly63 but whether an alleged expropriation is direct or indirect will depend on the measures themselves (eg levy of new excessive/arbitrary tax or higher/arbitrary rate of existing tax, passing of tax law, application of tax law by tax authorities and also by the national courts),64 the circumstances of the case and crucially how the claim is framed by the claimant. For example, if a claimant alleges that it has a right to tax refunds, it can streamline its claim to restrict its investment to the tax refunds themselves or returns to investments or claims to money65 and if the host state has refused to grant refunds that rightfully belong to the claimant and has, therefore, taken and kept possession of said cash, this can amount to a direct expropriation.66 This streamlining of a claim falls under the definition of partial expropriation, whereunder particular rights that form an aspect of the entire investment are expropriated, albeit the control, use and enjoyment of the investment as a whole need not be affected,67 especially (as regards indirect expropriation) on account of a lack of substantial deprivation of the entire investment. In most situations, however, alleged tax expropriations will fall under the indirect heading, but the tribunal’s assertion in Feldman that tax can only be indirect expropriation68 is too stringent a view in the opinion of the authors. Arbitral jurisprudence on what constitutes an indirect expropriation has taken strides in coming closer to a uniform definition, but inconsistencies do still exist and are likely to remain for the foreseeable future and this is why a case-by-case analysis is, as Professor Christie suggested some five decades ago, ‘probably the only method’69 to decide what kind of interference constitutes an expropriation. Similarly, there are no hard-and-fast rules as to when the power to tax results in a compensable taking under international law. Despite the requirement of a case-by-case analysis,70 we can still, as will become evident in the course of this article, determine discernible trends from the body of tax arbitration jurisprudence to date, much of which undoubtedly reflects customary international law. The issues before lawyers, arbitrators, and academics when characterizing a governmental measure as indirect expropriation (including creeping expropriation and equivalent measures) include the following: (i) form of state measure versus its impact; (ii) intent behind the measure versus its effect; (iii) extent of deprivation of the use and benefits of the investment (ie substantial or not); and (iv) legitimate and reasonable investment-backed expectations of the investor. The next section will examine the treatment by tribunals of tax in the context of the aforementioned as well as direct expropriation. 6. CHARACTERIZATION OF A MEASURE AS TAX VERSUS ITS IMPACT Tribunals in tax arbitrations have recognized the necessity for host states to be afforded flexibility in the creation, amendment and implementation of their tax laws and policies, recognizing that apparent wrongs by the state should not categorically be viewed as violations of international law, thereby giving the state the benefit of the doubt in the implementation of its tax policies.71 The reasoning behind such awards is that ‘taxation is in a special category’72 (emphasis added) from an expropriation standpoint because the ‘universal state prerogative’73 to tax would be impossible to utilize on account of ‘a guarantee against expropriation’74 if taxes were easily assimilated to expropriation of property.75 Concurrently, arbitral tribunals have made it clear that if tax powers are utilized to expropriate investment, the form of government measure to expropriate (ie tax-related) will not automatically excuse the state from liability.76 In the Archer Daniels case, the tribunal referred to taxation as an example of measures that can be used to expropriate indirectly77 and a paradigm where the impact of a measure prevails over its form. Archer Daniels was brought under NAFTA and thus subject to the tax veto clause in Article 2103(6). As already discussed, tax vetoes permit the arbitration of alleged tax expropriations, subject to prior negotiations between the pertinent states and that permission is in itself recognition of tax measures being capable of effecting expropriation. In Cargill, the tribunal recognized the tax veto in NAFTA78 and stated that the US tax authorities ‘would not … agree that the [tax] was not an expropriation’79 thus paving the way for arbitration under Article 1110 (expropriation).80 This further confirms that tax is capable of being expropriatory and moreover tribunals will not be restricted from ruling as such on the basis of the form of the measure used to allegedly expropriate. 7. DIRECT TAX EXPROPRIATION Domestic tax measures may, of course, amount to direct expropriation where they involve the direct taking of money or other assets. This is especially discernible in the context of tax refunds because the money (property) is already in the hands of the state. If the money or claims to money falls within the definition of investment under the terms of an applicable BIT, then the expropriation is direct where the money is taken, or where there is an intentional failure to return in the form of tax refunds. The first hurdle is for the claimant to convince the tribunal that the taxed (or possibly taxable) funds constitute returns from an investment and/or are investments as claims to money. In EnCana, the claimant argued that through its subsidiaries it had been wrongly denied of its right to tax refunds in breach of Ecuadorian law81 and that the breach amounted to a direct expropriation. Under the Canada–Ecuador BIT through which the claim was made, as with most BITs, an investment is broadly defined and in the case at hand encompassed ‘any asset owned or controlled either directly, or indirectly through an investor of a third state, by an investor of a contracting party in the territory of the other contracting party and includes … (iii) money [and] claims to money’82 (emphasis added). The EnCana tribunal determined that an investor’s claim to money can constitute an investment83 both in general terms as well as specifically under the aforementioned BIT whose list of investments was indicative rather than exhaustive. The tribunal was satisfied that Article I(g) of the Canada–Ecuador BIT did not give rise to a restrictive genus by virtue of the words ‘in particular, though not exclusively’ which were inserted before the examples of investments, thus making the definition very broad.84 Article VIII of the BIT (expropriation provision) states that ‘investments or returns of investors of either contracting party shall not be … expropriated … ’85 (emphasis added). ‘Returns’ are defined in the BIT as ‘all amounts yielded by an investment and in particular, though not exclusively, includes profits, interest, capital gains, dividends, royalties, fees or other current income’ (emphasis added).86 The EnCana tribunal, therefore, decided that the BIT contained a very broad definition of investments as well as returns and that tax refunds fell within its remit.87 Unlike EnCana, the claimant in Occidental failed to persuade the tribunal that an entitlement to VAT refunds were investments in themselves88 under the definition of investment in the US–Ecuador BIT (through which the claim was made) which includes, similar to the Canada–Ecuador BIT, ‘a claim to money … associated with an investment’89 (emphasis added). The Occidental tribunal stipulated that ‘[h]owever broad the definition of investment might be under the [US–Ecuador BIT] it would be quite extraordinary for a company to invest in a refund claim.’90 This passage by the Occidental tribunal does not implement the wide definition otherwise encompassing investments under the US–Ecuador BIT whereby a claim to money should (or at least may) be interpreted as any money owed to the investor. The tribunal was not completely antithetical to the idea of a claim to tax refunds constituting a money claim91; rather, it did not consider such claims to be investments in themselves but solely in the context of the investment as a whole, in respect of which the refunds represented merely a fraction and not a substantial deprivation of the investment.92 For this type of claim to succeed, a tribunal must be open to the concept of partial expropriation, as was the case with the EnCana tribunal but not its Occidental counterpart. The arbitrators in EnCana found that the state’s refusal to refund the VAT in retrospect, that is, the denial of refunds ‘accrued in respect of past transactions’,93 did fall under the BIT’s broad scope of ‘amounts yielded by an investment’.94 Therefore, Ecuador’s retrospective denial of VAT refunds was susceptible as a claim for expropriation under the BIT.95 Ecuador’s Interpretative Law No 2004-41 of 11 August 200496 (the Interpretative Law) provided an interpretation of Article 69A of the country’s Internal Tax Revenue Law (ITRL) which clearly stated that ‘petroleum is not a good that is fabricated’ for the purposes of Article 69A ITRL, thereby ruling out VAT refunds for inputs in oil exploration and exploitation under Article 69A. The scope of the right to refunds that befell the tribunal concerned the periods before and after the Interpretative Law was enacted because the resolutions by which the refund was denied and which triggered the dispute related to trading periods before the passing of the Interpretative Law.97 However, EnCana made a claim for VAT refunds in the arbitration (through its statement of Claim) for its subsidiary AEC for periods when tax was paid after the enactment of the Interpretative Law.98 In respect of tax refunds claimed after the Interpretative Law was enacted, it was suggested by EnCana that the law itself was unconstitutional (and thus expropriatory).99 Alas, the tribunal refused to determine the matter, declaring instead that the constitutionality of Ecuador’s laws had to be determined through the methods provided under the country’s constitution.100 As a result, the Interpretative Law was presumed to be constitutional and the claim that tax refunds had been expropriated after the enactment of the Interpretative Law were rejected.101 The authors fail to see the rationale behind this line of thinking. The expropriatory nature of a government measure under international law cannot (and should not) be measured against its constitutional compatibility, but rather its compatibility with international law, given that in the majority of cases a taking is consistent under domestic law. The questions left to be determined by the EnCana tribunal were whether the claimant’s Ecuadorian subsidiaries had a right to VAT refunds under Ecuadorian law for the period before the ‘Interpretative Law’ was enacted,102 especially those periods covered by the denying resolutions, and if so, whether that right had been expropriated by Ecuador.103 The tribunal acted on the assumption that the claimant did have a right to VAT refunds under Ecuadorian law on the basis of the Occidental ruling104 (for the purposes of the national treatment and fair and equitable treatment claim), even though the Occidental decision was not binding on the tribunal in EnCana.105 The arbitrators in EnCana also assumed that Ecuador’s tax authority, the Sericio de Rentas Internas (SRI), made a policy decision ‘to do everything within its power to deny refunds to the oil companies’.106 On the basis that the claimant was entitled to tax refunds and given the assumption that the SRI purposefully denied the refunds, the tribunal went on to analyse whether the denial of a right to VAT refunds amounted to a direct taking.107 The EnCana tribunal adopted the position that when a tax law does not by itself violate the rights afforded to investors, but rather a governmental body is in breach of applicable tax legislation, including the tax authorities, this does not give rise to an outright taking of property (or an indirect expropriation) unless it is accompanied by a denial of due process (ie no access to Ecuadorian courts through legal or practical means).108 The EnCana tribunal noted that a tax authority has the right under international law to take a position (even if it is wrong in law) regarding tax claims by individuals/companies as long as that position is made in good faith, the authority is ready to defend its stance before the courts109 and the policy is not ordinarily reviewable under the expropriation provisions in BITs ‘unless that policy in itself amounts to an actual and effective repudiation of legal rights’.110 The legal right to tax refunds may not be repudiated, according to the EnCana award, if: (i) the refusal is not merely wilful; (ii) the aggrieved party has access to local courts and; (iii) the courts’ decisions are independent of the state and cannot be overridden or repudiated by the state.111 In the case at hand, oil companies were afforded the right to challenge the SRI’s decisions before Ecuadorian courts and in fact in those instances that their application was successful the SRI complied with the relevant judgments without delay.112 Moreover, the SRI’s director, who personally oversaw the VAT refund issue and was in contact with Petroecuador’s President to determine whether or not VAT refunds were included in the participation contracts through the so-called Factor X,113 acted in good faith and this was not denied by the claimant.114 Finally, the judgments rendered by Ecuadorian courts were not bipartisan, lacking independence or were in any other way biased against oil companies.115 On these bases, EnCana’s claim that its VAT payments were directly expropriated by Ecuador was rejected116 because the SRI’s policy on VAT refunds ‘never rose to the level of repudiation of an Ecuadorian legal right’.117 The EnCana decision tells us that tax measures will not amount to direct expropriation unless they are accompanied by a violation of the pertinent conduct requirements, namely due process. This is of course a deviation from the usual rule that the conduct requirements’ role is to differentiate between lawful and unlawful expropriation. Although a violation of due process can help to prove that a state’s measures err on the side of expropriation rather than non-compensable government takings, the fact that due process (or all conduct requirements) is not violated does not and has not prevented tribunals from finding an expropriation as having occurred, whereby such expropriation can be characterized as lawful but lacking due compensation.118 There could have been an interesting divergence between the EnCana and Occidental awards had the tribunal in the Occidental case proceeded with the line of reasoning that tax refunds were claims to money. The Occidental tribunal stipulated that the claim to money would still have ‘to meet the standard required by international law’ to be deemed expropriatory.119 This means that it would have to meet the level of substantial deprivation, in which case the absence of due process rights and guarantees would not have been determinative factors. It goes without saying that on the basis of a substantial deprivation analysis the retrospective denial of tax refunds constituted a substantial deprivation of the claim to the money due. From the perspective of direct expropriation, the tax money was not returned by Ecuador’s treasury, which leads to the obvious conclusion that it was taken. The Occidental tribunal did not venture any further into this line of thinking as presumably it sufficed that Ecuador was clearly liable for its breach of the national treatment, and so unlike EnCana, the Occidental tribunal was able to reject the tax expropriation claim but compensate the claimant through other IIT standards.120 8. INTENT VS EFFECT The ‘intent vs effect’ dichotomy is 2-fold: on the one hand, some tribunals might require proof that the host state intended to expropriate an investment to hold the host state liable; on the other, so long as the investment has suffered the effect of expropriation, the state’s good will shall not be a defence against liability. It is widely held ‘that the mere post-facto explanation by a host state of its intention will in itself carry no decisive weight’,121 albeit this has not prevented a divergence of views between arbitrators, lawyers, and academics. In Olguin,122 the tribunal demanded ‘a teleologically driven action’123 as a prerequisite for a finding of expropriatory liability, holding further that even glaring omissions by the host state, absent intention, did not give rise to expropriation,124 thus rendering the element of intention to expropriate a key factor for an assessment of liability.125 The Olguin reasoning has been preferred by some scholars because it prevents BITs from serving as insurance policies against investment failures,126 a role they were not designed to fulfil.127 Indeed, though it is true that BITs ‘are not insurance policies against bad business judgments’,128 one of their purposes is to protect foreign investments from the effects of expropriation and support for this can be found in the majority of BITs which protect investors from indirect expropriation, that is, measures with an ‘effect equivalent to … expropriation’129 (emphasis added). The effect of the measure(s) taking precedence over the intent not only gives ‘effect’ to expropriation protections in BITs by disposing of requirements for formal decrees which is especially important when creeping expropriations occur in a manner that ‘seeks to cloak expropriative conduct with a veneer of legitimacy’,130 but it is equally important in circumstances whereby deprivation by a host state of the use or reasonably expected economic benefits of an investment are not obviously beneficial to the state.131 The Metalclad132 definition of expropriation is by now paradigmatic and sums up perfectly why the effect should always trump the state’s intent, whereby expropriation: includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State133 (emphasis added). The ‘intent vs effect’ debate in tax arbitration is a somewhat blurred avenue and the crux of the blur is tax constituting a special category for the purposes of expropriation. Relevant case law from tax arbitrations on this issue fall within two categories: (i) expropriatory effect, albeit liability arises only if there is an intention to expropriate, as substantiated by a breach of the conduct requirements (see section 9 below); and (ii) existence of intent, although expropriation is deemed to arise only if the effect is a total or near-total deprivation of the investment (over and above substantial deprivation), including investment in the narrow sense of partial expropriation. 9. INTENT AND VIOLATION OF THE CONDUCT REQUIREMENTS The jurisprudence under this heading stems from the EnCana award. In EnCana (as described above), the tribunal required that the denial of tax privileges: (i) be not merely wilful; (ii) be accompanied by a right of access to local courts and; (iii) the courts’ decisions be independent of the state and not susceptible to be overridden or repudiated by it.134 It is clear that the tax monies due to be refunded to the claimant’s subsidiaries in EnCana were directly expropriated by Ecuador but the tribunal deciding by a majority refused to uphold state liability because there was no denial of justice in the limited sense that the claimant was not denied access to the courts135 (ie the defunct decisions of the courts were not taken into account).136 The EnCana award thus excludes liability for otherwise expropriatory taxation measures if the taxation measures in question are judged to be licit by the host state’s own courts.137 Had the majority in EnCana based their findings on the more accepted ‘effects’ reasoning, as was the case with the award in Metalclad, regardless of culpa, the claimant would have succeeded in its claim because it was recognized by the tribunal that the tax money that ought to have been refunded was kept in its entirety, ie there was a total deprivation (more than substantial deprivation) of the investment’s (tax) returns. Instead, the EnCana majority added an additional hurdle to the finding of expropriation, namely that the due process (access to courts and no executive interference with court judgments) and non-discrimination requirements (i.e. the conduct requirements) must be breached for the host state to be liable for tax expropriation. This is a deviation from the accepted norm that effect overrides intent, with the opposite essentially preventing any findings of expropriation (ie presence of intent but a lack of effect—see section 10 below). Although there is a presumption that tax measures constitute bona fide use of police powers,138 where they entail a confiscatory character they are clearly expropriatory.139 The function of the conduct requirements is to determine the existence of an unlawful expropriation, not to assess whether an expropriation has actually taken place, that is, the first question must always be: ‘has there been an expropriation?’ and if there has been an expropriation then a violation of a conduct requirement will denote the existence of an unlawful expropriation. 10. EFFECT TAKING PRECEDENCE OVER INTENT (INTENT WITHOUT REQUISITE EFFECT) Most tax arbitrations dealing with expropriation claims have thus far recognized intentions to expropriate140 or discrimination against investors/investments (including unintended discrimination),141 albeit intent or discrimination alone have not by themselves sufficed for determining the existence of a tax expropriation.142 This course of thinking is clearly consistent with the general jurisprudence on expropriation. In our analysis of pertinent awards, references to effects being non-expropriatory generally mean that there has not been a substantial deprivation of one’s investment. This is discussed separately in Section 11. In Feldman, the claimant’s Mexican company, Corporación de Exportaciones Mexicanas, SA de CV (CEMSA), was in the business of cigarette exports. CEMSA relied heavily on receiving tax rebates for cigarettes it exported from Mexico and in fact its claim to a right to receive rebates appeared to be the only significant asset of the company,143 without which there would be no profits.144 The company was effectively precluded from receiving tax refunds initially by Mexican tax law which required invoices that ‘separately and expressly’ itemized the amount of tax paid,145 which is something only cigarette producers had access to,146 and finally by a change in the tax law which gave rebates for tax paid for cigarettes available only to the ‘first sale’147 which meant that when resellers purchased cigarettes from producers or distributors in Mexico, the producers would be entitled to the tax refund on that ‘first sale’, and when the resellers subsequently resold cigarettes on the export market, they would not be entitled to tax refunds. CEMSA was thereafter unable to engage in the business of reselling and exporting Mexican cigarettes and was ‘deprived completely and permanently of any potential economic benefits from that particular activity’.148 Despite this, the expropriation claim was rejected with one of the grounds being that the effect of the tax measures on the investment (ie CEMSA) was not expropriatory as the company was still operational and could continue trading in non-cigarette export activities, such as alcoholic beverages, with which it was concerned in the past and in respect of which tax rebates on exports would continue to remain available.149 Therefore, although CEMSA’s cigarette export business become untenable, the tax measures undertaken by the state to that effect did not prevent the claimant from controlling his investment through which he could continue other lines of business in Mexico.150 Here, again one sees the inclination noted in the beginning of this article of the state’s tax sovereignty in the domestic sphere where it is not discriminatory, even if the measure in question has a financial impact on the investor.151 The claimant in Cargill succumbed to a similar reasoning as that in the Feldman award. Cargill traded in high-fructose corn syrup (HFCS) used in soft drinks that became subjected by Mexican tax authorities to indirect taxes which had the effect of artificially suppressing substantial demand for HFCS in Mexico,152 which was dominated almost entirely by investors from the USA.153 There was no doubt that the HFCS tax measures were aimed at HFCS suppliers/producers to the soft drinks industry whose detriment of being driven out of the soft drink sweetener market benefited the majority Mexican-owned154 cane sugar industry,155 but it purposely targeted American investors to coerce them into lobbying the US government to comply with certain NAFTA obligations.156 Despite the clear intent to deprive investors of their investments in the HFCS soft drinks sweetener market, the tribunal decided that the damage done by the tax measures had to have an expropriatory effect on the investment as a whole, not specific businesses of the investment.157 In equal manner, the tribunal in Burlington, while recognizing that proof of intention to expropriate helps to differentiate between permissible and confiscatory taxation,158 as well as an intent to deprive and force abandonment of an investment or sell at a distress price indicates the existence of expropriation,159 it determined that the effect of the tax measure plays a primary role over and above such intent.160 Finding that ‘the State’s intent alone cannot make up for the lack of effects amounting to a substantial deprivation of the investment’,161 the claimant did not succeed in convincing the tribunal that an expropriation occurred162 as a result of a 99% tax on oil profits above a certain threshold, despite the tribunal finding that the tax was designed to force the investor to ‘abdicate its rights under the [oil participation contracts]’.163 The dispositive consideration for the Burlington tribunal was, therefore, the ‘effects of the measures, rather than their underlying motivation’.164 The arbitral tribunal in Link-Trading did not expressly pitch intent against effect. However, an analysis of the award does show that the tribunal focused more on the importance of the effect by demanding that it was up to the claimant to demonstrate ‘the causal link between the measures complained of and the deprivation of its business’.165 The tribunals in Feldman and Cargill also ventured into the ‘intent vs effect’ debate, finding in favour of the respondent state in each case whereby, despite discriminatory tax treatment,166 the effects on the claimants’ investments (the investments being Mexican subsidiaries) were not akin to expropriation.167 It has become standard practice for arbitral tribunals to require substantial deprivation of investment to make a finding of state liability. The aforementioned cases, as well as all other investor–state tax arbitrations (albeit subject to a finite number of exceptions such as RosInvest, Quasar, Yukos Universal, Veteran Petroleum, and Hulley Enterprises) have failed on the merits as a result of an absence of expropriatory effect, namely a substantial deprivation, but what this means is analysed in the following section. 11. LEVEL OF DEPRIVATION We established above that the effect of a host state’s measure(s) will, in most situations, take precedence over its intent, but an expropriation will only be found to have actually occurred (ie resulting in state liability) if the deprivation suffered by the claimant has reached a level that the arbitral tribunal recognizes as the benchmark for finding state liability. This liability is assessed against the protection afforded in the relevant BIT or else what the tribunal deems to be customary international law. The benchmark itself generally amounts to substantial deprivation, but has at various times also been referred to as radical deprivation168 and substantial interference.169 A substantial deprivation occurs when, inter alia, there is (i) a substantial deprivation of the economic value,170 economic use, and enjoyment of investments171; (ii) substantial interference with the use and enjoyment of the protected investment172; or (iii) deprivation of the fundamental rights of ownership which ‘is not merely ephemeral’173 and that makes the ‘formal distinctions of ownership irrelevant’.174 Additionally, a substantial deprivation is a deprivation of the investment ‘in whole or in significant part’.175 In Feldman, the claimant failed in his claim that the Mexican state expropriated his investment because the tax authorities refused to refund excise duties paid by the claimant’s company on exported cigarettes. One factor considered by the tribunal in rejecting the claim for expropriation was that the claimant was not deprived of controlling his investment (a Mexican company) and the state did not displace him as the controlling shareholder or interfere in the investment’s internal operations.176 Moreover, by being in control of the company, the claimant had the potential to pursue other non-cigarette business activities in Mexico through the investment.177 This reasoning resonates across all pertinent awards. In Archer Daniels, the loss of profits suffered by the claimants’ joint-venture company (ALMEX) from 1 January 2002 until 31 December 2006 due to the imposition of an indirect tax on HFCS (the sweetener tax), including diminished profits from lost sales of HFCS in Mexico, ‘was not sufficiently restrictive to conclude the tax had effects similar to an outright expropriation’.178 In addition, the tax did not deprive the investors of the ‘fundamental rights of ownership or management of their investment’ because they were at all times in control of ALMEX’s production, sales, and distribution.179 In Cargill, the claimant’s HFCS business was not its only income stream. The tribunal, therefore, required the sweetener tax to deprive the claimant from the investment in the Mexican subsidiary, not only the subsidiary’s HFCS business. For that reason, the sweetener tax’s effect on Cargill’s HFCS business in Mexico did not amount to a ‘radical deprivation’ of the claimant’s overall investment180 in its Mexican subsidiary. This is a situation in which the tribunal may have found an expropriation under the partial expropriation dictum had it been applied. It is clear that investment tribunals are sceptical, or at least disinclined, to accept that any loss to an investor arising from domestic tax measures amounts to expropriation. The customary nature underlying this line of thinking is best reflected in the harmony between BITs and bilateral tax agreements whereby states are clearly allowed to change and adapt their tax policies with general application even if this may cause economic losses to a particular class of commercial actors or investors. This conclusion is affirmed by the consistent case law of investment tribunals. In Link-Trading, the arbitral tribunal did not find the claimant had established a valid causal link between the amendment of the tax regime and the slump in its business performance.181 Although the amended Moldovan tax regime could have contributed to the claimant’s losses, this result in and by itself was insufficient to prove an expropriation as having occurred, and even if it were, it would have entailed that tax expropriation was a concept without limits, as most tax measures have cost impacts on businesses and consumers.182 The key, it seems, is not economic loss, even if substantial, but loss of control over the investment. In Goetz II,183 the arbitral tribunal opined that an investor must be deprived not only of expected profits but that the deprivation must result in either a loss of control of the investment or the rendering of the investment as purposeless.184 On that basis the suspension of tax exemptions by Burundi (as well as other measures) were not expropriatory because they did not lead to a loss of control of the investment (a company based in Burundi) or the inability to use the investment.185 The power of states to adopt internal tax measures even if they have an impact upon various classes of foreign investors is not in any way enhanced by fiscal or other crises-related arguments. If this were so, then given that all states have fiscal deficits and are indebted in one way or another, they would view their ‘crises’ as an open invitation to adopt discriminatory and expropriatory tax measures. In any event, with the exception of the El Paso case (which is not concerned with debt restructuring), none of the past or current cases concerning creditor disputes arising from sovereign debt restructuring have involved claims of tax expropriation as such.186 In El Paso, in the midst of its economic crisis between 1998–2002, Argentina took measures for contingency and recovery purposes, including the enactment of Public Emergency Law No 25,561 of 2 January 2002187 (Public Emergency Law). The Public Emergency Law devalued the Argentine peso by abolishing its parity with the US dollar188 and authorized the Argentine government to impose withholding taxes on hydrocarbon exports.189 El Paso complained that Argentina was responsible for expropriation by taxation in three aspects: (i) by imposing withholding taxes190; (ii) by not taking into account inflation for tax depreciation purposes191; and (iii) by limiting the range of tax deductions that El Paso’s Argentine subsidiaries could make (if considering the devaluation of the Peso as unreasonable).192 The last two claims were ‘based on the idea that a foreign investor has a right to certain tax deductions’.193 In short, these ‘deduction claims’ centred on the calculation of amounts that companies can deduct from their income and assets for tax assessment purposes. Both arose as a result of the Public Emergency Law. The last claim was based on the devaluation of the peso, whereas the second claim was predicated on the onset of inflation as a result of the devaluation of the peso, with inflation reaching 118% in 2002.194 Under Argentina’s Income Tax Law, the value of a corporation’s fixed assets was depreciated annually according to its estimated life expectancy.195 El Paso contended that Argentina’s non-recognition of inflation for tax depreciation purposes was unreasonable and confiscatory.196 Argentina stressed that Law No 24,073 of 4 February 1992 ‘froze all applicable indices and provisions for inflation adjustment purposes, including those related to tax depreciation … ’197 The laws relating to inflation and tax deprecation were in place since 1992 and El Paso was essentially complaining about ‘no change in the law’.198 The El Paso tribunal considered the export withholding taxes to be ‘reasonable governmental regulation within the context of the [Argentinian] crisis’199 (emphasis original). The withholding taxes that applied to hydrocarbon exports at rates between 4.76% and 16.67%200 had only a limited impact on El Paso’s property rights201 and could not constitute an expropriation, nor could they ‘have caused a forced sale constituting an expropriation of El Paso’s shares in the Argentinean companies subjected to … [the]… withholdings’.202 In addition, the withholding taxes were levied on extraordinary revenues made by the oil exporting sector as a result of the devaluation of the peso and not as a result of increased efficiency.203 Argentina’s expert witness explained that ‘it made total economic sense to have a ‘compensated devaluation’ by relying on export taxes to raise revenues in the sectors that had most benefited from the devaluation’.204 The El Paso tribunal agreed, noting that it was logical to establish a tax on those extra substantial revenues.205 Therefore, in El Paso, the claimants once again failed to substantiate a deprivation of their investment by taxation measures of the host state. In EnCana, for the claimant’s indirect tax expropriation claim to succeed, the tribunal required EnCana to prove that it had been deprived of its investment in its Ecuadorian subsidiaries as a result of Ecuador’s refusal to grant VAT refunds to those subsidiaries.206 Despite the financial harm endured by EnCana as a result of its subsidiaries being denied tax refunds, together with having to repay to Ecuador the money from tax refunds which were already paid out to EnCana (via its subsidiaries), EnCana continued to function profitably and was able to engage in its normal range of undertakings, that is, extracting and exporting oil.207 The EnCana tribunal emphasized that tax measures must be extraordinary, punitive in amount or arbitrary in their incidence to be considered as indirect expropriation,208 because any other outcome would result in the ‘universal state prerogative [of taxation being] denied by a guarantee against expropriation’209 given that taxation always culminates in the loss of profit or other income. The decision in EnCana was that the change in VAT laws or their interpretation was not expropriatory because they did not bring EnCana’s subsidiaries to a standstill or render the value ‘derived from their activities so marginal or unprofitable as effectively to deprive them of their character as investments’.210 Therefore, the denial of tax refunds in the ‘amount of 10 per cent of transactions associated with oil production and export’211 did not constitute a substantial deprivation (denial of the benefits of investment in whole or significant part) of EnCana’s investment212 and the indirect expropriation claim was thus rejected. In Occidental, the same grounds for rejecting EnCana’s indirect expropriation claims applied, primarily that Ecuador’s tax measures did not ‘meet the standards required by international law’213 to be considered expropriatory. Ecuador did not deprive OEPC of the use of or any reasonably expected economic benefit from its investment and equally the tax measures did not affect a significant part of the investment.214 The tribunal asserted that had the requirements for a finding of expropriation been more lenient (ie less than substantial deprivation), OEPC’s expropriation claim would nevertheless have failed,215 albeit the tribunal did not expand this point further. What it may imply, however, is that should substantial deprivation encompass the denial of the benefits of an investment in whole or significant part, and although it is impossible to put a universal figure on it (but let us assume approximately 90% of all available profits)216 a lesser level of deprivation, for example at 50%, would still not have amounted to expropriation because the denial of refunds in Occidental were likely to have been in the region of 10% of transactions associated with oil production and export.217 Just as the existence of expropriation is best determined on a case-by-case basis, so is substantial deprivation, which is ‘not … a mathematical exercise but a question of reasonableness’.218 12. THE BURLINGTON ARBITRATION The authors have decided to highlight this case to demonstrate the complexities of investment tax regimes and how they are applied in practice. One of the aims is to show that investment tax measures are not necessarily of a forceful unilateral nature but may in fact involve an offer by the host state and a significant degree of bargaining. States may themselves posit convincing arguments as to why they think a previous tax regime has ran its life cycle and is now unfair to its and its peoples interests. Curiously, host states have refrained from employing human rights arguments, but as already discussed this is probably because they have been advised that such arguments find little, if any, favour with investment tribunals. Had the Burlington award not involved tax measures it would no doubt have amounted to expropriation and as a result it exemplifies the lex specialis character of tax measures vis-a-vis the general rule of expropriation under customary international law. Burlington219 was a claim brought under the US–Ecuador BIT by Burlington Resources Inc (Burlington) against Ecuador for the alleged expropriation by Ecuador of Burlington’s investments in two oil exploration blocks, Block 7 and Block 21. Burlington invested in the participation contracts for the oil blocks through its wholly-owned subsidiary, Burlington Oriente.220 Burlington contracted into the participation contracts for Blocks 7 and 21221 as a minority contractor, holding 42.5% of Block 7 and 46.25% of Block 21, with the remainder in both blocks held by Perenco.222 Under the terms of participation formula, the contractors were entitled to between 65% and 76.2% of oil produced in Block 7 and between 60% and 67.5% of oil produced in Block 21, with the relevant percentage depending on the daily average production of oil in barrels per year.223 The dispute arose from Ecuador’s desire of a greater participation in oil revenues when oil prices increased exponentially from the time most participation contracts in Ecuador (not only for Blocks 7 and 21) were negotiated and executed. Ecuador maintained that the contracts were based on an oil price projection of US$15/bbl (per barrel)224 with which the contractors could cover their expenses and obtain a reasonable return on their investments.225 Burlington acquired interests in Blocks 7 and 21 in September 2001 when the price of oil was US$20.15/bbl.226 Prices began to rise in 2002 and by June 2008 the price of Oriente crude was US$121.66/bbl.227 While oil prices fell to below US$30/bbl at the end of 2008 and the beginning of 2009, they rose again and stabilized in the region of US$60-70/bbl in 2009–10.228 Ecuador wanted an increased share in the revenues which, in its opinion, were over and above what may be described as unprecedented and unexpected increases in the price of oil when the contracts were negotiated or executed. According to Ecuador, the ‘unprecedented price increase affected the economic equilibrium’229 of the contracts, which in turn (in Ecuador’s view) necessitated readjustment,230 particularly since the state, as the owner of subsoil minerals, should be the main beneficiary of extra revenues and other windfall profits from high oil prices.231 Ecuador argued that the contractor’s share of production was based on ‘the oil price projections estimated over the life of the contract’232 referred to as the ‘ “P” factor’.233 However, the arbitral tribunal did not find a link between the economies of the relevant participation contracts and any price assumptions, emphasizing ‘that the contractor was entitled to the economic value of its oil participation share irrespective of the price of oil … ’234 This was especially clear when comparing the contracts for Burlington’s Blocks 7 and 21 with the participation contract for an unrelated block by the name Tarapoa, which did contain an economy of contracts provision, clearly providing that: If the price of crude oil in the Block exceeds USD 17 per barrel, the surplus of the benefit brought about by the price increase in real terms (calculated at constant values of [1995]) will be distributed between the Parties in equal shares.235 A similar clause to the Tarapoa clause above was specifically discussed during Block 7 and 21 contract negotiations but rejected by the contractors.236 The non-inclusion of a price-based oil revenue distribution clause ‘was not the product of inadvertence but a deliberate choice of the contracting parties’.237 Ecuador unsuccessfully tried to negotiate the so-called economic disequilibrium with the contractors,238 with Burlington outright refusing the requests for a change in distribution of revenues.239 As a result, Ecuador enacted Law No 2006-42 on 19 April 2006 (Law 42) which amended Ecuador’s hydrocarbons legislation. Law 42 required oil companies to pay the state ‘50 per cent of the amount, if any, by which the market price of oil [exceeded] the price of oil at the time the [participation contracts] were executed’ (referred to henceforth as Law 42 at 50%).240 Law 42, therefore, gave Ecuador a greater share of revenues when the market price of oil exceeded the price that existed on execution of the participation contracts. Law 42 referred to oil revenues that exceeded the price of oil at the time the participation contracts were executed as ‘extraordinary revenues’. The 50% formula was increased to 99% on 18 October 2007 by Decree 662 (henceforth referred to as Law 42 at 99%). Under the threat of litigation from petroleum companies,241 Ecuador then passed the Ley de Equidad Tributaria (LET) (Tax Equity Act) on 28 December 2008 to open new negotiations with them.242 If petroleum companies took advantage of the LET, the state’s participation in extraordinary revenues would drop from 99% to 70%. Burlington and Perenco refused to participate in the scheme envisaged under the LET.243 Burlington initiated arbitration proceedings against Ecuador on 21 April 2008.244 The company, under protest, remitted to Ecuador Law 42 payments from the introduction of the law in mid-2006 until May 2008. In June 2008, through a tax consortium set up with Perenco, Burlington began making Law 42 payments to a segregated account in the USA without sending the same to Ecuador.245 As a result, on 19 February 2009, Ecuador initiated coactiva proceedings (administrative proceedings) against the consortium246 (and therefore Burlington)247 and began to seize Burlington’s share of oil production in March 2009.248 As part of the coactiva proceedings, from March 2009 to mid 2010, Burlington’s share of oil production was auctioned off to the sole bidder, Petroecuador (the Ecuadorian state-owned oil company), at below market price.249 On 16 July 2009, Burlington and Perenco ceased operation of Blocks 7 and 21 and on the same day Ecuador took possession of the blocks.250 Finally, Ecuador terminated the participation contracts for the blocks in July 2010 under what was called a caducidad process251 (the caducidad process leads to a declaratoria de caducidad del contracto (‘declaration of nullity of the contract’)). Burlington brought its expropriation claim on the premise that Ecuador’s measures individually and in the aggregate constituted an unlawful expropriation of its investment.252 The individual measures were the enactment of Law 42 at 50% and at 99%, the coactiva proceedings that resulted in the seizure of Burlington’s share of oil production, the takeover of Blocks 7 and 21 and the caducidad declarations (ie contract terminations).253 Here we analyze in brief the tribunal’s assessment of whether Law 42 at 50% and 99% were expropriatory on their own accord. The tribunal examined the investment deprivation caused by Law 42 at 50% and at 99% in real impact terms, that is, ‘had Law 42 payments not been made, the corresponding amounts would have become additional income for Burlington, to which the ordinary income tax and employment contributions would have applied’.254 Having considered the former factors, the real impact of Law 42 at 50% was calculated to be approximately 60% of the actual Law 42 tax payments.255 Burlington argued that Law 42 at 50% had a devastating impact on its investment,256 having been applied between April 2006 and October 2007. In 2006, Burlington made a net profit of US$44.18 million.257 Law 42 at 50% applied for three quarters of 2006, during which time Burlington made a three-quarter of a year aggregate profit in the region of US$33.14 million, and Burlington’s profits thus diminished by around 40%.258 In 2007 (during which Law 42 at 50% was operable for 10 months), Burlington paid US$87.74 million in Law 42 taxes259 (including two months at 99%) and its profits stood at US$30.95 million.260 Burlington would have earned approximately US$52.64 million extra revenue had it not been subjected to Law 42 taxes (US$52.64 million was the real impact of the payments) and its profits diminished by around 62.9% in 2007.261 In addition, on a barrel of oil basis, for Block 7 (Oriente crude), in July 2006, the market value was US$66.56, from which Burlington would have received US$48.28 and made Law 42 and 50% payments of US$18.36.262 On a Block 21 barrel of oil calculation (Napo crude), during which in July 2006 the market price was US$57.43/bbl, Burlington would have made Law 42 at 50% payments of US$18.36/bbl. On the basis of these figures, the Burlington tribunal (by a majority) did not consider that Law 42 at 50% had substantially deprived Burlington of the value of its investment.263 There was no substantial deprivation on the following three bases: (i) the consortium submitted plans for further investments in Block 7, thereby implicitly conceding, albeit indirectly, that Block 7 was economically viable with Law 42 at 50%; (ii) Burlington’s financial statements for Block 21 showed a positive figure, not a loss; and (iii) there were bidders willing to acquire Burlington’s interest in Blocks 7 and 21 while Law 42 at 50% was in effect.264 The purpose of Law 42 at 50% was found by the tribunal to replicate in the participation contracts the price adjustment clause of the Tarapoa contract, that is, a sharing of windfall profits on a 50/50 basis between the state and the oil company resulting from higher oil prices, not to force Burlington to abdicate its rights under the contracts.265 Burlington argued that Law 42 at 99% destroyed the value of its investment.266 Law 42 at 99% applied from November 2007 to March 2009 and, therefore, throughout 2008.267 In 2008, Burlington made US$203.09 million in Law 42 tax payments. Burlington’s accounts did not show profits for 2008 but this appeared to the tribunal to the result of a high rate of amortization.268 It is easier to assess the impacts of Law 42 at 99% on a barrel of oil basis, whereby Burlington was deprived of 62.3% of a barrel of Oriente crude269 and 73.9% of a barrel of Napo crude.270 On a diminishment of revenue basis, Law 42 at 99% reduced Burlington’s share in oil revenues in Block 7 by 58% (from 48.9% to 20.5%) and in Block 21 by 70.2% (from 57.4% to 17.1%).271 Although the tribunal found the records showed that Law 42 at 99% was intended to force Burlington to abdicate its rights under the participation contracts, the state’s intent alone could not make up for a lack of effects.272 On this basis, despite Burlington’s profits diminishing considerably, that alone did not prove that the company’s investment in Ecuador became worthless and unviable273 as the investment ‘preserved its capacity to generate a commercial return’.274 The Law 42 tax at 99% did not, therefore, constitute a substantial deprivation and was thus not found to be expropriatory by the majority tribunal.275 The dissenting arbitrator in the case, Orrego Vicuña, concluded that Law 42 at 50% and 99% were expropriatory.276 In his opinion, no reasonable business person would conclude that paying 50% of revenue income, or more substantially, 99% thereof, would be profitable or valuable.277 For those reasons, finding a buyer would be near-impossible because of the effect of the state’s tax measures on the viability of the business.278 The arbitrator found Law 42 (and especially at 99%) was beyond any standard of reasonableness and the fact that Ecuador rolled the figure back to 70% under the LET was proof of unreasonableness in itself.279 According to the arbitrator, although not unprecedented, a 50% tax on income ‘is very substantial’.280 A 99% tax, on the contrary, was determined to be ‘not just an expropriation but a confiscation’.281 Although the arbitrator did not expand on the difference between ‘expropriation’ and ‘confiscation’, it is in our opinion reasonable to assume, on the basis that the arbitrator expressed that a 50% tax is substantial deprivation (and therefore expropriation), that he meant a 99% tax is total deprivation and, therefore, confiscation. Finally, the arbitrator very briefly touches upon a human rights argument to make the case for substantial deprivation, stating that a 50% tax means the individual or entity works half of its time for the state, and at 99%, nearly all of its time for the state (albeit that in the circumstances of the case Burlington kept a certain minimum income).282 This raises a human rights issue of ‘freedom of the individual in a democratic society’.283 This is profound, because a substantial deprivation can be defined as the deprivation of the use, control and enjoyment of investment, all of which are restricted under extreme taxation as was the case with Law 42 at 99%. 13. THE YUKOS AFFAIR The authors have decided to highlight the rare circumstances in which claimants have succeeded on the merits in proving state liability for tax expropriation.284 The cases highlighted were both brought against the Russian Federation and both related to the expropriation of Yukos.285 The investors in both cases were minority shareholders in Yukos and brought claims against Russia for expropriating their investments in Yukos as a result of the treatment of Yukos by the Russian state. The brief analysis here focuses on the treatment of Yukos by Russia rather than the claimants in the specific cases as they and their investments (shares in Yukos) were not directly targeted by the Russian state but indirectly suffered as a result of the state’s treatment of Yukos.286 In a nutshell, Yukos was once Russia’s biggest oil company287 and the largest taxpayer in the state288 until it was subjected to tax audits and reassessments for the years 2000–2004 by the Russian Tax Ministry. The tax assessments were used as an excuse for the state to freeze certain critical assets of the company which made paying the tax debts insurmountable tasks. As a result of being unable to pay the tax debts, the state seized Yukos’s shares in its subsidiaries and auctioned off those companies (one of which was worth between US$15 billion and US$57.7 billion289 and accounted for 60% of Yukos’s total oil production290 and was auctioned off for US$9.8 billion to settle the year 2000 tax reassessment of US$3.5 billion) to settle the tax debts. YNG was sold at auction to BaikalFinansGroup (BFG), a company with no physical presence at its registered address and incorporated only days before the auction, and which was bought by the Russian state-owned oil company Rosneft three days after the auction for US$360, together with the voting shares in YNG, before the YNG payment price had to be paid.291 Rosneft did not buy at auction itself so that the debacle had a veneer of legitimacy.292 To put some perspective on the tax assessments, together with taxes already paid by Yukos for the years 2000–03, the assessments amounted to more than 90% of Yukos’ annual consolidated gross revenues for those years.293 From an alternative perspective, Yukos’s net income from the year 2000 to the third quarter of 2003 was US$13 billion, and with the last of Russia’s tax assessments included, the total tax assessments with fines and surcharges for 2000–04 amounted to more than US$24 billion.294 Both arbitral tribunals found the investors’ investments were expropriated as a result of Russia’s treatment of Yukos. The Yukos affair is an apt and recent example of the power to tax being used to destroy. Russia based its reasons for the extra tax liabilities on the basis of its apparent discovery that Yukos sold oil to its subsidiary trading companies based in low tax Russian jurisdictions who then sold the oil to third-party purchasers at market price, thus avoiding higher rates of tax. Russia labelled the trading companies as ‘shams’ and the intra-group transactions as ‘sham transactions’.295 Yukos, however, had apparently complied with the written word of the tax law.296 As a result of the Tax Ministry’s stance, Yukos became liable for: (i) VAT-related levies, fines and interest at US$13.5 billion297 (for VAT the trading companies had actually paid for on exported oil and for which they were due refunds because there is 0% tax on exports—the Tax Ministry also did not allow Yukos to benefit from the VAT refund requests submitted by the trading companies nor did it allow Yukos to submit its own refund documentation even though it was now viewed as the seller/exporter)298; and (ii) by declaring the trading companies as shams, Russia assessed Yukos as being liable for US$9.4 billion (including US$1.5 billion in repeat offender fines) of profit tax—tax which the trading companies had for years filed tax returns and paid billions thereto.299 Yukos was prevented from discharging the tax assessments at several stages in an overall scheme by the Russian state to expropriate the company. The settlement of the tax assessments was prevented at several stages (eg through freezing orders) and the freezing orders also resulted in Yukos defaulting on a US$1 billion securitized loan from a banking consortium (the SocGen consortium).300 With the Russian state-owned oil company, Rosneft, assuming the SocGen consortium’s debt, it and the Tax Ministry (ie together as the Russian state), became Yukos’ main creditors, controlling 94% of votes at the first creditor’s meeting in July 2006.301 With Rosneft already owning the YNG asset, Yukos’ main creditors decided to liquidate Yukos’ remaining assets,302 resulting (together with the purchase of YNG) in Russia ultimately owning 93% of Yukos’ assets.303 The choices of Yukos’ main creditors were, according to the Quasar tribunal ‘clearly … part of an overall confiscatory scheme’.304 The tax assessments began with a three week audit of Yukos’ tax affairs in 2003. Earlier that year, the Russian Tax Ministry’s specialized top level division that was instituted for large oil companies completed a six-month audit of Yukos and found only minor tax liabilities305 that Yukos paid in full.306 The three-week audit, on the contrary, which was preceded by the arrest and imprisonment of some of Yukos’ senior executives (including its CEO, Mikhail Khodorkovsky) and staff lawyers and external counsel, found liabilities in the amount of US$3.5 billion in taxes for 2000.307 Between 2 September 2004 and 9 December 2004, Tax Ministry reassessments for Yukos’ 2000 to 2003 tax years were issued, which, together with Yukos’ 2004 tax liability, amounted to US$20.6 billion in taxes, fines and punitive interest.308 The fines faced by Yukos were actually double fines for the 2001 to 2003 tax reassessments because Yukos was considered to be a repeat offender309 (the normal fine was 20%).310 Such doubling of fines, which in themselves amounted to US$3.8 billion of tax liability, were not used in any comparable cases.311 Other comparable taxpayers in Russia who made use of trading companies in low tax regions ‘were not subjected to ruinous tax consequences’.312 Although the Tax Ministry made new assessments against other oil companies for using the same tax planning strategies, the assessments and fines were not at the same confiscatory level as applied to Yukos.313 In addition, other oil companies were able to settle their debts on reasonable terms, whereas in the case of Yukos, its assets were transferred to the state.314 The central theme of the Yukos arbitrations was why Russia treated Yukos as it did if the true intention was a bona fide assessment and collection of taxes (as Russia had argued them to be).315 The claimant in RosInvest did not claim that the retroactive tax assessments caused a substantial deprivation,316 but the tax elements were considered by the tribunal together with the other actions attributable to the state that formed part of the creeping expropriation, including the conduct of the Russian courts in the context of denial of justice.317 The tribunal in Quasar, however, was ‘concerned with whether Yukos’ tax delinquency was actually a pretext for the seizing of Yukos’ assets and the transfer of them to Rosneft or one of its affiliates’.318 The RosInvest tribunal found that the interpretation of Russian law whereby a good-faith/bad-faith doctrine was developed in relation to Yukos’ use of the low tax regions, that is, that the tax benefits available in the low tax regions were rules of good faith that were exploited by Yukos, was a novel application of Russian law not used with other comparable taxpayers.319 This same interpretation was used to wrongly label Yukos and its trading companies as shams without economic substance.320 Russia also developed a proportionality principle that the tax benefits which companies derive from using low tax regions must correspond to their investment in those regions.321 The RosInvest tribunal found this not to be part of any law.322 The tribunal also decided the interpretation of VAT law was formalistic (see above on VAT-related levies and fines).323 For those reasons, as well as the fact that the doubling of fines were not used in comparable cases,324 the RosInvest tribunal found that the tax measures taken by Russia were not bona fide and were discriminatory.325 In totality, the RosInvest tribunal ruled that: (i) the VAT assessments and fines were extraordinary and not bona fide and not non-discriminatory taxation measures326; (ii) Yukos used ambiguous legislation that allowed the use of low tax regions to its advantage but done so in an open and transparent way and the application of so-called good faith and proportionality principles by the Tax Ministry to make Yukos liable for profits of the trading companies was not bona fide and was in fact discriminatory treatment, especially in view of other companies using the same methods and not being treated as Yukos was327; (iii) the repeat offender fines for US$3.8 billion for Yukos’ conduct that pre-dated the findings that it was a first-time offender was part of a cumulative effort in destroying Yukos328; (iv) the YNG auction and purchase of YNG by BFG was a front for Rosneft that was organized in a manner to ensure state control of Yukos’ prized asset—‘in short the Tribunal is convinced that the auction of YNG was rigged’329; and (v) the bankruptcy auctions, although not foul of Russian law, were initiated and conducted by SocGen bank in association with Rosneft which, therefore, fitted in with ‘the obvious general pattern and obvious intention of the totality scheme to deprive Yukos of its assets’330 (emphasis added). Russia’s intent was therefore to expropriate Yukos, and that intent was also made obvious by the discrimination against the company, whereas no other company was subjected to the same relentless attacks as Yukos was despite using almost identical ‘tax avoidance’ measures.331 Russia’s intent was put into effect by the tax measures and consequent auctions and liquidation proceedings, whereby Yukos’ assets were expropriated by removing them from the company and from certain individuals’ control332 (mainly its then-CEO, Mikhail Khodorkovsky, and Platon Lebedev who was the president of Group Menatep (now GML) which had a controlling interest in Yukos). The RosInvest tribunal determined that there was a complete taking of Yukos’ assets as a result of the tax measures constituting an expropriation of the RosInvest claimant’s shares in Yukos.333 The cumulative effect of Russia’s tax measures were judged as being an unlawful expropriation of Yukos’ assets.334 The RosInvest decision clearly shows that Yukos was expropriated with intent and effect through measures kick-started by the Russian Tax Ministry. The Quasar tribunal determined that the Tax Ministry’s tax assessments were, rather than being the consequences of sham transactions, actually sham tax assessments.335 The Quasar tribunal also decided that Russia was hostile towards Yukos by invalidating the trading companies’ exports but still making Yukos liable for VAT in excess of US$13.5 billion on the basis of being the true seller, and then not allowing Yukos (as the true seller) to apply for the VAT refunds—effectively the state tried to have it both ways.336 Also, by not giving Yukos a moment to catch its breath and dispose of its assets in an orderly fashion to cover the tax assessments, the Tax Ministry did not act like a legitimately operating tax authority would.337 This included the Tax Ministry’s refusal to wait for three years before acting on the writ of execution (it acted immediately, giving Yukos five days to pay its tax debts). Although tax authorities should seek to collect monies expeditiously, that aim should be balanced with rational care and the right of the taxpayer.338 Such rationality was accorded to Rosneft when it became liable for YNG’s tax debts with a scheduled quarterly payment over five years agreed to by the Tax Ministry.339 The failure of the Tax Ministry to work with or even respond to Yukos’ multiple settlement requests was ‘disturbing to say the least’340 and if the real intent was to collect legitimately owed taxes, Russia could have come to a satisfactory conclusion that did not involve the liquidation of Yukos.341 The quick sale of an asset the size of YNG and the lack of investigation by Russia before dismantling a company of Yukos’ magnitude342 proved that the intent and effect of the tax assessments was to subjugate Yukos rather than to collect taxes.343 Therefore, the real goal behind the tax assessments against Yukos was a ploy to expropriate Yukos and not to legitimately collect taxes.344 The tribunal found the VAT assessments made against Yukos for $13.5 billion and the subsequent disapproval for Yukos to apply for VAT refunds were ‘confiscatory to a degree which comes close to validating the claims [of expropriation] in their entirety on this basis alone’.345 The Quasar tribunal ultimately determined that Russia expropriated Yukos.346 The RosInvest and Quasar cases can be distinguished from all those cases discussed in this article and is decisive proof of the authors’ view first written above that arbitral tribunals require a total deprivation of investment (over and above substantial deprivation) to find tax measures to be expropriatory.347 Clearly, the expropriation of Yukos could not have occurred without intent through tax measures which were discriminatory, extraordinary, and lacking due process, and of course, therefore, not bona fide measures of general taxation which is permitted under international law. Intent, therefore, will in most cases automatically be a requisite part of a total deprivation of investment. 14. UNILATERAL REPUDIATION OF TAX CONCESSIONS Some of the cases discussed thus far have involved a unilateral repudiation of contractually agreed tax concessions by the host state. The balance employed by investment tribunals is clearly inclined towards the prevalence of tax sovereignty, save for circumstances where the repudiation is such that deprives the investment of any economic value or otherwise constitutes a taking. In theory, it is not clear whether this prevalence of qualified tax sovereignty is the result of a unique rule attributable to the fundamental nature of sovereignty (lato sensu) under customary law, or rather a distinct exception to the rule whereby states must not only honour their agreements but they cannot invoke domestic laws as justification for violating their international obligations. The better view is that the attributes of sovereignty, including economic self-determination, dictate that, save for expropriation there are no restrictions on the state to legislate as regards its domestic fiscal policy.348 This conclusion is drawn from the fact that despite the otherwise binding (contractual) nature of tax stabilization clauses, these have been struck down by courts in liberal democracies on the ground that they effectively inhibit the constitutional ability of the state to legislate in certain areas.349 Not surprisingly, arbitral tribunals have categorically denied the right to executive necessity in respect of developing nations in disputes with companies from their developed counterparts, arguing that international law (ie the institution of stabilization clauses) overrides any domestic laws, namely the unfettered power of government to legislate.350 Although this tension is hard to reconcile, it seems that contemporary investment tribunals have distanced themselves from the pro-investor nationalization awards of the 1970s and 1980s and without expressly referring to the doctrine of executive necessity, in practice they view tax measures as largely falling within its remit. In a recent case entertained by the Caribbean Court of Justice (CCJ), a last instance court for Caribbean island-states, a newly elected Belize government repudiated a tax concession granted to a group of companies by means of a settlement deed negotiated by its predecessor.351 The concession was adhered to by the parties for a period of two years notwithstanding the fact that it had not been approved by the Belize legislature, was confidential (hence non-transparent), and was manifestly contrary to the country’s tax laws. The successor government repudiated the concession and the private parties initiated arbitral proceedings which rendered an award for damages which they subsequently sought to enforce in Belize. The issue of enforcement ultimately reached the Caribbean Court of Justice which was asked to assess the government’s claim that the violation of fundamental constitutional rules and the interests of the people of Belize dictate that the award in question violates Caribbean and international public policy. The Court upheld these claims, arguing that public policy should be assessed by reference to ‘the values, aspirations, mores, institutions and conception of cardinal principles of law of the people of Belize’352 as well as international public policy.353 The tax concession could only be considered illegal if it was found to breach ‘fundamental principles of justice or the rule of law and must represent an unacceptable violation of those principles’.354 The Court did not expressly say that such tax concessions were repugnant per se or that they gave rise to a legitimate human rights defence, but in the opinion of the authors this is certainly implicit. What the Court did emphasize, however, is that tax concessions, even those subject to conduct-based estoppel such as the one at hand, are procedurally unfair or illegitimate because they violate fundamental principles of constitutional legal order and to ‘disregard these values is to attack the foundations upon which the rule of law and democracy are constructed’.355 This conclusion that tax measures possess a strong constitutional foundation is significant because many of the existing tax concessions in the developing world, particularly in mining and natural resources, have come about as a result of advice received by the World Bank (WB) whereby it was urged that to attract investors the host states’ should apply a profit-based tax regime.356 According to this, host states should not expect returns immediately but wait until the investor has recouped his capital and other expenses—which in the case of mining are significant—and the investment starts to generate profits for the investor. As a result, states were urged not to demand royalties (in any case they should not exceed 2%), import or export taxes and make special allowances for corporate tax.357 A number of countries, especially in Africa, subscribed to these rather generous tax concessions, which in conjunction with poor drafting, corruption and lack of expert advice, effectively culminated in the generation of immense profits with little, if any, benefits to the impoverished local populations. A scholar that conducted extensive research on post-WB tax concessions in three resource-rich sub-Saharan nations found that they received only a miniscule amount of revenues, whether in the form of direct taxes or revenues, as compared to the investors.358 In the case of Zambia, for example, the royalty rate was set at 0.6% of the gross value of the minerals produced. Investors were exempted from payment in the first five years and in any event this was deductible against their income tax. Even so, royalty payments were agreed to be deferred when the investors’ cash operating margins fell below zero. Although one may perhaps presume that profit would be made from corporate tax which was set at 25%, investors were in fact allowed to deduct up to 100% of their capital expenditures, in addition to price participation payments and were freed from customs and excise duties for items related to their production activities. Moreover, investors are allowed to carry losses forward for 10 and 20 years on the basis of first-in-first-out. Despite the obligation to pay some other minor taxes, mining investors in Zambia were exempted from paying any withholding tax on dividends, royalties and management fees to shareholders or affiliates. Equally, there were no restrictions in place as regards transfer pricing which has allowed investors to offset losses incurred by other affiliates across the world with huge profits in Zambia and elsewhere. Estimates clearly show that Zambia’s profits from its mines were manifold, even with a much smaller production, prior to their privatization at the advice of the WB. Tax repudiation does not only concern a fair reassessment of existing tax regimes, as would be the case for a revision of the aforementioned Zambian paradigm, but also disputes as to the investor’s tax compliance. In many cases, host states claim that the investor intentionally overstates his expenses and costs to decrease his taxable profits. This may be achieved ‘lawfully’ as is the case with dubious transfer pricing accountancy or conversely by concealing the true budget. In both cases, not only is the level of tax payments unfair, in addition to the state suffering a loss, but moreover the shareholders of the company manipulating its profits equally incur a loss of profit. In 2009, arbitral proceedings were commenced by the Karachaganak Petroleum Operating Company (KPOM), an oil and gas joint venture in Kazakhstan’s largest field, requesting among others the reimbursement of retrospective crude export duty payments. The Kazakh government, through its state-owned oil company (KazMunayGas (KMG)) retorted that following independent auditing KPOM was unable to account for a sum close to $400 million declared as major expenditures. The dispute was ultimately settled before the tribunal was ever constituted and the terms of the settlement saw KMG acquire a 10% equity in KPOM, half of which was financed by a KPOM loan, while the other half in the form of an undisclosed settlement arising from the two arbitral claims and counterclaims (ie export duty payments and overstated expenses).359 State practice concerning unilateral tax repudiations (short of expropriation) is of a 2-fold nature. On the one hand, countries may expressly enact new tax legislation affecting businesses on their territory or subject to their laws, whereas on the other they may engage in overt or concealed statements or agreements360 and/or seek to settle disputes before an award is rendered. The latter may entail a degree of resource nationalism, as is the case with Ecuador or indeed the Nyerere doctrine in the aftermath of colonization, but in the vast majority of cases there is no claim by the host state of an intent to nationalize nor is there any use of self-determination arguments, even if it is ultimately claimed that existing tax concessions are unfair.361 By way of illustration, Kazakhstan enacted a sweeping tax code in 2009 which replaced existing royalties with a natural resource extraction tax calculated on the basis of recoverable reserves and global crude prices in any given year. Whatever its impact on investors it was argued that it is fair for producing nations to impose tax in correlation with global market prices. Although the Kazakh government initially stipulated that the changes will not affect investments guaranteed by tax stabilization clauses, senior officials continue to describe these clauses as unfair, but stop short of making any direct claims of unilateral repudiation.362 This state practice is speculative and uncertain and hence difficult to quantify. However, given our observations throughout this article, particularly on the basis of available investment awards, where a host state violates the terms of a tax stabilization clause investment tribunals would have a hard job balancing between breach of contract and tax sovereignty. The damage would have to be sustained but it would no doubt be mitigated, perhaps even considerably, by the following factors: (i) the duration of the contract and the profit accrued to the investor at the time of the breach;(ii) the unfair nature of the tax concession, if any; (iii) the absence of negotiating parity between the parties when the contract was signed, if any; (iv) relevant international standards and practice and; (v) the good faith of the host state, reflected either in its prior consultation with the affected investors or the efforts taken to mitigate as far as possible any negative impacts. Such an outcome in favour of the host state would be undeniable in the absence of a stabilization clause and hence the breach of a clearly unfair stabilization clause with the adoption of tax measures consistent with international practice would hold significant sway with investment tribunals. Several tribunals have made it clear that a state can be liable for tax expropriation if there is a breach of legitimate expectations, the basis of which is a stabilization clause. The rationale inherent in this connection between stabilization clauses and legitimate expectations is addressed in the following sections through the ‘eyes’ of relevant awards. 15. LEGITIMATE AND REASONABLE EXPECTATIONS OF THE INVESTOR In Feldman, under Mexico’s IEPS law, the presentation of detailed invoices to receive tax refunds had been a condition since 1 January 1987 and continued throughout the time the claimant, Feldman, invested in Mexico in April 1990 until 1 January 1998 when the law was amended to allow tax rebates only to the first sale of cigarettes in Mexico.363 Therefore, the invoice requirement was always written law and although it was not always applied364 it was not expropriatory and constituted a reasonable legal requirement backed up by rational policy—that is, the Mexican tax authorities could straightforwardly, accurately, and without overstatement, analyse and process the tax amounts for which rebates were sought.365 Indeed, without the invoices, the claimant was unable to know and declare precisely the amounts of tax rebates CEMSA would be owed366 and had on some occasions used formulas to estimate the tax refund amounts accepted in 1992, but were grossly overstated in later years.367 The fact that the tax law’s invoice requirement was always law since Feldman’s investment in Mexico albeit without ever having been enforced could not give him a legitimate expectation that enforcement of the tax laws would not change. As noted by the tribunal, ‘tax authorities in most countries do not act in a consistent and predictable way’.368 Therefore, a line of conduct by tax authorities (ie their enforcement or non-enforcement of tax laws) cannot give an investor a legitimate expectation that such conduct would continue and there can be no expropriation on those grounds. In EnCana, part of the indirect expropriation claim was based on a legitimate expectation to receive VAT refunds. The EnCana tribunal recognized that a tax expropriation can occur if specific commitments have been made by the host state as regards tax measures,369 such as a tax stabilization clause.370 Without a commitment being made by a host state to an investor/investments, the host state is entitled to change its tax laws as it sees fit, with the investor having ‘neither the right nor any legitimate expectation that the tax regime will not change, perhaps to its disadvantage, during the period of investment’371 (authors’ emphasis). There was no such commitment made by Ecuador in EnCana. Therefore, if the economic benefit from the investment is reduced by taxation, in the absence of a specific commitment made by the host state to the investor, tax measures will not be expropriatory. Similarly, in Cargill, the tribunal rejected the notion that an investor could have reasonable investment-backed expectations that the tax law will remain stable unless such expectations arise from contract or quasi-contractual bases.372 In Link Trading, the tribunal determined that tax measures that violate obligations given by the state to an investment can be abusive373 and in turn abusive tax measures can amount to expropriation.374 In that case, however, the tribunal agreed with Moldova’s position on the 10-year guarantee, concluding that Moldova did not make any specific obligations to maintain the customs and tax regimes applicable to the claimant’s customers buying in the Free Economic Zone of Chisinau (Moldova) where the claimant had its business.375 The claimant could not, therefore, have had a legitimate expectation that the tax regime would not change and so there was no expropriation on that basis. In El Paso, El Paso claimed that ‘[i]nvestors have a reasonable and legitimate expectation to be able to adjust their fixed assets for tax purposes in periods of high inflation.’376 This argument was rejected by the tribunal because there is no duty on a state to adapt its tax regime in foreign investors’ best interests.377 Therefore, the calculation of taxes which is merely unfavourable to a foreign investor does not equate to expropriation.378 In Occidental II, the arbitration concerning Ecuador’s Law 42 that resulted in the Burlington arbitration, was found by the tribunal to be in breach of the participation contracts and, therefore, flouted the claimants’ legitimate expectations. In that arbitration, however, Law 42 was not considered to be a tax.379 The analysis of the above tax arbitrations has shown that arbitral tribunals are willing to find a state liable for expropriation if a legitimate expectation has been breached, but investors cannot have legitimate expectations that the tax regime, both in terms of tax laws and enforcement of those laws, will not change, unless there is a contractual/quasi-contractual obligation thereto. Hence, the state’s power to tax, including its power to amend and create new tax laws, supersedes investors’ expectations that are based on anything other than contractual/legal obligations given by the state to the investor/investment. In the alternative, an arbitral tribunal could still require a substantial deprivation of an entire investment even though contract rights have been repudiated.380 The issue of investors’ legitimate expectations has, in some respects, found greater credence in the context of minimum standard of treatment, namely the fair and equitable treatment standard (FET).381 In the recent Micula award,382 the tribunal clearly emphasized that in the context of FET, absent a stabilization clause, investors must expect legislation to change.383 Like the national treatment standard, FET does not require a substantial deprivation of investment, and therefore claimants could potentially have a greater chance of success for breach of legitimate expectations in relation to the tax regime applicable to them under the FET standard. In fact, stabilization clauses aside, a shift in the tax regime applicable to investments can result in a violation of FET if the investments were made on the basis of receiving tax incentives (and others) under a legislative regime for a specific period of time.384 A repudiation of or a substantial change to those incentives will violate FET if: (i) the state has made a promise or assurance; (ii) the promise or assurance is relied on by investors as a matter of fact; and (iii) such reliance was reasonable.385 As the tribunal in Micula stated: it cannot be fair and equitable for a state to offer advantages to investors with the purpose of attracting investment in an otherwise unattractive region … and then maintain the formal shell of the [incentive] regime but eviscerate it of all (or substantially all) content.386 16. CONCLUSION Available case law and state practice clearly demonstrate that the application of domestic tax measures affecting investments in the host state constitute lex specialis to the general framework of expropriation under customary international law. Unlike other national measures clad with the attire of formal law and contrary to the rule whereby states cannot invoke their domestic legislation to evade their international obligations, tax measures are viewed as intrinsic to (or inseparable from) the fundamental attributes of sovereignty, in much the same manner as self-defence (mutatis mutandis). Despite its reverence this is nonetheless a qualified sovereignty, stopping short of expropriation, whether direct or indirect. In the EnCana case, for example, a direct expropriation claim would have otherwise been successful, albeit the tribunal required the violation of particular conduct requirements, although the role of conduct requirements is to differentiate between lawful and unlawful expropriation. The lex specialis character of tax measures is further confirmed in the Burlington award, which no doubt constituted a substantial deprivation as no major oil company would likely invest hundreds of millions of dollars to pay a 99% tax to make a mere $30 million a year, or only 37.7% of the value of a barrel of oil. If the Burlington case concerned measures other than tax, the finding of the tribunal would have been in favour of expropriation on the basis of a breach of legitimate expectations coupled with substantial deprivation. Investment tribunals are unlikely to lower the threshold of state liability for expropriation arising from tax measures and are in fact likely to view the substantial deprivation standard very strictly and in a manner that requires a total deprivation of property. This is clearly evident in the Yukos cases, where the host state engaged in a total deprivation of the investors’ profits and in fact the tax assessments were so vast that they went above and beyond Yukos’ net income for the relevant periods of tax assessments. A finding of liability for tax expropriation will always be embarrassing for the host state as it communicates utter disregard for investors and constitutes an abuse of the tax power. It is for this reason that tribunals are prepared to give the benefit of the doubt to the host state, as in EnCana. No such leeway is afforded to host states in respect of tax measures that violate the national treatment principle. Unlike tax expropriation, violation of the national treatment principle provides few difficulties for investment tribunals because where there is a like investor/investment, if the foreign investor/investment is treated less preferentially than the host state’s investor/investment this alone suffices for liability to arise. There need not be an abuse of power by the state, whether nationality-based discrimination is present or not. This is evident from the vast number of tax arbitrations that succeeded on the merits in the national treatment claims but failed on expropriation for the same tax measures.387 Finally, state practice confirms the position adopted by investment tribunals, particularly the affirmation of the state’s power to tax as enshrined in bilateral tax treaties without being disputed or in any other way distorted in BITs. States are aware of the qualified limits of this sovereign power and with the exception of very few cases where tax expropriation was blatant, in all other cases, whether leading to arbitration or not, host states demonstrated an inclination to retain the investment productive and profitable, and there was no serious counterclaim (at a political level) by the investor’s state of nationality that the host state is not entitled to amend its domestic tax regime. No doubt, a change of tax regime in breach of a stabilization clause will incur liability for the host state. Perhaps, the next phase of argumentation by host states will involve human rights claims, including economic self-determination, particularly in respect of tax concessions entered into under terms that were coercive, corrupt or largely unfair to the host state. Whatever the case, the lex specialis character of domestic tax measures in the field of international investment law will remain valid for the foreseeable future. 1 Nearly 200 years ago, in the US case of McCulloch v Maryland (1819) 17 US 327, the judge presiding over the case, Chief Justice Marshall, correctly asserted that ‘ … the power to tax involves the power to destroy … ’. 2 See El Paso Energy International Company v Argentine Republic, ICSID Case No ARB/03/15, Award of 31 October 2011, para 290. 3 See, for example, art 77 of the EC–Chile FTA which applies the national treatment principle in respect of internal taxes to imported goods. Given that importers of goods engage in trade and not investment, a violation of this provision does not give rise to international investment arbitration (IIA). 4 Trade liberalization encompasses tariff barriers and non-tariff barriers. As far as the former is concerned, the term tariff is broad and includes practices such as duties, surcharges, and export subsidies. Non-tariff barriers include licensing requirements, quotas and arbitrary standards, among others. 5 In the 1970s, developed countries were allowed to grant preferential tariffs to imports from least developed nations, a system known as Generalized System of Preferences (GSP), which constituted an exception to the most favoured nation (MFN) principle, itself a cornerstone of the General Agreement on Tariffs and Trade (GATT) and later the WTO. This was formalized in 1979 through an instrument known as the Enabling Clause, arts 1, 5, and 7. See ‘Differential and more favourable treatment reciprocity and fuller participation of developing countries’, Decision of 28 November 1979. This remains in force under art 1(b)(iv) of the 1994 WTO Agreement. 6 WTO, Mexico – Tax Measures on Soft Drinks and Other Beverages, adopted on 24 March 2006; the same tax measures were subject to investment arbitration between Archer Daniels Midland Company and Tate & Lyle Ingredients Americas Inc v United Mexican States, (ICSID Case No ARB(AF)/05/05), Final Award of 21 November 2007, Corn Products International Inc. v United Mexican States, ICSID Case No ARB(AF)/04/01, Decision on Responsibility of 15 January 2008, and Cargill Incorporated v United Mexican States, ICSID Case No ARB(AF)/05/2, Award of 18 September 2009. 7 Joint tax vetoes and tax exclusions [because relevant matters are ordinarily the subject matter of other bilateral or multilateral tax treaties] constitute standard clauses in many contemporary BITs and FTAs. See A Kolo, ‘Tax “Veto” as a Special Jurisdictional and Substantive Issue in Investor-State Arbitration: Need for Reassessment?’ (2008–09) 32 Suffolk Transnatl L Rev 475. 8 For example, art 25 OECD Model Tax Convention and art 7 of the EC Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises was adopted in 1990 [EU Arbitration Convention], 90/436/EEC, OJ L 225 (20 August 1990). See I Bantekas, ‘The Mutual Agreement Procedure and Arbitration of Double Taxation Disputes’ (2008) 1 Colombian YBIL 182. 9 The 2006 Protocol Amending the Convention between the USA and Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes provides for mandatory arbitration in respect of certain cases in the mutual agreement procedure (art 25). 10 See AD Christians, ‘Tax Treaties for Investment and Aid to Sub-Saharan Africa’ (2005) 71 Brooklyn LR 639. 11 See generally G Kofler, M Poiares Maduro and P Pistone (eds), Human Rights and Taxation in Europe and the World (IBFD, Amsterdam, 2011). 12 The ECtHR has never suggested that the levying of religious tax (the so-called Kirchensteuer) violates art 9 ECHR, whereas the German Federal Constitutional Court has tried to limit some of the unintended effects of this unique tax. By way of illustration, in case BVerfg, 1BvR 3006/07 (2 July 2008) it found that a levy ordinarily charged for abandoning the registers of a particular religion was unconstitutional. See also National & Provincial Building Society, Leeds Permanent Building Society and Yorkshire Building Society v United Kingdom (1997) 25 EHRR 127 para 80: ‘a contracting state … when framing and implementing policies in the area of taxation, enjoys a wide margin of appreciation and the [ECtHR] will respect the legislature’s assessment in such matters unless it is devoid of reasonable foundation’. 13 Ferrazzini v Italy (2002) 34 EHRR 45, para 29; confirmed in Jussila v Finland (2007) 45 EHRR 39. 14 OAO Neftyanaya Kompaniya Yukos v Russia, Eur Ct HR Application No 14902/04, Judgment of 17 January 2012 (Yukos v Russia) paras 561 and 564. 15 ibid para 565. 16 ibid para 646. 17 ibid paras 621 and 646. 18 ibid para 656. 19 ibid para 657. 20 By way of illustration, the European Court of Justice (ECJ) has been criticized for its failure to declare that juridical double taxation should be prohibited as discriminatory, especially as regards its judgments in Damseaux v Belgium, Case C-128/08, judgment (16 July 2009) para 27 and Kerckhaert and Morres, Case C-194/06, judgment (14 November 2006) paras 19–24. The result in these cases is a violation of the right to property, enshrined in art 17 of the EU Charter of Fundamental Rights, by reason of confiscatory double taxation to which the parties are subjected (in this case cross-border inheritance). 21 art V(2)(a) 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 330 UNTS 38. 22 Particularly after Mitsubishi Motors Corp v Soler Chrysler Plymouth Inc, 473 US 614; see I Bantekas, ‘The Foundations of Arbitrability in International Commercial Arbitration’ (2008) 27 Aust YBIL 193. 23 See WW Park, ‘Arbitrability and Tax’ in LA Mistelis and SL Brekoulakis (eds), Arbitrability: International and Comparative Perspectives (Kluwer, 2009) 179, 181. 24 See, for example, Portuguese Law/Decree No 10/2011 on tax arbitration, in respect of which commentators suggest that it has increased tax arbitration manifold. 25 See, for example, Ecuador v Occidental Exploration & Production Co (OEPC), [2006] EWHC 345 (Comm), where the court (not an investment tribunal) looked to the tax exclusion stipulations of art X of the 1993 US–Ecuador BIT rather than Ecuadorian claims that tax was not arbitrable under its laws. 26 By way of illustration, South American rules of civil procedure require that all tax disputes be settled by national judicial authorities and they, therefore, face a conflict between a ‘prohibition on submitting tax disputes to arbitration and international commitments to be bound by arbitration when there is an arbitration clause in a treaty’. See N Quiñones Cruz, ‘International Tax Arbitration and the Sovereignty Objection: The South American Perspective’ (2008) Tax Notes Intl 533, 540. 27 See R O'Keefe and CJ Tams (eds), The United Nations Convention on Jurisdictional Immunities of States and Their Property: A Commentary (OUP, 2013) 277. 28 art 19, ICSID Additional Facility Rules. 29 Metalclad Corp v Mexico, ICSID Case No ARB(AF)/97/1, Award, 30 August 2000, para 70; Total SA v Argentina, Case No ARB/04/1, Decision on Liability, 21 December 2010, para 40. 30 CMS Gas Transmission Co v Argentina, ICSID Case No ARB/01/8, Award, 12 May 2005, para 121, where the tribunal rejected the claim that the severity of the Argentine crisis should allow the country to give priority to its fundamental human rights obligations. 31 In BCB Holdings Ltd and The Belize Bank Ltd v Attorney General of Belize [2013] CCJ 5 (AJ) the Belize Finance Minister had granted tax waivers in a unique deed but did not subject it to parliamentary approval. Although the award was rendered free of any public policy claims, in BCB Holdings Ltd LCIA Case No 81169, Award of 29 August 2009, such claims were sustained at the phase of enforcement. See paras 3 and 61 of the CCJ judgment. 32 art 2(2), Spanish Arbitration Act, Law No 60/2003 (as amended in 2011); Greek Law 3943/2011 on tax evasion. 33 See Greek Supreme Special Court judgment 24/1993 that held that tax disputes with foreign investors are beyond any doubt arbitrable. 34 County of Mobile v Kimball (1880) 102 US 691, 703; see also Houck v Little River Drainage District (1915) 239 US 254 (Mr Justice Hughes) 264, expressly stating that a state’s power to tax is ultra vires if it is abusive and ‘as a result of its arbitrary character is mere confiscation of particular property’. Equally confirmed in A Magnano Co v Hamilton, (1933) 292 US 40, 44. 35 See, for example, Kügele v Polish State, Case No 34, (1932) Annual Digest 24, 69, which rejected the argument that an increase in taxes (a licence fee in the case at hand) may be confiscatory, although the tribunal did not necessarily reach the conclusion that this was generally impossible under all circumstances. 36 One should distinguish between jurisdiction and locus standi for IIA from the existence of expropriation as such under international (including customary) law. That is why the tribunal in Link-Trading Joint Stock Company v Department for Customs Control of the Republic of Moldova, UNCITRAL Arbitration, Final Award, 18 April 2002, para 64, award iterated that tax is expropriatory where it violates a BIT or other treaty or where the taxes themselves constitute abusive takings. See also T Wälde and A Kolo, ‘Confiscatory Taxation under Customary International Law and Modern Investment Treaties’ (1999) 4 CEPMLP J <http://www.dundee.ac.uk/cepmlp/journal/html/vol4/article4-17.html> accessed 25 May 2010. 37 Duke Energy International Peru Investments No 1 v Peru, ICSID Case No ARB/03/28 is the only case to the best knowledge of the authors where a tax claim (based on a violation of the parties’ stabilization clause) was submitted on the basis of the parties’ contract rather than a BIT. 38 See, for example, art 2103(6) NAFTA; art 21.3(6) DR-CAFTA; art 21(5) ECT; art XII(4) Canada–Ecuador BIT; art 170(4)(b), Japan–Mexico BIT; art 21(2) US Model BIT; art 16, Canada Model BIT; art 28, Norwegian Model BIT. 39 This is explicit in art 16(1) of the 2004 Canadian Model BIT and art 3(4) of the 2008 German Model BIT which excludes the application of national and MFN treatment to advantages provided in other bilateral tax treaties; equally, art 28(2), Norwegian Model BIT and art 196(3), EC–Chile FTA. 40 UNCTAD, ‘Taxation’ (2000) Series on Issues in International Investment Agreements, Doc No UNCTAD/ITE/IIT/16, 36 <http://unctad.org/en/docs/iteiit16_en.pdf> accessed 16 May 2014. 41 For example, art 13(1), 2004 Canadian Model BIT; art 1110(1) NAFTA; art 9, EC–RSA FTA. 42 El Paso award (n 2) para 292. 43 art VIII(5)(b), Draft MAI. 44 OECD Negotiating Group on the MAI, ‘The Multilateral Agreement on Investment- Draft Consolidated Text’ Doc No DAFFE/MAI(98)7/REV1 (22 April 1998) 86; see also art 6(2) of the Norwegian Model BIT. 45 art III, US–Egypt BIT. 46 UNCTAD, Expropriation (UNCTAD Series on Issues in International Investment Agreements II (2011) Doc UNCTAD/DIAE/IA/2011/7) 133. 47 art 5, 1999 Argentina–New Zealand BIT; art 8, 1999 New Zealand–Chile BIT; art 5, 1988 New Zealand–China BIT (with exchange of notes). 48 See William W Park, ‘Arbitration and the Fisc: NAFTA’s “Tax Veto” ’ (2001) 2 Chi J Intl L 231. 49 See H Lauterpacht, ‘The Problems of Jurisdictional Immunities of Foreign States’ (1951) 28 BYBIL 220, 237. 50 In Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v Mongolia (Award on jurisdiction and liability, 28 April 2011) the arbitrators refused to assert jurisdiction for examining substantive tax disputes. 51 Yukos Capital SarL v OJSC Rosneft Oil Company [2011] EWHC 1461 (Comm) 122; Tullow Uganda Ltd v Heritage Oil and Gas Ltd, Heritage Oil plc [2013] EWHC 1656 (Comm); Government of India v Taylor [1955] AC 491 (HL) 511. 52 Agreement between the Government of the Republic of Costa Rica and the Government of Canada for the Promotion and Protection of Investments, signed 18 March 1998 (Canada–Costa Rica BIT). 53 Eudoro Armando Olguin v Republic of Paraguay, ICSID Case No ARB/98/5, Award of 26 July 2001 para 84. 54 CME Czech Republic BV (The Netherlands) v Czech Republic, Arbitration under the UNCITRAL Rules, Partial Award of 13 September 2001 para 607. 55 art VIII(5)(b), Draft MAI; social securities are likely to be interpreted by an arbitral tribunal as taxes—Hellenic Electric Railways Ltd v Government of Greece, Ad Hoc Arbitration, Geneva, Award of 18 March 1930, in which the arbitral tribunal rejected the distinction between social security contributions and taxes. 56 EnCana Corporation v Republic of Ecuador, LCIA Case No UN3481, Award and Partial Dissent of 3 February 2006 (EnCana, EnCana Award or EnCana Dissent). 57 EnCana award, para 142(2). 58 Antoine Goetz and Others v Republic of Burundi, ICSID Case No ARB/95/3, Award of 10 February 1999 (Goetz I); Antoine Goetz and Others & et SA Affinage des Metaux v Republic of Burundi, ICSID Case No ARB/01/2, Award of 21 June 2012 (Goetz II); Archer Daniels (n 6); Burlington Resources Inc v Republic of Ecuador, ICSID Case No ARB/08/5, Decision on Jurisdiction of 2 June 2010 and Decision on Liability of 14 December 2012 (Burlington); Cargill (n 6); Corn Products International Inc v United Mexican States, ICSID Case No ARB(AF)/04/01, Decision on Responsibility (Redacted Version) of 15 January 2008 (Corn Products); El Paso (n 2) Decision on Jurisdiction of 27 April 2006 and Award of 31 October 2011 ; Marvin Roy Feldman Karpa v United Mexican States, ICSID Case No ARB(AF)/99/1, Award of 16 December 2002 (Feldman); Occidental Exploration and Production Company v The Republic of Ecuador, LCIA Case No UN 3467, Award of 1 July 2004 (Occidental). 59 EnCana award (n 56) para 142(3). 60 ibid para 142(4). 61 ibid. 62 ibid. 63 See generally EnCana award (n 56) paras 169–200. 64 On conduct of the courts, see section below on The Yukos Affair; see also generally RosInvest Co UK Limited v The Russian Federation, SCC Case No V 079/2005, Award on Jurisdiction of 1 October 2007 (RosInvest Jurisdiction Award) and Final Award of 12 September 2010 (RosInvest); Quasar de Valores SICA V SA, ORGOR DE V AWRES SICA V SA, GBI 9000 SICA V SA, ALOS 34 SL v The Russian Federation, SCC Case No 24/2007, Award of 20 July 2012 (Quasar); and Yukos v Russia (E Ct HR). 65 EnCana award (n 56) para 182. 66 EnCana award (n 56) para 179. Similarly, if an investor is exempted from paying taxes (ie there is no need to go through the refund route because the tax is not paid in the first place) and that tax advantage is revoked, the revocation of the tax advantage can constitute an indirect expropriation. 67 R Dolzer and C Schreuer, Principles of International Investment Law (2nd edn,OUP, 2012) 119; see also Waste Management Inc v Mexico, ICSID Case No ARB(AF)/00/3, Award of 30 April 2004 (Waste Management II) para 141; Middle East Cement Shipping and Handling Co SA v Egypt, ICSID Case No ARB/99/6, Award of 12 April 2002, in which the tribunal accepted that a licence granted to the investor for the bulk importation and storage of cement was an investment (para 101) under the Egypt–Greece BIT, and that the revocation of the licence amounted to an expropriation of the licence (as an investment) (para 107). 68 Feldman (n 58) para 101. 69 GC Christie, ‘What Constitutes a Taking of Property Under International Law’ (1962) 38 Brit YB Intl L 307, 338. 70 Feldman award (n 58) para 102. 71 Feldman award (n 58) para 103; EnCana award (n 56) para 177; El Paso award (n 2) para 290; Link-Trading award (n 36) para 68; in RosInvest (n 64), Russia argued that there is a presumption of legality for tax measures under international law (RosInvest award, para 188) and that taxation measures are lawful from a public international law perspective, do not generally constitute expropriation and states have a wide margin of discretion in exercising their tax powers (RosInvest award, para 476). The RosInvest tribunal agreed with Russia that tax authorities may have a certain discretion and the right to change their positions regarding interpretation and application of tax laws but are still subject to objectivity and fairness by an arbitral tribunal to determine whether such measures are bona fide or not (RosInvest award, para 496). 72 EnCana award (n 56) para 177. 73 ibid 74 ibid. 75 ibid. 76 Feldman award (n 58) para 91; Occidental award (n 58) para 85; Archer Daniels award (n 6) para 238; EnCana award (n 56) para 177; Burlington award (n 58) para 392. 77 Archer Daniels award (n 6) para 238. 78 Cargill award (n 6) para 16. 79 ibid para 17. 80 ibid. 81 EnCana award (n 56) para 179. 82 art I(g), Canada-Ecuador BIT. 83 EnCana award (n 56) para 182. 84 ibid para 182. 85 art VIII(1), Canada–Ecuador BIT 86 art I(j), Canada–Ecuador BIT; EnCana award (n 56) para 117. 87 EnCana award (n 56) para 182. 88 Occidental award (n 58) paras 81 and 86. 89 art I(1)(a)(iii), US–Ecuador BIT. 90 ibid. 91 Occidental award (n 58) para 86. 92 ibid at para 89. 93 EnCana award (n 56) para 183. 94 EnCana award (n 56) para 183, citing art I(j), Canada–Ecuador BIT which provides a definition of ‘returns’. 95 ibid. 96 ibid para 95. 97 ibid para 185. 98 ibid. 99 ibid para 186. 100 ibid para 186. 101 ibid para 186 and 187. 102 Ecuador’s Interpretative Law No 2004-41 of 11 August 2004 (Interpretative Law) contained an interpretation of art 69A of Ecuador’s Internal Tax Regime Law (ITRL) that had permitted refunds of VAT paid in inputs for exported ‘fabricated’ goods. The Interpretative Law clearly stated that ‘petroleum is not a good that is fabricated’ for the purposes of art 69A ITRL, thereby ruling out VAT refunds for inputs in oil exploration and exploitation under art 69A ITRL. 103 EnCana award (n 56) para 188. 104 Occidental award (n 58) paras 143 and 152. 105 EnCana award (n 56) para 189. 106 ibid para 190. 107 ibid para 191. 108 EnCana award (n 56) paras 192–5; the EnCana tribunal arrived at this decision by adopting the position of the Waste Management award, whereby ‘the mere non-performance of a contractual obligation’ (emphasis added) does not equate to a taking of property or a measure tantamount to expropriation (Waste Management award (n 67) para 174). 109 EnCana award (n 56) para 194. 110 ibid para 195. 111 ibid para 194. 112 ibid para 196. 113 Factor X was a formula in the participation contracts which set the participation percentages between Petroecuador and the oil companies and outlined that any changes in the tax regime would result in adjustments to the participation percentages to absorb the increase or decrease in taxes, maintaining the economic balance of the contracts. (EnCana award (n 56) para 31 and Occidental award (n 58) para 97). The EnCana and Occidental contracts did not, however, contain provisions on VAT and its reimbursement (EnCana award (n 56) para 150 and Occidental award (n 58) para 143). 114 ibid; the Occidental tribunal emphasized that the SRI’s decisions appeared to be founded on reason and fact, not prejudice or preference (Occidental award (n 58) para 163). The SRI tried to bring some resemblance of order to the variety of contradictory practices, rules and regulations dealing with the VAT refund issue (Occidental award (n 58) para 163). 115 EnCana award (n 56) para 196; in addition, Ecuador’s Tax Court and Supreme Court had differences of opinion which suggested proper due process (para 196). 116 ibid para 197. 117 ibid. 118 Compañía de Desarrollo de Santa Elena, SA v The Republic of Costa Rica, ICSID Case No ARB/96/1, Final Award of 17 February 2000 (Santa Elena) para 68; some tribunals and scholars have labelled expropriations that lack compensation as unlawful whereas others have not. We are of the opinion that an expropriation that lacks compensation is not de facto unlawful (unless it also violates the pertinent conduct requirements) and is unlawful only when the host state has obviously expropriated investment and refused to compensate the investor. In all other situations litigation is required to determine the existence of expropriation and in such circumstances it would be unfair to brand the action as unlawful if it has not violated the conduct requirements. 119 Occidental award (n 58) para 86. 120 T Wälde and A Kolo, Investor-State Disputes, ‘The Interface Between Treaty-Based International Investment Protection and Fiscal Sovereignty’ (2007) 35(8/9) Intertax 424, 445. 121 Dolzer and Schreuer (n 67) 115. 122 Olguin (n 53). 123 ibid para 84. 124 ibid. 125 The tribunal in Sea-Land Service, Inc v The Islamic Republic of Iran, Ports and Shipping Organisation, Award No 135-33-1 of 22 June 1984, 6 Iran–USCTR 149, came to a similar conclusion, requiring at the very least proof of deliberate governmental interference in a company’s use and benefit of its investment. (6 Iran–USCTR 149, 166); M Brunetti, ‘The Iran-United States Claims Tribunal, NAFTA ch 11 and the Doctrine of Indirect Expropriation’ (2001) 2 Chi J Intl L 203, 207. 126 Campbell McLachlan QC, Laurence Shore and Matthew Weiniger, International Investment Arbitration – Substantive Principles (OUP 2008) 292. 127 Emilio Agustín Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, Award of 13 November 2000, para 64. 128 ibid. 129 art 13(1), ECT; see also majority of UK BITs, such as art 5(1), UK–Turkey BIT and art 4(1) UK–Malaysia BIT; similar can be found in various Swedish BITs such as art 4(1), Sweden–Argentina BIT and art 4(1) Sweden–Russia BIT; see also Siemens AG v Argentina, ICSID Case No ARB/02/8, Award of 6 February 2007, para 270. 130 Compañiá de Aguas del Aconquija SA and Vivendi Universal v Argentine Republic, ICSID Case No ARB/97/3, Award of 20 August 2007 (Vivendi II) para 7.5.20. 131 Metalclad Corporation (n 29) para 103. 132 ibid. 133 ibid; Although the Metalclad definition of expropriation is within the context of NAFTA, expropriation provisions in the international investment universe are all almost identical in form and/or effect and NAFTA jurisprudence is assumed to reflect applicable standards under customary international law, as a result, among others, of having been applied in non-NAFTA cases. 134 EnCana award (n 56) para 194. 135 EnCana award, Dissent (n 56) para 6. 136 The decisions are said to be defunct on the basis that oil companies did have a legal right to tax refunds under Ecuadorian law and Andean Community law as decided by the Occidental tribunal (Occidental award (n 58) paras 143 and 152) and for argument’s sake considered correct by the EnCana tribunal (EnCana award (n 56) para 189) and Ecuadorian courts had on occasion ruled that oil companies were due VAT refunds (Occidental award (n 58) paras 141 and 143). 137 EnCana award, Dissent (n 56) para 7. 138 Quasar award (n 64) para 181; El Paso award (n 2) para 290; the Burlington tribunal, however, took the position that there is no presumption of validity in favour of tax measures because the relevant BIT would state the same if that was the true position (Burlington award (n 58) para 365). 139 s712 comment (g), Third Restatement of the Law of Foreign Relations of the United States 1987 (Third Restatement); the Burlington tribunal also made a correlation between confiscatory taxation and expropriatory taxation (Burlington award (n 58) para 394), as have Walde and Kolo (n 120) 441. 140 See Burlington award (n 58) para 455; Archer Daniels award (n 6) para 251; RosInvest award (n 64) para 621(a); Quasar award (n 64) para 79 (referring to the tax assessments against Yukos being ‘shams’). 141 See Occidental award (n 58) paras 163 and 177 on arbitrariness/discrimination without intent. 142 Archer Daniels award (n 6) para 251. 143 Feldman award (n 58) para 118. 144 ibid. 145 Feldman award (n 58) para 15. 146 ibid. 147 ibid para 21. 148 ibid para 109. 149 ibid para 142. 150 ibid. 151 The Mexican tax laws themselves were prima facie measures of bona fide general taxation (ibid para 113). Crucially, Mexico was successful in arguing legitimate polices for the tax law, including the necessity to restrict grey market cigarette exports (ibid paras 115–16 and 136) and illegal re-exportation of Mexican cigarettes back into Mexico (ibid para 136). The application of the tax laws was, however, de facto discriminatory, whereby they were not applied to like-situated Mexican exporters of cigarettes, resulting in Mexico being liable for violating art 1102 of NAFTA (national treatment)—see ibid paras 154–88). 152 Cargill award (n 6) para 109. 153 ibid paras 106 and 217. 154 ibid paras 106 and 217. 155 ibid paras 208 and 219. 156 ibid paras 208 and 220. 157 Cargill Award (n 6) para 368. 158 Burlington award (n 58) para 401. 159 ibid. 160 ibid. 161 ibid para 455. 162 See section on Burlington case below. 163 ibid para 455. 164 ibid para 482. 165 Link-Trading award (n 36) para 87. 166 Feldman award (n 58) para 188; Cargill award (n 6) para 220. 167 Feldman award (n 58) para 152; Cargill award (n 6) para 368. 168 Técnicas Medioambientales Tecmed, SA v United Mexican States, ICSID Case No ARB(AF)/00/2, Award of 29 May 2003, para 115; and MCI Power Group LC and New Turbine Inc v Republic of Ecuador, ICSID Case No ARB/03/6, Award of 31 July 2007, para 300. 169 MCI Power Group, ibid para 300. 170 Telenor Mobile Communications AS v Republic of Hungary, ICSID Case No. ARB/04/15, Award of 13 September 2006, para 65. 171 ibid; Tecmed award (n 168) para 115. 172 MCI Power Group award (n 168) para 300. 173 Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran, the Government of the Islamic Republic of Iran et al, Iran-USCTR, Award No. 141-7-2 of 22 June 1984. 174 Waste Management award (n 67) para 143. 175 Metalclad award (n 29) para 103. 176 Feldman award (n 58) para 142. 177 ibid. 178 Archer Daniels award (n 6) para 246. 179 ibid para 245. 180 Cargill award (n 6) para 368. 181 Link-Trading award (n 36) para 91; the downturn in the business and change in the tax regime coincided in part with the Russian financial crisis of 1998, resulting in the sharp depreciation of the Moldovan currency against the US dollar from September 1998 to September 1999. This was found by the tribunal to actually constitute a stronger causal link to the company’s business misfortunes than the tax measures at hand (Link-Trading award (n 36) para 90). 182 Link-Trading award (n 36) para 91. 183 Goetz II (n 58). 184 Goetz II award (n 58) para 194. 185 ibid para 196. 186 See K Halverson Cross, ‘Sovereign Arbitration’ in RM Lastra and L Buchheit (eds), Sovereign Debt Management (OUP, 2013) 151. Exceptionally, the Cypriot government’s haircut to private deposits in Cypriot banks was characterized at the time as an extraordinary tax to bailout the country’s banking sector. Several mass claims are being organized and it is not unlikely that the tax on deposits constitute a claim for tax expropriation, particularly as the Greece–Cyprus BIT of 1993 provides a very broad definition of investments with many of the depositors being Greeks. 187 El Paso award (n 2) para 95. 188 ibid. 189 ibid; the Public Emergency Law also ‘ … converted US dollar obligations into pesos at the rate of 1:1, a measure known as “pesification”;… effected the conversion, on that basis, of dollar-denominated tariffs into pesos;… eliminated adjustment clauses established in US dollars or other foreign currencies as well as indexation clauses or mechanisms for public service contracts, including tariffs for the distribution of electricity and natural gas;… [and] required electricity and gas companies to continue to perform their public contracts… ’ (ibid). 190 ibid para 282. 191 ibid para 283. 192 ibid para 284. 193 ibid para 285. 194 ibid para 283. 195 ibid para 111. 196 ibid para 283. 197 ibid para 287. 198 ibid para 295, citing El Paso’s memorial at 366. 199 El Paso award (n 2) para 297. 200 ibid para 297. 201 ibid para 298. 202 ibid. 203 ibid para 297. 204 El Paso award (n 2) para 297, citing Argentina’s expert witness, Nouriel Roubini (a leading economist) in Argentina’s counter memorial at 153. 205 ibid. 206 EnCana award (n 56) paras 172 and 178. This was unlike the direct tax expropriation claim in the same case, for which the tribunal only required deprivation of ‘claims to money’, that is, a deprivation of the cash paid for taxes, rather than the much higher threshold of proving a substantial deprivation of the use, control, and economic benefits of the subsidiaries themselves. 207 EnCana award (n 56) para 174. 208 ibid para 177. 209 ibid. 210 EnCana award (n 56) para 174. 211 ibid para 177. 212 ibid. 213 Occidental award (n 58) para 86. 214 ibid para 89. 215 ibid. 216 Companies will seldom invest in a country if 90% of their profits will be taxed by the state because the remaining 10% profit margin would not be worth the investment risk and effort. In Burlington, Ecuador’s denial of Burlington to 62.3% and 73.9% of the value of a barrel of oil was not considered to be a substantial deprivation (see below). 217 In EnCana, the claims to refunds amounted to 10% of transactions associated with oil production and export (EnCana award (n 56) para 177) and since Occidental engaged in the same sector and brought its claim on the premise of similar taxation measures by Ecuador, it is a safe assumption that the value of VAT refunds in Occidental would also have been in the region of 10% of transactions associated with oil production and export. 218 Burlington award, dissent (n 58) para 26. 219 Burlington Resources Inc (n 58) Decision on Liability of 14 December 2012 (Burlington award). 220 Burlington award (n 58) paras 6 and 14. 221 ibid para 14. 222 ibid para 15; Perenco brought their own claim against Ecuador: Perenco Ecuador Limited v Republic of Ecuador, ICSID Case No ARB/08/6, Decision on Remaining Issues of Jurisdiction and Liability, 12 September 2014. 223 Burlington award (n 58) paras 18 and 19. 224 ibid para 138. 225 ibid; the price of oil at the time the Block 7 contract was executed on 23 March 2000 was US$25.11 per barrel (Burlington award (n 58) para 291). 226 ibid para 23. 227 ibid para 24. 228 ibid. 229 ibid para 136. 230 ibid para 137. 231 ibid. 232 ibid para 279. 233 ibid. 234 ibid para 281. 235 Clause 8.1 of the Tarapoa Contract (Burlington award (n 58) para 294). 236 Burlington award (n 58) para 299. 237 ibid. 238 ibid para 139. 239 ibid. 240 ibid para 32. 241 ‘Ecuador: Diversification and Sustainable Growth in an Oil-Dependent Country’ (31 March 2010) World Bank, LCR PREM Report No 46551-EC, 29. 242 Burlington award (n 58) para 142. 243 ibid. 244 ibid. 245 ibid para 185. 246 ibid para 56. 247 ibid par 186. 248 ibid. 249 ibid. 250 ibid. 251 ibid. 252 ibid paras 254 and 337. 253 ibid para 337. 254 Burlington award (n 58) para 424. 255 ibid para 424. 256 ibid para 420. 257 ibid para 425. 258 ibid. 259 ibid para 426. 260 ibid. 261 ibid. 262 ibid para 427. 263 ibid para 430. 264 ibid para 431. 265 ibid para 432; the tribunal in Perenco also decided that ‘Law 42 at 50% did not substantially deprive [Perenco] of its investment, or effectively neutralise the benefit of the investment or rights related thereto, nor did it render Perenco's activities so marginal or unprofitable as to effectively deprive them of their character as investments’ (Perenco award (n 222) para 673). 266 ibid para 434. 267 ibid para 435. 268 ibid para 445; Amortization refers to situations where the capital investment is accounted for/spread over 3–5 years instead of the year the investment was actually made. 269 ibid para 448. 270 ibid para 449. 271 ibid para 450. 272 ibid para 455. 273 ibid para 456. 274 ibid. 275 ibid para 457; the Perenco tribunal also rejected the claim that Law 42 at 99% resulted in expropriation, citing four reasons: (i) Perenco continued to operate the blocks and there was no impairment of any rights of ownership or control (Perenco award (n 222) para 681); (ii) paying the taxes at 99%, although disadvantageous, ‘did not bring the operation to a halt... or... effectively neutralise the investment or render it as if it had ceased to exist’ (Perenco award (n 222) para 685); (iii) throughout 2008 and 2009, Perenco continued to negotiate with the state to reach a mutually satisfactory adjustment which indicated the tax had not ended the investment (Perenco award (n 222) at para 686); and (iv) although arguments of the illegitimacy and draconian proportionality of Law 42 at 99% had merit, a disproportionate measure does not render an expropriation ‘where the evidence of effect indicates otherwise’ (Perenco award (n 222) para 689). The decision by the Perenco tribunal further strengthens the assertion of the authors that total deprivation is required for tax expropriation and that tax is lex specialis under the customary international law of expropriation. 276 ibid dissent at para 23. 277 ibid dissent at para 25. 278 ibid. 279 ibid dissent at para 26. 280 ibid dissent at para 27. 281 ibid. 282 ibid. 283 ibid. 284 There were, at the time of writing and in the best knowledge of the authors, only the RosInvest and Quasar claims that had resulted in the finding of state liability for tax expropriation. Another three Yukos cases also resulted in findings of tax expropriation after this article was authored—see n 285 and n 347 below. The authors are aware of the Revere case (Revere Copper Brass Inc v Overseas Private Investment Corporation, AAA Case No 16 10 0137 76, Award of 24 August 1978), in which the claimant investor succeeded in its compensation claim for tax expropriation by Jamaica. However, the claim was brought against political risk insurers (Overseas Private Investment Corporation—OPIC) rather than the host state, and because it is not conclusive that the claim would not have succeeded if it was brought against the Jamaican state as opposed to an insurance company, we are not including it within our assessment of tax expropriation in investor–state arbitration. 285 A further three arbitrations against Russia for the expropriation of Yukos, the proceedings for which have been consolidated into one, were at the time of writing pending final awards: Hulley Enterprises Limited (Cyprus) v Russian Federation, ECT Arbitration, PCA Case No AA 226; Yukos Universal Limited (Isle of Man) v Russian Federation, ECT Arbitration, PCA Case No AA 227; and Veteran Petroleum Limited (Cyprus) v Russian Federation, ECT Arbitration, PCA Case No AA 228; since writing this article, the final awards (also consolidated) were rendered—see n 347 below. 286 The RosInvest and Quasar arbitral awards themselves, in most part, also focus on the treatment of Yukos as opposed to the investors. 287 ‘Yukos Ten Years On’ (The Yukos Library, 2013) <http://www.theyukoslibrary.com/en/the-yukos-affair-ten-years-on/> accessed 10 January 2014. 288 Quasar (n 64) para 102. 289 OAO Yuganskneftegaz (YNG) was: (i) valued by the Quasar claimants as at least US$15 billion (ibid para 84); (ii) sold at auction for US$9.4 billion which was just over half of its appraisal value by Russia’s own advisors (ibid para 163); (iii) valued before its auction by investment bankers at US$22 billion (RosInvest Jurisdiction Award (n 64) para 2, quoting the claimant’s Request for Arbitration); and (iv) valued by Russian-state-owned oil company Rosneft, YNG’s ultimate post-auction owner, at US$57.7 billion (Quasar award (n 64) para 84). 290 Quasar award (n 64) para 162. 291 RosInvest award (n 64) para 76. 292 See RosInvest award (n 64) paras 70–76; and Quasar award (n 64) para 104, quoting the claimants’ Statement of Claim. 293 RosInvest Jurisdiction Award (n 64) para 2, quoting the claimant’s Request for Arbitration. 294 Quasar award (n 64) para 47, quoting the claimants’ Statement of Claim. 295 Quasar award (n 64) para 66. 296 RosInvest award (n 64) para 460. 297 ibid para 426. 298 ibid paras 424–25. 299 ibid para 4, quoting the Claimant’s Post-Hearing Reply Brief; Quasar award (n 64) para 75. 300 Quasar award (n 64) para 134. 301 ibid para 142. 302 ibid para 144. 303 The creditors decided to liquidate rather than accept Yukos’ proposals to deal with remaining tax debts by selling some US$15.7 billion of assets and using the remaining assets to generate approximately US$3 billion per year to pay off any outstanding tax debt, as well as using funds held in the Netherlands to pay off other creditors such as the SocGen consortium (Quasar award (n 64) para 143). 304 Quasar award (n 64) para 147. 305 RosInvest award (n 64) para 494. 306 Quasar award (n 64) para 47. 307 Quasar award (n 64) para 47, quoting claimants’ Statement of Claim. 308 RosInvest award (n 64) para 4, quoting the Claimant’s Post-Hearing Reply Brief; and ‘Timeline’ (The Yukos Library) < http://www.theyukoslibrary.com/en/library/timeline/> accessed 16 May 2014. (The Yukos Library: Timeline). 309 RosInvest award (n 64) paras 69–70. 310 ibid para 444. 311 ibid para 453. 312 ibid para 539, quoting Prof Peter Maggs’ Report I, 173. 313 ibid para 537. 314 ibid. 315 Quasar award (n 64) para 41. 316 RosInvest award (n 64) para 262. 317 ibid para 273. 318 Quasar award (n 64) para 160. 319 RosInvest award (n 64) para 449. 320 ibid. 321 Quasar award (n 64) para 54. 322 RosInvest award (n 64) para 450. 323 ibid para 452. 324 ibid para 453. 325 ibid para 454. 326 ibid para 620(a). 327 ibid para 620(b). 328 ibid para 620(c). 329 ibid para 620(d). 330 ibid para 620(e). 331 ibid para 621. 332 ibid para 621. 333 RosInvest award (n 64) paras 624–25. 334 ibid para 633. 335 Quasar award (n 64) para 79. 336 ibid para 80. 337 ibid para 170. 338 ibid para 174. 339 ibid para 175. 340 ibid para 103. 341 ibid; an investigation would have been required to decide whether Yukos could actually pay its tax debts over a period of time—which, with the increase in oil prices, such a scenario would have been plausible (ibid). 342 ibid. 343 ibid. 344 ibid para 177. 345 Quasar award (n 64) para 82. 346 ibid para 186. 347 The final award for the three consolidated arbitrations against Russia, brought under the ECT, by Hulley, Veteran and Yukos Universal (n 285) was made by that arbitral tribunal on 18 July 2014 (henceforth together referred to as the Yukos Universal award). The evidence in the ECT arbitrations suggested to the tribunal that ‘the primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets’ (Yukos Universal award para 756), with two stand-out mistreatments being the US$13.5 billion VAT (and fines) assessments for exported oil (which is VAT-exempt) and the auction of YNG for far less than its value (Yukos Universal award para 1579). The tribunal decided Yukos was indirectly expropriated (Yukos Universal award para 1580). As to the conduct requirements: (i) the expropriation of Russia's largest taxpayer was profoundly questionable, even if its assets became state-owned (Yukos Universal award para 1581); (ii) the mistreatment of Yukos compared with other oil companies who participated in tax avoidance schemes ‘may well have been discriminatory’ (but the tribunal did not decide that issue) (Yukos Universal award para 1582); (iii) the expropriation of Yukos was not carried out with due process of law (Yukos Universal award para 1583); and on the compensation requirement (iv) there was no compensation whatsoever and therefore no prompt, adequate and effective compensation (Yukos Universal award para 1584). The claimants were altogether awarded over US$50 billion (Yukos Universal award para 1827) plus US$60 million in legal fees and EUR €4.2 million in arbitration costs (Yukos Universal award para 1887). The decision in the ECT Yukos arbitrations further confirms the conclusion of the authors that total deprivation is required for tax expropriation (as well as intent, which would be implicit if the effect is a total deprivation) and that tax is lex specialis under international laws governing expropriation. 348 See also USA v Winstar Corp et al, 518 US 839 (1996) where the US Supreme Court held that an agreement by the government to compensate a contracting party as a result of a legislative change by no means suggests a surrender of sovereignty. 349 Watson's Bay and South Shore Ferry Co Ltd v Whitfield [1919] 27 CLR 268, 277; Redericktiebolaget Amphitrite v King [1921] 2 KB 500, 503. These cases support the so-called doctrine of executive necessity. The idea is that the contracts or promises made by the government are unenforceable in the public interest if they fetter the future competence and powers of the executive. This has not, however, precluded British courts from ruling that changes in local taxation laws abroad affecting foreign investors are arbitrable—potentially giving rise to indirect or creeping expropriation. See Ecuador v Occidental Exploration & Production Co (OEPC) [2006] EWHC 345 (Comm). 350 See AGIP v Congo (1982) 21 ILM 726 and Texas Overseas Petroleum/California Asiatic Oil Co(TOPCO) v Libya (1978) 17 ILM 3, 12. An extract from the arbitral award in Copper Revere and Brass Inc v OPIC (1978) 17 ILM 1343, para 44, is instructive: ‘Inevitably, in order to meet the aspirations of its people, the Government may for certain periods of time impose limits on the sovereign powers of the State, just as it does when it embarks on international financing by issuing long term government bonds on foreign markets. Under international law the commitments made in favour of foreign nationals are binding notwithstanding the power of Parliament and other governmental organs under the domestic Constitution to override or nullify such commitments.’ 351 BCB Holdings Ltd (n 31). 352 ibid para 23. 353 ibid para 27. 354 ibid para 28. 355 ibid para 59. 356 A variant of this tax regime is now a standard contractual term for oil and gas production operations, namely the production sharing agreement (PSA), whereby the investor typically recovers capital and operating costs in the form of a share in crude production at the beginning of its cycle. Once the investor’s costs are reimbursed the remainder of the output (profit oil) is shared among the state and the investor in accordance with an individually agreed formula, which typically encompasses all other applicable taxes. 357 World Bank, The Strategy for African Mining (World Bank, 1992) 29ff. 358 R Nshala, ‘Dispossession through Liberalisation: How Sub-Saharan African Nations Lost Sovereignty over Mineral Resources’ SJD thesis, Harvard Law School (Harvard Law School Library, 2012) 360–70. 359 S Perry, ‘Kazakhstan Settles Billion-Dollar Oil Claims’ (2011) GAR <http://globalarbitrationreview.com/news/article/30045/kazakhstan-settles-billion-dollar-oil-claims> accessed 17 December 2011. 360 Especially, concessions or PSAs governed by private law, in which case the confidentiality clause prevents the agreement from parliamentary scrutiny and approval. 361 See generally, TM Franck, Fairness in International Law and Institutions (OUP, 1998) 25–46, where he focuses on the procedural legitimacy of international rules by reference to four distinct properties of the rule. These are its coherence, determinacy, symbolic validation through ritual and pedigree, and its adherence to a normative hierarchy. Franck’s idea of procedural legitimacy, through the interaction of these properties, concerns the degree to which the rule will be obeyed by states and not if it is necessarily perceived as fair by individual stakeholders. 362 R Kennedy, ‘Resource Nationalisation Trends in Kazakhstan, 2004-2009’ (March 2010) Russ-Casp Working Paper 7–8. 363 Feldman Award (n 58) para 119. 364 ibid. 365 ibid para 129. 366 ibid para 130. 367 ibid para 131. 368 ibid para 113. 369 EnCana award (n 56) para 173. 370 ibid. 371 EnCana award (n 56) para 173. 372 Cargill award (n 6) para 290 (this point arose in the disposition of the fair and equitable treatment claim—the decision was not repeated in the expropriation section of the award). 373 Link-Trading award (n 36) para 64. 374 ibid. 375 Link-Trading award (n 36) para 86. 376 El Paso award (n 2) para 295, quoting El Paso’s Memorial, 362. 377 ibid. 378 ibid. 379 Occidental Petroleum Corporation and Occidental Exploration and Production Company v Republic of Ecuador, ICSID Case No ARB/06/11, Award of 5 October 2012, para 527. 380 Burlington award (n 58) para 453. 381 See El Paso award (n 2) paras 350–64; Ioan Micula, Viorel Micula, SC European Food SA, SC Starmill SRL and SC Multipack SRL v Romania, ICSID Case No ARB/05/20, award of 11 December 2013, paras 527–29. 382 ibid. 383 ibid para 666; see also Paushok award (n 50) para 305, and Perenco award (n 222) para 586. 384 ibid paras 677–86. 385 ibid para 668. 386 ibid para 687. 387 Archer Daniels, Cargill, Corn Products, Feldman, and Occidental. © The Author 2015. 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The treatment of tax as expropriation in International investor–state arbitration

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Abstract

Domestic tax measures are treated by investment tribunals as a fundamental attribute of sovereignty and constitute lex specialis in relation to the general rule on expropriation under customary international law. Although both direct and indirect expropriation are possible through the imposition of tax measures, in practice such findings are rare and further restricted by joint tax vetoes and tax exclusion clauses in international investment treaties and bilateral tax treaties. This inclination in favour of host states is further confirmed by the requirement that the conduct requirements for expropriation be satisfied, although the role of conduct requirements is to differentiate between lawful and unlawful expropriation. The lex specialis character of tax measures suggests, particularly as a result of cases such as Burlington, that investment tribunals are unlikely to lower the threshold of state liability for expropriation arising from tax measures and are in fact likely to view the substantial deprivation standard very strictly and in a manner that requires a total deprivation of property. A state’s power to tax individuals and entities within its jurisdiction also empowers the state with the tools to take and/or destroy investments within its reach.1 1. INTRODUCTION The regulation of tax in international investment law is hardly straightforward even if, as this article demonstrates, the imposition of arbitrary and discriminatory taxes may amount to both direct and indirect expropriation, as well as a violation of an applicable standard of investor treatment. For one thing, the levying of taxes is an indispensable function of sovereignty, lest states are unable to attain the requisite resources to uphold their sovereignty or survival. This has given rise to a presumption in favour of the validity of tax-related measures under international investment law.2 Moreover, the sovereign power to tax is subject to several (consensual) limitations under international law, particularly trade liberalization agreements, whether in the form of regional free trade agreements (such as the North American Free Trade Agreement (NAFTA))3 or global arrangements such as those set up by the World Trade Organization (WTO). Whereas the restrictions on tariffs (taxes on foreign goods upon entry) and internal taxes4 in the context of trade liberalization treaties are meant to inhibit any undue advantages to similar domestic products (essentially by making the imported goods more expensive),5 the purpose in foreign investment law is to decrease the economic value of the investment in such a manner that its operation is no longer profitable to the investor. These two restrictions on the imposition of (arbitrary) taxes are over-arching and it is not unusual for concerned states to initiate proceedings under the WTO, subsequently followed by submission to investment arbitration.6 Exceptionally, some taxes are far too favourable towards investors which in turn is viewed by other nations as a facilitation of tax evasion and ultimately money laundering. Such tax practices are often subject to multilateral sanctions and other countermeasures, as is the case with the tax practices of tax heavens and countries maintaining fictitious fleets under so-called flags of convenience. As will become evident in the course of this research, the recent spate of bilateral investment treaties (BITs) and free trade agreements (FTAs) specifically address the authority of host states to impose internal taxes. The overall aim of all the aforementioned restrictions is to maintain and enforce a level playing field between investors, imports and local competitors, and goods, while at the same time respecting the host states’ tax powers, chiefly on the basis of mutuality.7 As a result of these considerations, a variety of international legal regimes have arisen concerning the determination as to the legitimacy and regulation of taxes. Trade liberalization, whether regional or global, is one, followed by international law on foreign investment, particularly as regards the assessment of expropriation and the application of appropriate standards of investor treatment. An additional regime is that established under bilateral or multilateral tax treaties, many of which now envisage a specialized arbitration procedure in respect of double taxation8 or other specialized disputes, such as advance pricing agreements.9 Arbitration lawyers would not rush to characterize these processes as akin to arbitration because of their largely public nature as well as the absence of the type of party autonomy usually associated with international commercial arbitration. Nonetheless, they are not straightforward public law procedures and in any event constitute an exception to the general rule whereby tax disputes between a tax payer and the state are not susceptible to third-party determination. Inter-state resolution of tax disputes, the fourth variable identified in this research, is generally non-contentious in the sense that states anticipate relevant issues through bilateral tax agreements, which unlike regular treaties, involve a continuous process of inter-state collaboration that is flexible and readily adapted to changing circumstances without, in any way, implying that disputes do not arise. Typical disputes concern transfer pricing, division of revenues from value added taxes, double taxation, source-based withholding tax on royalties for intellectual property (such as trademarks and copyright) used in one country and paid to enterprises or persons resident in another,10 and others. No doubt, other inter-state disputes can arise in connection to taxes, such as under sovereign financing agreements and regarding the obligation of the borrowing nation to impose and collect unpopular taxes, but such disputes will not normally culminate in contentious litigation or arbitration because the lender can simply refuse to provide debt relief or further financing. The fifth and final variable concerns the human rights dimension of tax, which although individual in nature should be distinguished from the personal entitlement to investment (or other) arbitration affordable to the victim of arbitrary or illegal tax; with the exception of expropriation which is viewed as a deprivation of the right to property, IIA does not perceive other violations against investors through the lens of human rights (eg violation of the national treatment principle as discrimination) nor indeed are the available remedies predicated on human rights considerations. Nonetheless, where an arbitrary and discriminatory tax is considered by an international judicial entity as a violation of the right to property the outcome is equal in legal nature (not necessarily its effects) to expropriation, albeit the range of cases is limited because of the exclusion of states’ tax competence from human rights scrutiny.11 The European Convention of Human Rights (ECHR) only makes reference to tax in the context of the right to property in Article 1(2) of Protocol I to the ECHR and then merely to affirm the tax sovereignty of states. The European Court of Human Rights (ECtHR) has generally been disinclined to encompass tax within the remit of fundamental freedoms under the ECHR, even in situations where the national authorities viewed the tax in question as unconstitutional.12 In Ferrazzini v Italy the Court held that ‘tax disputes fall outside the scope of civil rights and obligations, despite the pecuniary effects which they necessarily produce for the taxpayer’.13 Although the context and claim arising in Ferrazzini is clearly of a human rights nature, namely the undue length of tax assessment proceedings leading to a deprivation of the right to a fair trial, it is unlikely that an investment tribunal would have taken the same stance had the case concerned a foreign investor claiming that the length of such a tax assessment constituted unfair and inequitable treatment. Alas, the ECtHR has reached at some decisions that have largely eroded Ferrazzini, for the same reasons that investment tribunals find the conduct of national tax authorities (including legislators) offensive, whether expropriatory or other. The Court’s ‘lawfulness’ test seeks to strike a fair balance between the state’s interest in enforcing its tax laws and the protection of a person’s right to property. In the Yukos case, tax assessments made against the company in 2004 for the year 2000 fell outside a three-year statutory time-bar set out in Article 113 of the Russian Tax Code,14 but because the tax assessments for the year 2000 were subject to criminal proceedings, a 14 July 2005 decision by Russia’s Constitutional Court changed the interpretation of the rules on statutory time limits to tax assessments subjected to criminal proceedings.15 The Russian authorities made use of attachment, seizure, and freezing orders for the enforcement of Yukos’s tax debt,16 leading to the auction of the company’s main production unit (OAO Yuganskneftegaz (YNG)) in bankruptcy proceedings, ultimately sold at a low price to a sham bidder.17 The ECtHR found that the Russian authorities lacked flexibility in their enforcement of the tax debt18 and ‘given the pace of the enforcement proceedings, the obligation to pay the full enforcement fee and the authorities’ failure to take proper account of the consequences of their actions’, it also held that that the ‘domestic authorities failed to strike a fair balance between the legitimate aims sought and the measures employed’.19 Overall, investors (and their legal counsel) have thus far found no compelling reason to employ human rights arguments or relevant claims in cases concerning tax before investment tribunals even though, as will become evident, domestic tax measures are only rarely viewed as giving rise to expropriation. This strategy is further justified by the fact that if human rights arguments are introduced by investors they will equally have to be admitted for the host states, which possess a much more compelling resonance particularly as regards the obligation of the state to uphold and protect socio-economic rights that are contrary to its foreign direct investment (FDI) obligations. The potential of such claims is, however, significant,20 and although they are not well developed even in the field of commercial arbitration, at least national courts are not disinclined from employing constitutional and human rights arguments. At the very least, as will be shown, several states unilaterally repudiate existing tax concessions by arguing that they are unfair, particularly in economic terms. The human rights dimension of tax is well beyond the scope of this article. The subject matter of this article concerns the specific relationship between investors and host states and the authority of the latter to impose taxes that violate the treatment envisaged in applicable international investment treaties (IITs), FTAs as well as the parties’ contractual arrangements. Equally, it shall explore under what circumstances an internal tax measure may amount to a taking (or expropriation) whether directly or indirectly on the basis of the jurisprudence of investment tribunals under rules largely premised on customary international law. The article will demonstrate that domestic tax measures are considered by investment tribunals as a fundamental attribute of sovereignty and lex specialis that largely overrides the general rule and requirements of expropriation under customary international law. Before entering into this discussion it is perhaps prudent to examine the doctrine of arbitrability as this applies to tax in IIA as well as the legal foundation for tax-related IIA under international law. 2. A QUICK NOTE ON TAX-RELATED INVESTMENT ARBITRABILITY AND PUBLIC POLICY Arbitrability is a concept encountered in the context of commercial arbitration whereby each state may restrict the types of disputes which private parties may validly refer to arbitration on the ground of public interest; as a result, disputes designated as non-arbitrable may only be submitted to litigation. Lack of arbitrability will result in an award being set aside in the seat of the arbitration (lex arbitri) or refused recognition and enforcement by the country where enforcement is sought.21 Although arbitrability has been eroded significantly in the course of the past 20 years,22 tax disputes (other than investment-related) remain firmly grounded within the remit of public authority and at best private disputes concerning tax contributions in complex joint ventures may be submitted to arbitration to assess the appropriate contribution of each participant.23 In equal manner, states in developed nations are increasingly urging taxpayers to settle disputes with the state through statutory (mandatory) arbitration, although the largely public nature of such tax arbitration negates many of the benefits typically associated with party autonomy.24 Arbitrability, as such, does not exist in IIA. Any restrictions curtailing the investor’s freedom to submit a particular dispute to arbitration will be definitively circumscribed by the relevant IIT,25 the parties’ contract or an applicable investment statute with a standing offer to arbitrate, irrespective of conflicting rules in other domestic laws, even if long-standing and otherwise peremptory.26 In commercial arbitration, arbitrability and public policy considerations may appear from thin air to the detriment of the parties’ right to legal certainty and procedural fairness. The very fact that BITs and other multilateral treaties subject the authority of the state to impose taxes to scrutiny as regards its impact on investor entitlements (expropriation or standards of treatment) leads to the obvious conclusion that states have consented to a qualified erosion of this sovereign power, at least in the context of international investment law. In fact, Article 17 of the UN Convention on Jurisdictional Immunities of States and their Properties makes it clear that investment contracts constitute commercial transactions.27 Even so, the 1958 New York Convention remains important because where an investor seeks to enforce an ICSID award in a non-ICSID Member State this may only be achieved through the channels of commercial arbitration whereby the enforcing state may indeed subject the award to its arbitrability legislation. Similarly, an investor seeking to enforce an ICSID Additional Facilities award can only achieve the same under the New York Convention, which is why the Additional Facility rules require the seat of arbitration to be in a New York Convention state.28 Nonetheless, a line should be drawn between the arbitrability of tax disputes and the use of the New York Convention as a mechanism for tax collection. Public policy considerations are not generally taken into consideration by investment tribunals on the ground that internal law should not be used as justification to violate an obligation under a BIT,29 in accordance with the rule set out in Article 27 of the 1969 Vienna Convention on the Law of Treaties (VCLT). It is no wonder, therefore, that legitimate (constitutionally based) human rights claims by host states have been rejected by investment tribunals.30 Given that tax policies are used to finance states’ human rights obligations, such as healthcare and education or their ability to maintain internal and external security, public policy considerations predicated on such grounds will equally fail in investment arbitral proceedings, whereas the case is different in international commercial arbitration even if an agreement to the contrary exists between the parties.31 Even so, an increasing number of commercial arbitration statutes, many predicated on the UNCITRAL Model Law, stipulate that where a state or an instrumentality thereof is a party to international commercial arbitration against a private entity, it may not invoke the prerogatives of its own law to avoid the obligations arising from the award.32 Whatever may be the case in the sphere of international commercial arbitration, it is abundantly clear that states are bound by Articles 27 and 46 VCLT and customary international law as regards the arbitrability (and lack of public policy restrictions) of those tax disputes with foreign investors that amount to expropriation or which constitute a violation of applicable standards of treatment.33 3. THE LEGAL BASIS OF TAX-RELATED INVESTMENT ARBITRATION IN INTERNATIONAL LAW Prior to the introduction of IIA in international relations by the ICSID Convention and later by other multilateral and bilateral agreements, it may be argued that a hybrid institution of tax resolution existed under customary international law. The idea that internal tax measures may violate agreed investment protection principles or be expropriatory in nature was amply recognized in the 20th century,34 despite some (exceptional) later judgments/awards to the contrary,35 even if resolution of relevant disputes was ultimately achieved through diplomatic protection or at the inter-state level. The absence of locus standi in no way reduces the validity of the substantive rule, nor indeed the fact that expropriatory tax claims were few in practice. It is on the basis of this legal framework that the matter was later encompassed in investment-related treaties. The contemporary legal basis for tax-related investment arbitration is largely treaty-based, although exceptionally this may be achieved by means of agreement between the parties or a standing offer in a domestic statute.36 In practice, the latter two are rare37 and so our focus will be on treaty-based tax-related IIA. It goes without saying that a violation of a tax stabilization, discussed in more details in the last two sections of the article, or tax freezing clause in an investment contract triggers the arbitration clause in the contract as regards the resolution of the ensuing tax dispute. The vast majority of BITs or FTAs (with investment provisions, eg NAFTA) do not contain exclusions to the application of expropriation provisions for tax-related claims except for the ability of the tax authorities of the BIT parties to jointly veto the application of expropriation provisions to tax claims on a case-by-case basis38 (joint tax veto). They do, however, widely include exclusions to the application of national treatment and MFN treatment in tax matters. The rationale underlying such tax exclusions is to avoid conflict with existing bilateral tax regimes39 and so that states can retain maximum fiscal sovereignty, such as avoiding regulatory chill from the threat of investor–state arbitration in respect of tax matters relating to national treatment (and MFN) and so that they can grant favourable tax treatment to their nationals or nationals of select third states (which would breach national treatment and MFN, respectively, but for the tax exclusions).40 This explains why investment tribunals have found a violation of applicable standards of treatment and indirect expropriation (in the form of measures with an equivalent effect)41 in BITs that are either silent on such matters or otherwise contain tax exclusions.42 In fact, the draft Multilateral Agreement on Investment (MAI) contained a definition of ‘taxation measures’ which includes ‘any provision relating to taxes of the law of the contracting party or of a political subdivision thereof or a local authority therein, or any administrative practices of the contracting party relating to taxes’ and taxes are taken to include ‘direct taxes, indirect taxes and social security contributions’.43 The MAI Interpretive Notes recognized that some taxation measures are capable of constituting an expropriation, although the general presumption was that if they are ‘within the bounds of internationally recognised tax policies and practices’ they would not.44 Although most of the new generation of BITs and multilateral investment treaties (MITs) contain explicit references to tax exclusions, joint tax vetoes prescribe the ambit of this authority in the field of foreign investment (as well as other fields in the context of all-embracing FTAs, such as competition and customs), very few specifically spell out that tax measures may be expropriatory or in violation of other investor guarantees. Article 21(5)(a) of the Energy Charter Treaty (ECT) is therefore a rarity. It states that the ECT expropriation provision (Article 13) applies to taxes and hence relevant disputes may be submitted to IIA under condition that the joint veto procedure is first exhausted. Subparagraph (b) then goes on to say that a tax may indeed be expropriatory or discriminatory, in which case the full impact of Article 13 is applicable (subject to the joint veto procedure). Some BITs list tax measures among those that may give rise to expropriation. Exceptionally, the US–Egypt BIT does so indicatively, stipulating that: No investment or any part of an investment of a national or a company of either Party shall be expropriated or nationalized by the other Party or a political or administrative subdivision thereof or subjected to any other measure, direct or indirect (including, for example, the levying of taxation, the compulsory sale of all or part of such an investment, or impairment or deprivation of management, control or economic value of such an investment by the national or company concerned), if the effect of such other measure, or a series of such other measures, would be tantamount to expropriation or nationalization45 (emphasis added). Most IITs whether bilateral or multilateral subject their expropriation provisions to the host state’s regulatory measures in the field of tax.46 As a result, investors may validly claim under the treaty that their assets have been taken, directly or indirectly, by a particular tax law or measure. While most IITs, as already explained, contain tax exclusions to the privileges otherwise offered under the national treatment principle, some exceptionally restrict the application of tax measures to expropriation by including tax exclusions to the entire IIT and, therefore, capture expropriation within such exclusion.47 In equal measure, a handful of IITs attempt to block the deliberation of tax in expropriation claims through joint tax vetoes. Tax vetoes allow states to plan their fiscal and tax policies without undue disruption, otherwise they would be reluctant to enter into investment agreements because these would interfere with their tax planning and other bilateral tax obligations. It is not unlikely that in the event of dispute the pertinent states find a political solution (even if the tax measure in question is in fact an act of expropriation) which avoids the embarrassment of IIA.48 Equally, if not for the national treatment and MFN tax exclusions in most IITs, host states would be constantly held to ransom over their tax policies and this is the position all states with a foreign corporate presence would be in, from ‘developed’ capital exporting countries to ‘developing’ capital importing countries. 4. TAX AS EXPROPRIATION In the following sections we shall be discussing in what manner investment tribunals have assessed internal tax measures as giving rise to expropriation, both direct and indirect. It will become evident that although the tribunals are relying on relevant principles of customary international law, they are compelled to balance their assessment of expropriatory conduct with the sovereign entitlement to adopt tax measures. As a result, the standard generally employed is higher in threshold as compared to general expropriation under international law. Although it is beyond the purview of this article (largely because it is only relevant to commercial arbitration and litigation before foreign courts), we take the view that although tax measures fall within the jure imperii authority of states49 they also encompass a limited commercial dimension when a part of investment contracts. The situation in IIA is clear, namely that tax-related investment disputes (giving rise to alleged expropriation or violation of investment guarantees) are arbitrable. In the sphere of civil litigation and commercial arbitration50 the situation is far from concise, but it is generally agreed that foreign courts may not pass judgment on the tax measures of other states, but may only assess whether the contract between the parties is consistent with those tax laws.51 5. TAX MEASURES AND EXPROPRIATION Expropriation provisions in IITs generally require host states to refrain from expropriating investments of other nationals, whether direct or indirect (including measures equivalent to expropriation) unless the expropriation (i) is carried out for a public purpose; (ii) is non-discriminatory; (iii) takes place with due process of law ((i)–(iii) are together referred to as the conduct requirements); and (iv) with prompt, adequate, and effective compensation (the compensation requirement). The majority of IITs do not define ‘measures’ that can give rise to an expropriation but those that do define the term do so broadly, such as ‘any law, regulation, procedure, requirement, or practice’52 of the host state. This broadness encompasses ‘driven actions’ of the state53 that result in expropriation as well as ‘inactions’ (ie the refusal of the state to take action) with the inaction also capable of causing an expropriation.54 Likewise, tax measures are merely ‘measures’ attributable to the host state which relate to taxation. We have already referred to the draft MAI’s definition of ‘taxation measures’ as ‘any provision relating to taxes of the law of the Contracting Party or of a political subdivision thereof or a local authority therein, or any administrative practices of the Contracting Party relating to taxes’ and taxes are taken to include ‘direct taxes, indirect taxes and social security contributions’.55 The tribunal in EnCana56 summarized what taxes, tax measures, and tax laws amount to under international investment law. The EnCana definition confirms that taxes include not only direct taxes (including income tax, corporation tax, capital gains tax) but also indirect taxes (such as excise duties and value added tax (VAT)).57 Other tribunals have confirmed this result by rendering awards in disputes related to taxes other than direct taxes.58 The EnCana tribunal defined tax measures as relating not only to the actual provisions of the law that impose taxes, but all ‘aspects of the tax regime which go to determine how much tax is payable or refundable … ’59 while a taxation law ‘is one which imposes a liability on classes of persons to pay money to the state for public purposes’.60 Measures under expropriation provisions are taxation measures if they ‘are part of the regime for the imposition of a tax’61 and measures providing relief for taxation are also tax measures to the same extent as measures that impose taxes.62 Host states can flex their tax powers to expropriate investments both directly and indirectly63 but whether an alleged expropriation is direct or indirect will depend on the measures themselves (eg levy of new excessive/arbitrary tax or higher/arbitrary rate of existing tax, passing of tax law, application of tax law by tax authorities and also by the national courts),64 the circumstances of the case and crucially how the claim is framed by the claimant. For example, if a claimant alleges that it has a right to tax refunds, it can streamline its claim to restrict its investment to the tax refunds themselves or returns to investments or claims to money65 and if the host state has refused to grant refunds that rightfully belong to the claimant and has, therefore, taken and kept possession of said cash, this can amount to a direct expropriation.66 This streamlining of a claim falls under the definition of partial expropriation, whereunder particular rights that form an aspect of the entire investment are expropriated, albeit the control, use and enjoyment of the investment as a whole need not be affected,67 especially (as regards indirect expropriation) on account of a lack of substantial deprivation of the entire investment. In most situations, however, alleged tax expropriations will fall under the indirect heading, but the tribunal’s assertion in Feldman that tax can only be indirect expropriation68 is too stringent a view in the opinion of the authors. Arbitral jurisprudence on what constitutes an indirect expropriation has taken strides in coming closer to a uniform definition, but inconsistencies do still exist and are likely to remain for the foreseeable future and this is why a case-by-case analysis is, as Professor Christie suggested some five decades ago, ‘probably the only method’69 to decide what kind of interference constitutes an expropriation. Similarly, there are no hard-and-fast rules as to when the power to tax results in a compensable taking under international law. Despite the requirement of a case-by-case analysis,70 we can still, as will become evident in the course of this article, determine discernible trends from the body of tax arbitration jurisprudence to date, much of which undoubtedly reflects customary international law. The issues before lawyers, arbitrators, and academics when characterizing a governmental measure as indirect expropriation (including creeping expropriation and equivalent measures) include the following: (i) form of state measure versus its impact; (ii) intent behind the measure versus its effect; (iii) extent of deprivation of the use and benefits of the investment (ie substantial or not); and (iv) legitimate and reasonable investment-backed expectations of the investor. The next section will examine the treatment by tribunals of tax in the context of the aforementioned as well as direct expropriation. 6. CHARACTERIZATION OF A MEASURE AS TAX VERSUS ITS IMPACT Tribunals in tax arbitrations have recognized the necessity for host states to be afforded flexibility in the creation, amendment and implementation of their tax laws and policies, recognizing that apparent wrongs by the state should not categorically be viewed as violations of international law, thereby giving the state the benefit of the doubt in the implementation of its tax policies.71 The reasoning behind such awards is that ‘taxation is in a special category’72 (emphasis added) from an expropriation standpoint because the ‘universal state prerogative’73 to tax would be impossible to utilize on account of ‘a guarantee against expropriation’74 if taxes were easily assimilated to expropriation of property.75 Concurrently, arbitral tribunals have made it clear that if tax powers are utilized to expropriate investment, the form of government measure to expropriate (ie tax-related) will not automatically excuse the state from liability.76 In the Archer Daniels case, the tribunal referred to taxation as an example of measures that can be used to expropriate indirectly77 and a paradigm where the impact of a measure prevails over its form. Archer Daniels was brought under NAFTA and thus subject to the tax veto clause in Article 2103(6). As already discussed, tax vetoes permit the arbitration of alleged tax expropriations, subject to prior negotiations between the pertinent states and that permission is in itself recognition of tax measures being capable of effecting expropriation. In Cargill, the tribunal recognized the tax veto in NAFTA78 and stated that the US tax authorities ‘would not … agree that the [tax] was not an expropriation’79 thus paving the way for arbitration under Article 1110 (expropriation).80 This further confirms that tax is capable of being expropriatory and moreover tribunals will not be restricted from ruling as such on the basis of the form of the measure used to allegedly expropriate. 7. DIRECT TAX EXPROPRIATION Domestic tax measures may, of course, amount to direct expropriation where they involve the direct taking of money or other assets. This is especially discernible in the context of tax refunds because the money (property) is already in the hands of the state. If the money or claims to money falls within the definition of investment under the terms of an applicable BIT, then the expropriation is direct where the money is taken, or where there is an intentional failure to return in the form of tax refunds. The first hurdle is for the claimant to convince the tribunal that the taxed (or possibly taxable) funds constitute returns from an investment and/or are investments as claims to money. In EnCana, the claimant argued that through its subsidiaries it had been wrongly denied of its right to tax refunds in breach of Ecuadorian law81 and that the breach amounted to a direct expropriation. Under the Canada–Ecuador BIT through which the claim was made, as with most BITs, an investment is broadly defined and in the case at hand encompassed ‘any asset owned or controlled either directly, or indirectly through an investor of a third state, by an investor of a contracting party in the territory of the other contracting party and includes … (iii) money [and] claims to money’82 (emphasis added). The EnCana tribunal determined that an investor’s claim to money can constitute an investment83 both in general terms as well as specifically under the aforementioned BIT whose list of investments was indicative rather than exhaustive. The tribunal was satisfied that Article I(g) of the Canada–Ecuador BIT did not give rise to a restrictive genus by virtue of the words ‘in particular, though not exclusively’ which were inserted before the examples of investments, thus making the definition very broad.84 Article VIII of the BIT (expropriation provision) states that ‘investments or returns of investors of either contracting party shall not be … expropriated … ’85 (emphasis added). ‘Returns’ are defined in the BIT as ‘all amounts yielded by an investment and in particular, though not exclusively, includes profits, interest, capital gains, dividends, royalties, fees or other current income’ (emphasis added).86 The EnCana tribunal, therefore, decided that the BIT contained a very broad definition of investments as well as returns and that tax refunds fell within its remit.87 Unlike EnCana, the claimant in Occidental failed to persuade the tribunal that an entitlement to VAT refunds were investments in themselves88 under the definition of investment in the US–Ecuador BIT (through which the claim was made) which includes, similar to the Canada–Ecuador BIT, ‘a claim to money … associated with an investment’89 (emphasis added). The Occidental tribunal stipulated that ‘[h]owever broad the definition of investment might be under the [US–Ecuador BIT] it would be quite extraordinary for a company to invest in a refund claim.’90 This passage by the Occidental tribunal does not implement the wide definition otherwise encompassing investments under the US–Ecuador BIT whereby a claim to money should (or at least may) be interpreted as any money owed to the investor. The tribunal was not completely antithetical to the idea of a claim to tax refunds constituting a money claim91; rather, it did not consider such claims to be investments in themselves but solely in the context of the investment as a whole, in respect of which the refunds represented merely a fraction and not a substantial deprivation of the investment.92 For this type of claim to succeed, a tribunal must be open to the concept of partial expropriation, as was the case with the EnCana tribunal but not its Occidental counterpart. The arbitrators in EnCana found that the state’s refusal to refund the VAT in retrospect, that is, the denial of refunds ‘accrued in respect of past transactions’,93 did fall under the BIT’s broad scope of ‘amounts yielded by an investment’.94 Therefore, Ecuador’s retrospective denial of VAT refunds was susceptible as a claim for expropriation under the BIT.95 Ecuador’s Interpretative Law No 2004-41 of 11 August 200496 (the Interpretative Law) provided an interpretation of Article 69A of the country’s Internal Tax Revenue Law (ITRL) which clearly stated that ‘petroleum is not a good that is fabricated’ for the purposes of Article 69A ITRL, thereby ruling out VAT refunds for inputs in oil exploration and exploitation under Article 69A. The scope of the right to refunds that befell the tribunal concerned the periods before and after the Interpretative Law was enacted because the resolutions by which the refund was denied and which triggered the dispute related to trading periods before the passing of the Interpretative Law.97 However, EnCana made a claim for VAT refunds in the arbitration (through its statement of Claim) for its subsidiary AEC for periods when tax was paid after the enactment of the Interpretative Law.98 In respect of tax refunds claimed after the Interpretative Law was enacted, it was suggested by EnCana that the law itself was unconstitutional (and thus expropriatory).99 Alas, the tribunal refused to determine the matter, declaring instead that the constitutionality of Ecuador’s laws had to be determined through the methods provided under the country’s constitution.100 As a result, the Interpretative Law was presumed to be constitutional and the claim that tax refunds had been expropriated after the enactment of the Interpretative Law were rejected.101 The authors fail to see the rationale behind this line of thinking. The expropriatory nature of a government measure under international law cannot (and should not) be measured against its constitutional compatibility, but rather its compatibility with international law, given that in the majority of cases a taking is consistent under domestic law. The questions left to be determined by the EnCana tribunal were whether the claimant’s Ecuadorian subsidiaries had a right to VAT refunds under Ecuadorian law for the period before the ‘Interpretative Law’ was enacted,102 especially those periods covered by the denying resolutions, and if so, whether that right had been expropriated by Ecuador.103 The tribunal acted on the assumption that the claimant did have a right to VAT refunds under Ecuadorian law on the basis of the Occidental ruling104 (for the purposes of the national treatment and fair and equitable treatment claim), even though the Occidental decision was not binding on the tribunal in EnCana.105 The arbitrators in EnCana also assumed that Ecuador’s tax authority, the Sericio de Rentas Internas (SRI), made a policy decision ‘to do everything within its power to deny refunds to the oil companies’.106 On the basis that the claimant was entitled to tax refunds and given the assumption that the SRI purposefully denied the refunds, the tribunal went on to analyse whether the denial of a right to VAT refunds amounted to a direct taking.107 The EnCana tribunal adopted the position that when a tax law does not by itself violate the rights afforded to investors, but rather a governmental body is in breach of applicable tax legislation, including the tax authorities, this does not give rise to an outright taking of property (or an indirect expropriation) unless it is accompanied by a denial of due process (ie no access to Ecuadorian courts through legal or practical means).108 The EnCana tribunal noted that a tax authority has the right under international law to take a position (even if it is wrong in law) regarding tax claims by individuals/companies as long as that position is made in good faith, the authority is ready to defend its stance before the courts109 and the policy is not ordinarily reviewable under the expropriation provisions in BITs ‘unless that policy in itself amounts to an actual and effective repudiation of legal rights’.110 The legal right to tax refunds may not be repudiated, according to the EnCana award, if: (i) the refusal is not merely wilful; (ii) the aggrieved party has access to local courts and; (iii) the courts’ decisions are independent of the state and cannot be overridden or repudiated by the state.111 In the case at hand, oil companies were afforded the right to challenge the SRI’s decisions before Ecuadorian courts and in fact in those instances that their application was successful the SRI complied with the relevant judgments without delay.112 Moreover, the SRI’s director, who personally oversaw the VAT refund issue and was in contact with Petroecuador’s President to determine whether or not VAT refunds were included in the participation contracts through the so-called Factor X,113 acted in good faith and this was not denied by the claimant.114 Finally, the judgments rendered by Ecuadorian courts were not bipartisan, lacking independence or were in any other way biased against oil companies.115 On these bases, EnCana’s claim that its VAT payments were directly expropriated by Ecuador was rejected116 because the SRI’s policy on VAT refunds ‘never rose to the level of repudiation of an Ecuadorian legal right’.117 The EnCana decision tells us that tax measures will not amount to direct expropriation unless they are accompanied by a violation of the pertinent conduct requirements, namely due process. This is of course a deviation from the usual rule that the conduct requirements’ role is to differentiate between lawful and unlawful expropriation. Although a violation of due process can help to prove that a state’s measures err on the side of expropriation rather than non-compensable government takings, the fact that due process (or all conduct requirements) is not violated does not and has not prevented tribunals from finding an expropriation as having occurred, whereby such expropriation can be characterized as lawful but lacking due compensation.118 There could have been an interesting divergence between the EnCana and Occidental awards had the tribunal in the Occidental case proceeded with the line of reasoning that tax refunds were claims to money. The Occidental tribunal stipulated that the claim to money would still have ‘to meet the standard required by international law’ to be deemed expropriatory.119 This means that it would have to meet the level of substantial deprivation, in which case the absence of due process rights and guarantees would not have been determinative factors. It goes without saying that on the basis of a substantial deprivation analysis the retrospective denial of tax refunds constituted a substantial deprivation of the claim to the money due. From the perspective of direct expropriation, the tax money was not returned by Ecuador’s treasury, which leads to the obvious conclusion that it was taken. The Occidental tribunal did not venture any further into this line of thinking as presumably it sufficed that Ecuador was clearly liable for its breach of the national treatment, and so unlike EnCana, the Occidental tribunal was able to reject the tax expropriation claim but compensate the claimant through other IIT standards.120 8. INTENT VS EFFECT The ‘intent vs effect’ dichotomy is 2-fold: on the one hand, some tribunals might require proof that the host state intended to expropriate an investment to hold the host state liable; on the other, so long as the investment has suffered the effect of expropriation, the state’s good will shall not be a defence against liability. It is widely held ‘that the mere post-facto explanation by a host state of its intention will in itself carry no decisive weight’,121 albeit this has not prevented a divergence of views between arbitrators, lawyers, and academics. In Olguin,122 the tribunal demanded ‘a teleologically driven action’123 as a prerequisite for a finding of expropriatory liability, holding further that even glaring omissions by the host state, absent intention, did not give rise to expropriation,124 thus rendering the element of intention to expropriate a key factor for an assessment of liability.125 The Olguin reasoning has been preferred by some scholars because it prevents BITs from serving as insurance policies against investment failures,126 a role they were not designed to fulfil.127 Indeed, though it is true that BITs ‘are not insurance policies against bad business judgments’,128 one of their purposes is to protect foreign investments from the effects of expropriation and support for this can be found in the majority of BITs which protect investors from indirect expropriation, that is, measures with an ‘effect equivalent to … expropriation’129 (emphasis added). The effect of the measure(s) taking precedence over the intent not only gives ‘effect’ to expropriation protections in BITs by disposing of requirements for formal decrees which is especially important when creeping expropriations occur in a manner that ‘seeks to cloak expropriative conduct with a veneer of legitimacy’,130 but it is equally important in circumstances whereby deprivation by a host state of the use or reasonably expected economic benefits of an investment are not obviously beneficial to the state.131 The Metalclad132 definition of expropriation is by now paradigmatic and sums up perfectly why the effect should always trump the state’s intent, whereby expropriation: includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State133 (emphasis added). The ‘intent vs effect’ debate in tax arbitration is a somewhat blurred avenue and the crux of the blur is tax constituting a special category for the purposes of expropriation. Relevant case law from tax arbitrations on this issue fall within two categories: (i) expropriatory effect, albeit liability arises only if there is an intention to expropriate, as substantiated by a breach of the conduct requirements (see section 9 below); and (ii) existence of intent, although expropriation is deemed to arise only if the effect is a total or near-total deprivation of the investment (over and above substantial deprivation), including investment in the narrow sense of partial expropriation. 9. INTENT AND VIOLATION OF THE CONDUCT REQUIREMENTS The jurisprudence under this heading stems from the EnCana award. In EnCana (as described above), the tribunal required that the denial of tax privileges: (i) be not merely wilful; (ii) be accompanied by a right of access to local courts and; (iii) the courts’ decisions be independent of the state and not susceptible to be overridden or repudiated by it.134 It is clear that the tax monies due to be refunded to the claimant’s subsidiaries in EnCana were directly expropriated by Ecuador but the tribunal deciding by a majority refused to uphold state liability because there was no denial of justice in the limited sense that the claimant was not denied access to the courts135 (ie the defunct decisions of the courts were not taken into account).136 The EnCana award thus excludes liability for otherwise expropriatory taxation measures if the taxation measures in question are judged to be licit by the host state’s own courts.137 Had the majority in EnCana based their findings on the more accepted ‘effects’ reasoning, as was the case with the award in Metalclad, regardless of culpa, the claimant would have succeeded in its claim because it was recognized by the tribunal that the tax money that ought to have been refunded was kept in its entirety, ie there was a total deprivation (more than substantial deprivation) of the investment’s (tax) returns. Instead, the EnCana majority added an additional hurdle to the finding of expropriation, namely that the due process (access to courts and no executive interference with court judgments) and non-discrimination requirements (i.e. the conduct requirements) must be breached for the host state to be liable for tax expropriation. This is a deviation from the accepted norm that effect overrides intent, with the opposite essentially preventing any findings of expropriation (ie presence of intent but a lack of effect—see section 10 below). Although there is a presumption that tax measures constitute bona fide use of police powers,138 where they entail a confiscatory character they are clearly expropriatory.139 The function of the conduct requirements is to determine the existence of an unlawful expropriation, not to assess whether an expropriation has actually taken place, that is, the first question must always be: ‘has there been an expropriation?’ and if there has been an expropriation then a violation of a conduct requirement will denote the existence of an unlawful expropriation. 10. EFFECT TAKING PRECEDENCE OVER INTENT (INTENT WITHOUT REQUISITE EFFECT) Most tax arbitrations dealing with expropriation claims have thus far recognized intentions to expropriate140 or discrimination against investors/investments (including unintended discrimination),141 albeit intent or discrimination alone have not by themselves sufficed for determining the existence of a tax expropriation.142 This course of thinking is clearly consistent with the general jurisprudence on expropriation. In our analysis of pertinent awards, references to effects being non-expropriatory generally mean that there has not been a substantial deprivation of one’s investment. This is discussed separately in Section 11. In Feldman, the claimant’s Mexican company, Corporación de Exportaciones Mexicanas, SA de CV (CEMSA), was in the business of cigarette exports. CEMSA relied heavily on receiving tax rebates for cigarettes it exported from Mexico and in fact its claim to a right to receive rebates appeared to be the only significant asset of the company,143 without which there would be no profits.144 The company was effectively precluded from receiving tax refunds initially by Mexican tax law which required invoices that ‘separately and expressly’ itemized the amount of tax paid,145 which is something only cigarette producers had access to,146 and finally by a change in the tax law which gave rebates for tax paid for cigarettes available only to the ‘first sale’147 which meant that when resellers purchased cigarettes from producers or distributors in Mexico, the producers would be entitled to the tax refund on that ‘first sale’, and when the resellers subsequently resold cigarettes on the export market, they would not be entitled to tax refunds. CEMSA was thereafter unable to engage in the business of reselling and exporting Mexican cigarettes and was ‘deprived completely and permanently of any potential economic benefits from that particular activity’.148 Despite this, the expropriation claim was rejected with one of the grounds being that the effect of the tax measures on the investment (ie CEMSA) was not expropriatory as the company was still operational and could continue trading in non-cigarette export activities, such as alcoholic beverages, with which it was concerned in the past and in respect of which tax rebates on exports would continue to remain available.149 Therefore, although CEMSA’s cigarette export business become untenable, the tax measures undertaken by the state to that effect did not prevent the claimant from controlling his investment through which he could continue other lines of business in Mexico.150 Here, again one sees the inclination noted in the beginning of this article of the state’s tax sovereignty in the domestic sphere where it is not discriminatory, even if the measure in question has a financial impact on the investor.151 The claimant in Cargill succumbed to a similar reasoning as that in the Feldman award. Cargill traded in high-fructose corn syrup (HFCS) used in soft drinks that became subjected by Mexican tax authorities to indirect taxes which had the effect of artificially suppressing substantial demand for HFCS in Mexico,152 which was dominated almost entirely by investors from the USA.153 There was no doubt that the HFCS tax measures were aimed at HFCS suppliers/producers to the soft drinks industry whose detriment of being driven out of the soft drink sweetener market benefited the majority Mexican-owned154 cane sugar industry,155 but it purposely targeted American investors to coerce them into lobbying the US government to comply with certain NAFTA obligations.156 Despite the clear intent to deprive investors of their investments in the HFCS soft drinks sweetener market, the tribunal decided that the damage done by the tax measures had to have an expropriatory effect on the investment as a whole, not specific businesses of the investment.157 In equal manner, the tribunal in Burlington, while recognizing that proof of intention to expropriate helps to differentiate between permissible and confiscatory taxation,158 as well as an intent to deprive and force abandonment of an investment or sell at a distress price indicates the existence of expropriation,159 it determined that the effect of the tax measure plays a primary role over and above such intent.160 Finding that ‘the State’s intent alone cannot make up for the lack of effects amounting to a substantial deprivation of the investment’,161 the claimant did not succeed in convincing the tribunal that an expropriation occurred162 as a result of a 99% tax on oil profits above a certain threshold, despite the tribunal finding that the tax was designed to force the investor to ‘abdicate its rights under the [oil participation contracts]’.163 The dispositive consideration for the Burlington tribunal was, therefore, the ‘effects of the measures, rather than their underlying motivation’.164 The arbitral tribunal in Link-Trading did not expressly pitch intent against effect. However, an analysis of the award does show that the tribunal focused more on the importance of the effect by demanding that it was up to the claimant to demonstrate ‘the causal link between the measures complained of and the deprivation of its business’.165 The tribunals in Feldman and Cargill also ventured into the ‘intent vs effect’ debate, finding in favour of the respondent state in each case whereby, despite discriminatory tax treatment,166 the effects on the claimants’ investments (the investments being Mexican subsidiaries) were not akin to expropriation.167 It has become standard practice for arbitral tribunals to require substantial deprivation of investment to make a finding of state liability. The aforementioned cases, as well as all other investor–state tax arbitrations (albeit subject to a finite number of exceptions such as RosInvest, Quasar, Yukos Universal, Veteran Petroleum, and Hulley Enterprises) have failed on the merits as a result of an absence of expropriatory effect, namely a substantial deprivation, but what this means is analysed in the following section. 11. LEVEL OF DEPRIVATION We established above that the effect of a host state’s measure(s) will, in most situations, take precedence over its intent, but an expropriation will only be found to have actually occurred (ie resulting in state liability) if the deprivation suffered by the claimant has reached a level that the arbitral tribunal recognizes as the benchmark for finding state liability. This liability is assessed against the protection afforded in the relevant BIT or else what the tribunal deems to be customary international law. The benchmark itself generally amounts to substantial deprivation, but has at various times also been referred to as radical deprivation168 and substantial interference.169 A substantial deprivation occurs when, inter alia, there is (i) a substantial deprivation of the economic value,170 economic use, and enjoyment of investments171; (ii) substantial interference with the use and enjoyment of the protected investment172; or (iii) deprivation of the fundamental rights of ownership which ‘is not merely ephemeral’173 and that makes the ‘formal distinctions of ownership irrelevant’.174 Additionally, a substantial deprivation is a deprivation of the investment ‘in whole or in significant part’.175 In Feldman, the claimant failed in his claim that the Mexican state expropriated his investment because the tax authorities refused to refund excise duties paid by the claimant’s company on exported cigarettes. One factor considered by the tribunal in rejecting the claim for expropriation was that the claimant was not deprived of controlling his investment (a Mexican company) and the state did not displace him as the controlling shareholder or interfere in the investment’s internal operations.176 Moreover, by being in control of the company, the claimant had the potential to pursue other non-cigarette business activities in Mexico through the investment.177 This reasoning resonates across all pertinent awards. In Archer Daniels, the loss of profits suffered by the claimants’ joint-venture company (ALMEX) from 1 January 2002 until 31 December 2006 due to the imposition of an indirect tax on HFCS (the sweetener tax), including diminished profits from lost sales of HFCS in Mexico, ‘was not sufficiently restrictive to conclude the tax had effects similar to an outright expropriation’.178 In addition, the tax did not deprive the investors of the ‘fundamental rights of ownership or management of their investment’ because they were at all times in control of ALMEX’s production, sales, and distribution.179 In Cargill, the claimant’s HFCS business was not its only income stream. The tribunal, therefore, required the sweetener tax to deprive the claimant from the investment in the Mexican subsidiary, not only the subsidiary’s HFCS business. For that reason, the sweetener tax’s effect on Cargill’s HFCS business in Mexico did not amount to a ‘radical deprivation’ of the claimant’s overall investment180 in its Mexican subsidiary. This is a situation in which the tribunal may have found an expropriation under the partial expropriation dictum had it been applied. It is clear that investment tribunals are sceptical, or at least disinclined, to accept that any loss to an investor arising from domestic tax measures amounts to expropriation. The customary nature underlying this line of thinking is best reflected in the harmony between BITs and bilateral tax agreements whereby states are clearly allowed to change and adapt their tax policies with general application even if this may cause economic losses to a particular class of commercial actors or investors. This conclusion is affirmed by the consistent case law of investment tribunals. In Link-Trading, the arbitral tribunal did not find the claimant had established a valid causal link between the amendment of the tax regime and the slump in its business performance.181 Although the amended Moldovan tax regime could have contributed to the claimant’s losses, this result in and by itself was insufficient to prove an expropriation as having occurred, and even if it were, it would have entailed that tax expropriation was a concept without limits, as most tax measures have cost impacts on businesses and consumers.182 The key, it seems, is not economic loss, even if substantial, but loss of control over the investment. In Goetz II,183 the arbitral tribunal opined that an investor must be deprived not only of expected profits but that the deprivation must result in either a loss of control of the investment or the rendering of the investment as purposeless.184 On that basis the suspension of tax exemptions by Burundi (as well as other measures) were not expropriatory because they did not lead to a loss of control of the investment (a company based in Burundi) or the inability to use the investment.185 The power of states to adopt internal tax measures even if they have an impact upon various classes of foreign investors is not in any way enhanced by fiscal or other crises-related arguments. If this were so, then given that all states have fiscal deficits and are indebted in one way or another, they would view their ‘crises’ as an open invitation to adopt discriminatory and expropriatory tax measures. In any event, with the exception of the El Paso case (which is not concerned with debt restructuring), none of the past or current cases concerning creditor disputes arising from sovereign debt restructuring have involved claims of tax expropriation as such.186 In El Paso, in the midst of its economic crisis between 1998–2002, Argentina took measures for contingency and recovery purposes, including the enactment of Public Emergency Law No 25,561 of 2 January 2002187 (Public Emergency Law). The Public Emergency Law devalued the Argentine peso by abolishing its parity with the US dollar188 and authorized the Argentine government to impose withholding taxes on hydrocarbon exports.189 El Paso complained that Argentina was responsible for expropriation by taxation in three aspects: (i) by imposing withholding taxes190; (ii) by not taking into account inflation for tax depreciation purposes191; and (iii) by limiting the range of tax deductions that El Paso’s Argentine subsidiaries could make (if considering the devaluation of the Peso as unreasonable).192 The last two claims were ‘based on the idea that a foreign investor has a right to certain tax deductions’.193 In short, these ‘deduction claims’ centred on the calculation of amounts that companies can deduct from their income and assets for tax assessment purposes. Both arose as a result of the Public Emergency Law. The last claim was based on the devaluation of the peso, whereas the second claim was predicated on the onset of inflation as a result of the devaluation of the peso, with inflation reaching 118% in 2002.194 Under Argentina’s Income Tax Law, the value of a corporation’s fixed assets was depreciated annually according to its estimated life expectancy.195 El Paso contended that Argentina’s non-recognition of inflation for tax depreciation purposes was unreasonable and confiscatory.196 Argentina stressed that Law No 24,073 of 4 February 1992 ‘froze all applicable indices and provisions for inflation adjustment purposes, including those related to tax depreciation … ’197 The laws relating to inflation and tax deprecation were in place since 1992 and El Paso was essentially complaining about ‘no change in the law’.198 The El Paso tribunal considered the export withholding taxes to be ‘reasonable governmental regulation within the context of the [Argentinian] crisis’199 (emphasis original). The withholding taxes that applied to hydrocarbon exports at rates between 4.76% and 16.67%200 had only a limited impact on El Paso’s property rights201 and could not constitute an expropriation, nor could they ‘have caused a forced sale constituting an expropriation of El Paso’s shares in the Argentinean companies subjected to … [the]… withholdings’.202 In addition, the withholding taxes were levied on extraordinary revenues made by the oil exporting sector as a result of the devaluation of the peso and not as a result of increased efficiency.203 Argentina’s expert witness explained that ‘it made total economic sense to have a ‘compensated devaluation’ by relying on export taxes to raise revenues in the sectors that had most benefited from the devaluation’.204 The El Paso tribunal agreed, noting that it was logical to establish a tax on those extra substantial revenues.205 Therefore, in El Paso, the claimants once again failed to substantiate a deprivation of their investment by taxation measures of the host state. In EnCana, for the claimant’s indirect tax expropriation claim to succeed, the tribunal required EnCana to prove that it had been deprived of its investment in its Ecuadorian subsidiaries as a result of Ecuador’s refusal to grant VAT refunds to those subsidiaries.206 Despite the financial harm endured by EnCana as a result of its subsidiaries being denied tax refunds, together with having to repay to Ecuador the money from tax refunds which were already paid out to EnCana (via its subsidiaries), EnCana continued to function profitably and was able to engage in its normal range of undertakings, that is, extracting and exporting oil.207 The EnCana tribunal emphasized that tax measures must be extraordinary, punitive in amount or arbitrary in their incidence to be considered as indirect expropriation,208 because any other outcome would result in the ‘universal state prerogative [of taxation being] denied by a guarantee against expropriation’209 given that taxation always culminates in the loss of profit or other income. The decision in EnCana was that the change in VAT laws or their interpretation was not expropriatory because they did not bring EnCana’s subsidiaries to a standstill or render the value ‘derived from their activities so marginal or unprofitable as effectively to deprive them of their character as investments’.210 Therefore, the denial of tax refunds in the ‘amount of 10 per cent of transactions associated with oil production and export’211 did not constitute a substantial deprivation (denial of the benefits of investment in whole or significant part) of EnCana’s investment212 and the indirect expropriation claim was thus rejected. In Occidental, the same grounds for rejecting EnCana’s indirect expropriation claims applied, primarily that Ecuador’s tax measures did not ‘meet the standards required by international law’213 to be considered expropriatory. Ecuador did not deprive OEPC of the use of or any reasonably expected economic benefit from its investment and equally the tax measures did not affect a significant part of the investment.214 The tribunal asserted that had the requirements for a finding of expropriation been more lenient (ie less than substantial deprivation), OEPC’s expropriation claim would nevertheless have failed,215 albeit the tribunal did not expand this point further. What it may imply, however, is that should substantial deprivation encompass the denial of the benefits of an investment in whole or significant part, and although it is impossible to put a universal figure on it (but let us assume approximately 90% of all available profits)216 a lesser level of deprivation, for example at 50%, would still not have amounted to expropriation because the denial of refunds in Occidental were likely to have been in the region of 10% of transactions associated with oil production and export.217 Just as the existence of expropriation is best determined on a case-by-case basis, so is substantial deprivation, which is ‘not … a mathematical exercise but a question of reasonableness’.218 12. THE BURLINGTON ARBITRATION The authors have decided to highlight this case to demonstrate the complexities of investment tax regimes and how they are applied in practice. One of the aims is to show that investment tax measures are not necessarily of a forceful unilateral nature but may in fact involve an offer by the host state and a significant degree of bargaining. States may themselves posit convincing arguments as to why they think a previous tax regime has ran its life cycle and is now unfair to its and its peoples interests. Curiously, host states have refrained from employing human rights arguments, but as already discussed this is probably because they have been advised that such arguments find little, if any, favour with investment tribunals. Had the Burlington award not involved tax measures it would no doubt have amounted to expropriation and as a result it exemplifies the lex specialis character of tax measures vis-a-vis the general rule of expropriation under customary international law. Burlington219 was a claim brought under the US–Ecuador BIT by Burlington Resources Inc (Burlington) against Ecuador for the alleged expropriation by Ecuador of Burlington’s investments in two oil exploration blocks, Block 7 and Block 21. Burlington invested in the participation contracts for the oil blocks through its wholly-owned subsidiary, Burlington Oriente.220 Burlington contracted into the participation contracts for Blocks 7 and 21221 as a minority contractor, holding 42.5% of Block 7 and 46.25% of Block 21, with the remainder in both blocks held by Perenco.222 Under the terms of participation formula, the contractors were entitled to between 65% and 76.2% of oil produced in Block 7 and between 60% and 67.5% of oil produced in Block 21, with the relevant percentage depending on the daily average production of oil in barrels per year.223 The dispute arose from Ecuador’s desire of a greater participation in oil revenues when oil prices increased exponentially from the time most participation contracts in Ecuador (not only for Blocks 7 and 21) were negotiated and executed. Ecuador maintained that the contracts were based on an oil price projection of US$15/bbl (per barrel)224 with which the contractors could cover their expenses and obtain a reasonable return on their investments.225 Burlington acquired interests in Blocks 7 and 21 in September 2001 when the price of oil was US$20.15/bbl.226 Prices began to rise in 2002 and by June 2008 the price of Oriente crude was US$121.66/bbl.227 While oil prices fell to below US$30/bbl at the end of 2008 and the beginning of 2009, they rose again and stabilized in the region of US$60-70/bbl in 2009–10.228 Ecuador wanted an increased share in the revenues which, in its opinion, were over and above what may be described as unprecedented and unexpected increases in the price of oil when the contracts were negotiated or executed. According to Ecuador, the ‘unprecedented price increase affected the economic equilibrium’229 of the contracts, which in turn (in Ecuador’s view) necessitated readjustment,230 particularly since the state, as the owner of subsoil minerals, should be the main beneficiary of extra revenues and other windfall profits from high oil prices.231 Ecuador argued that the contractor’s share of production was based on ‘the oil price projections estimated over the life of the contract’232 referred to as the ‘ “P” factor’.233 However, the arbitral tribunal did not find a link between the economies of the relevant participation contracts and any price assumptions, emphasizing ‘that the contractor was entitled to the economic value of its oil participation share irrespective of the price of oil … ’234 This was especially clear when comparing the contracts for Burlington’s Blocks 7 and 21 with the participation contract for an unrelated block by the name Tarapoa, which did contain an economy of contracts provision, clearly providing that: If the price of crude oil in the Block exceeds USD 17 per barrel, the surplus of the benefit brought about by the price increase in real terms (calculated at constant values of [1995]) will be distributed between the Parties in equal shares.235 A similar clause to the Tarapoa clause above was specifically discussed during Block 7 and 21 contract negotiations but rejected by the contractors.236 The non-inclusion of a price-based oil revenue distribution clause ‘was not the product of inadvertence but a deliberate choice of the contracting parties’.237 Ecuador unsuccessfully tried to negotiate the so-called economic disequilibrium with the contractors,238 with Burlington outright refusing the requests for a change in distribution of revenues.239 As a result, Ecuador enacted Law No 2006-42 on 19 April 2006 (Law 42) which amended Ecuador’s hydrocarbons legislation. Law 42 required oil companies to pay the state ‘50 per cent of the amount, if any, by which the market price of oil [exceeded] the price of oil at the time the [participation contracts] were executed’ (referred to henceforth as Law 42 at 50%).240 Law 42, therefore, gave Ecuador a greater share of revenues when the market price of oil exceeded the price that existed on execution of the participation contracts. Law 42 referred to oil revenues that exceeded the price of oil at the time the participation contracts were executed as ‘extraordinary revenues’. The 50% formula was increased to 99% on 18 October 2007 by Decree 662 (henceforth referred to as Law 42 at 99%). Under the threat of litigation from petroleum companies,241 Ecuador then passed the Ley de Equidad Tributaria (LET) (Tax Equity Act) on 28 December 2008 to open new negotiations with them.242 If petroleum companies took advantage of the LET, the state’s participation in extraordinary revenues would drop from 99% to 70%. Burlington and Perenco refused to participate in the scheme envisaged under the LET.243 Burlington initiated arbitration proceedings against Ecuador on 21 April 2008.244 The company, under protest, remitted to Ecuador Law 42 payments from the introduction of the law in mid-2006 until May 2008. In June 2008, through a tax consortium set up with Perenco, Burlington began making Law 42 payments to a segregated account in the USA without sending the same to Ecuador.245 As a result, on 19 February 2009, Ecuador initiated coactiva proceedings (administrative proceedings) against the consortium246 (and therefore Burlington)247 and began to seize Burlington’s share of oil production in March 2009.248 As part of the coactiva proceedings, from March 2009 to mid 2010, Burlington’s share of oil production was auctioned off to the sole bidder, Petroecuador (the Ecuadorian state-owned oil company), at below market price.249 On 16 July 2009, Burlington and Perenco ceased operation of Blocks 7 and 21 and on the same day Ecuador took possession of the blocks.250 Finally, Ecuador terminated the participation contracts for the blocks in July 2010 under what was called a caducidad process251 (the caducidad process leads to a declaratoria de caducidad del contracto (‘declaration of nullity of the contract’)). Burlington brought its expropriation claim on the premise that Ecuador’s measures individually and in the aggregate constituted an unlawful expropriation of its investment.252 The individual measures were the enactment of Law 42 at 50% and at 99%, the coactiva proceedings that resulted in the seizure of Burlington’s share of oil production, the takeover of Blocks 7 and 21 and the caducidad declarations (ie contract terminations).253 Here we analyze in brief the tribunal’s assessment of whether Law 42 at 50% and 99% were expropriatory on their own accord. The tribunal examined the investment deprivation caused by Law 42 at 50% and at 99% in real impact terms, that is, ‘had Law 42 payments not been made, the corresponding amounts would have become additional income for Burlington, to which the ordinary income tax and employment contributions would have applied’.254 Having considered the former factors, the real impact of Law 42 at 50% was calculated to be approximately 60% of the actual Law 42 tax payments.255 Burlington argued that Law 42 at 50% had a devastating impact on its investment,256 having been applied between April 2006 and October 2007. In 2006, Burlington made a net profit of US$44.18 million.257 Law 42 at 50% applied for three quarters of 2006, during which time Burlington made a three-quarter of a year aggregate profit in the region of US$33.14 million, and Burlington’s profits thus diminished by around 40%.258 In 2007 (during which Law 42 at 50% was operable for 10 months), Burlington paid US$87.74 million in Law 42 taxes259 (including two months at 99%) and its profits stood at US$30.95 million.260 Burlington would have earned approximately US$52.64 million extra revenue had it not been subjected to Law 42 taxes (US$52.64 million was the real impact of the payments) and its profits diminished by around 62.9% in 2007.261 In addition, on a barrel of oil basis, for Block 7 (Oriente crude), in July 2006, the market value was US$66.56, from which Burlington would have received US$48.28 and made Law 42 and 50% payments of US$18.36.262 On a Block 21 barrel of oil calculation (Napo crude), during which in July 2006 the market price was US$57.43/bbl, Burlington would have made Law 42 at 50% payments of US$18.36/bbl. On the basis of these figures, the Burlington tribunal (by a majority) did not consider that Law 42 at 50% had substantially deprived Burlington of the value of its investment.263 There was no substantial deprivation on the following three bases: (i) the consortium submitted plans for further investments in Block 7, thereby implicitly conceding, albeit indirectly, that Block 7 was economically viable with Law 42 at 50%; (ii) Burlington’s financial statements for Block 21 showed a positive figure, not a loss; and (iii) there were bidders willing to acquire Burlington’s interest in Blocks 7 and 21 while Law 42 at 50% was in effect.264 The purpose of Law 42 at 50% was found by the tribunal to replicate in the participation contracts the price adjustment clause of the Tarapoa contract, that is, a sharing of windfall profits on a 50/50 basis between the state and the oil company resulting from higher oil prices, not to force Burlington to abdicate its rights under the contracts.265 Burlington argued that Law 42 at 99% destroyed the value of its investment.266 Law 42 at 99% applied from November 2007 to March 2009 and, therefore, throughout 2008.267 In 2008, Burlington made US$203.09 million in Law 42 tax payments. Burlington’s accounts did not show profits for 2008 but this appeared to the tribunal to the result of a high rate of amortization.268 It is easier to assess the impacts of Law 42 at 99% on a barrel of oil basis, whereby Burlington was deprived of 62.3% of a barrel of Oriente crude269 and 73.9% of a barrel of Napo crude.270 On a diminishment of revenue basis, Law 42 at 99% reduced Burlington’s share in oil revenues in Block 7 by 58% (from 48.9% to 20.5%) and in Block 21 by 70.2% (from 57.4% to 17.1%).271 Although the tribunal found the records showed that Law 42 at 99% was intended to force Burlington to abdicate its rights under the participation contracts, the state’s intent alone could not make up for a lack of effects.272 On this basis, despite Burlington’s profits diminishing considerably, that alone did not prove that the company’s investment in Ecuador became worthless and unviable273 as the investment ‘preserved its capacity to generate a commercial return’.274 The Law 42 tax at 99% did not, therefore, constitute a substantial deprivation and was thus not found to be expropriatory by the majority tribunal.275 The dissenting arbitrator in the case, Orrego Vicuña, concluded that Law 42 at 50% and 99% were expropriatory.276 In his opinion, no reasonable business person would conclude that paying 50% of revenue income, or more substantially, 99% thereof, would be profitable or valuable.277 For those reasons, finding a buyer would be near-impossible because of the effect of the state’s tax measures on the viability of the business.278 The arbitrator found Law 42 (and especially at 99%) was beyond any standard of reasonableness and the fact that Ecuador rolled the figure back to 70% under the LET was proof of unreasonableness in itself.279 According to the arbitrator, although not unprecedented, a 50% tax on income ‘is very substantial’.280 A 99% tax, on the contrary, was determined to be ‘not just an expropriation but a confiscation’.281 Although the arbitrator did not expand on the difference between ‘expropriation’ and ‘confiscation’, it is in our opinion reasonable to assume, on the basis that the arbitrator expressed that a 50% tax is substantial deprivation (and therefore expropriation), that he meant a 99% tax is total deprivation and, therefore, confiscation. Finally, the arbitrator very briefly touches upon a human rights argument to make the case for substantial deprivation, stating that a 50% tax means the individual or entity works half of its time for the state, and at 99%, nearly all of its time for the state (albeit that in the circumstances of the case Burlington kept a certain minimum income).282 This raises a human rights issue of ‘freedom of the individual in a democratic society’.283 This is profound, because a substantial deprivation can be defined as the deprivation of the use, control and enjoyment of investment, all of which are restricted under extreme taxation as was the case with Law 42 at 99%. 13. THE YUKOS AFFAIR The authors have decided to highlight the rare circumstances in which claimants have succeeded on the merits in proving state liability for tax expropriation.284 The cases highlighted were both brought against the Russian Federation and both related to the expropriation of Yukos.285 The investors in both cases were minority shareholders in Yukos and brought claims against Russia for expropriating their investments in Yukos as a result of the treatment of Yukos by the Russian state. The brief analysis here focuses on the treatment of Yukos by Russia rather than the claimants in the specific cases as they and their investments (shares in Yukos) were not directly targeted by the Russian state but indirectly suffered as a result of the state’s treatment of Yukos.286 In a nutshell, Yukos was once Russia’s biggest oil company287 and the largest taxpayer in the state288 until it was subjected to tax audits and reassessments for the years 2000–2004 by the Russian Tax Ministry. The tax assessments were used as an excuse for the state to freeze certain critical assets of the company which made paying the tax debts insurmountable tasks. As a result of being unable to pay the tax debts, the state seized Yukos’s shares in its subsidiaries and auctioned off those companies (one of which was worth between US$15 billion and US$57.7 billion289 and accounted for 60% of Yukos’s total oil production290 and was auctioned off for US$9.8 billion to settle the year 2000 tax reassessment of US$3.5 billion) to settle the tax debts. YNG was sold at auction to BaikalFinansGroup (BFG), a company with no physical presence at its registered address and incorporated only days before the auction, and which was bought by the Russian state-owned oil company Rosneft three days after the auction for US$360, together with the voting shares in YNG, before the YNG payment price had to be paid.291 Rosneft did not buy at auction itself so that the debacle had a veneer of legitimacy.292 To put some perspective on the tax assessments, together with taxes already paid by Yukos for the years 2000–03, the assessments amounted to more than 90% of Yukos’ annual consolidated gross revenues for those years.293 From an alternative perspective, Yukos’s net income from the year 2000 to the third quarter of 2003 was US$13 billion, and with the last of Russia’s tax assessments included, the total tax assessments with fines and surcharges for 2000–04 amounted to more than US$24 billion.294 Both arbitral tribunals found the investors’ investments were expropriated as a result of Russia’s treatment of Yukos. The Yukos affair is an apt and recent example of the power to tax being used to destroy. Russia based its reasons for the extra tax liabilities on the basis of its apparent discovery that Yukos sold oil to its subsidiary trading companies based in low tax Russian jurisdictions who then sold the oil to third-party purchasers at market price, thus avoiding higher rates of tax. Russia labelled the trading companies as ‘shams’ and the intra-group transactions as ‘sham transactions’.295 Yukos, however, had apparently complied with the written word of the tax law.296 As a result of the Tax Ministry’s stance, Yukos became liable for: (i) VAT-related levies, fines and interest at US$13.5 billion297 (for VAT the trading companies had actually paid for on exported oil and for which they were due refunds because there is 0% tax on exports—the Tax Ministry also did not allow Yukos to benefit from the VAT refund requests submitted by the trading companies nor did it allow Yukos to submit its own refund documentation even though it was now viewed as the seller/exporter)298; and (ii) by declaring the trading companies as shams, Russia assessed Yukos as being liable for US$9.4 billion (including US$1.5 billion in repeat offender fines) of profit tax—tax which the trading companies had for years filed tax returns and paid billions thereto.299 Yukos was prevented from discharging the tax assessments at several stages in an overall scheme by the Russian state to expropriate the company. The settlement of the tax assessments was prevented at several stages (eg through freezing orders) and the freezing orders also resulted in Yukos defaulting on a US$1 billion securitized loan from a banking consortium (the SocGen consortium).300 With the Russian state-owned oil company, Rosneft, assuming the SocGen consortium’s debt, it and the Tax Ministry (ie together as the Russian state), became Yukos’ main creditors, controlling 94% of votes at the first creditor’s meeting in July 2006.301 With Rosneft already owning the YNG asset, Yukos’ main creditors decided to liquidate Yukos’ remaining assets,302 resulting (together with the purchase of YNG) in Russia ultimately owning 93% of Yukos’ assets.303 The choices of Yukos’ main creditors were, according to the Quasar tribunal ‘clearly … part of an overall confiscatory scheme’.304 The tax assessments began with a three week audit of Yukos’ tax affairs in 2003. Earlier that year, the Russian Tax Ministry’s specialized top level division that was instituted for large oil companies completed a six-month audit of Yukos and found only minor tax liabilities305 that Yukos paid in full.306 The three-week audit, on the contrary, which was preceded by the arrest and imprisonment of some of Yukos’ senior executives (including its CEO, Mikhail Khodorkovsky) and staff lawyers and external counsel, found liabilities in the amount of US$3.5 billion in taxes for 2000.307 Between 2 September 2004 and 9 December 2004, Tax Ministry reassessments for Yukos’ 2000 to 2003 tax years were issued, which, together with Yukos’ 2004 tax liability, amounted to US$20.6 billion in taxes, fines and punitive interest.308 The fines faced by Yukos were actually double fines for the 2001 to 2003 tax reassessments because Yukos was considered to be a repeat offender309 (the normal fine was 20%).310 Such doubling of fines, which in themselves amounted to US$3.8 billion of tax liability, were not used in any comparable cases.311 Other comparable taxpayers in Russia who made use of trading companies in low tax regions ‘were not subjected to ruinous tax consequences’.312 Although the Tax Ministry made new assessments against other oil companies for using the same tax planning strategies, the assessments and fines were not at the same confiscatory level as applied to Yukos.313 In addition, other oil companies were able to settle their debts on reasonable terms, whereas in the case of Yukos, its assets were transferred to the state.314 The central theme of the Yukos arbitrations was why Russia treated Yukos as it did if the true intention was a bona fide assessment and collection of taxes (as Russia had argued them to be).315 The claimant in RosInvest did not claim that the retroactive tax assessments caused a substantial deprivation,316 but the tax elements were considered by the tribunal together with the other actions attributable to the state that formed part of the creeping expropriation, including the conduct of the Russian courts in the context of denial of justice.317 The tribunal in Quasar, however, was ‘concerned with whether Yukos’ tax delinquency was actually a pretext for the seizing of Yukos’ assets and the transfer of them to Rosneft or one of its affiliates’.318 The RosInvest tribunal found that the interpretation of Russian law whereby a good-faith/bad-faith doctrine was developed in relation to Yukos’ use of the low tax regions, that is, that the tax benefits available in the low tax regions were rules of good faith that were exploited by Yukos, was a novel application of Russian law not used with other comparable taxpayers.319 This same interpretation was used to wrongly label Yukos and its trading companies as shams without economic substance.320 Russia also developed a proportionality principle that the tax benefits which companies derive from using low tax regions must correspond to their investment in those regions.321 The RosInvest tribunal found this not to be part of any law.322 The tribunal also decided the interpretation of VAT law was formalistic (see above on VAT-related levies and fines).323 For those reasons, as well as the fact that the doubling of fines were not used in comparable cases,324 the RosInvest tribunal found that the tax measures taken by Russia were not bona fide and were discriminatory.325 In totality, the RosInvest tribunal ruled that: (i) the VAT assessments and fines were extraordinary and not bona fide and not non-discriminatory taxation measures326; (ii) Yukos used ambiguous legislation that allowed the use of low tax regions to its advantage but done so in an open and transparent way and the application of so-called good faith and proportionality principles by the Tax Ministry to make Yukos liable for profits of the trading companies was not bona fide and was in fact discriminatory treatment, especially in view of other companies using the same methods and not being treated as Yukos was327; (iii) the repeat offender fines for US$3.8 billion for Yukos’ conduct that pre-dated the findings that it was a first-time offender was part of a cumulative effort in destroying Yukos328; (iv) the YNG auction and purchase of YNG by BFG was a front for Rosneft that was organized in a manner to ensure state control of Yukos’ prized asset—‘in short the Tribunal is convinced that the auction of YNG was rigged’329; and (v) the bankruptcy auctions, although not foul of Russian law, were initiated and conducted by SocGen bank in association with Rosneft which, therefore, fitted in with ‘the obvious general pattern and obvious intention of the totality scheme to deprive Yukos of its assets’330 (emphasis added). Russia’s intent was therefore to expropriate Yukos, and that intent was also made obvious by the discrimination against the company, whereas no other company was subjected to the same relentless attacks as Yukos was despite using almost identical ‘tax avoidance’ measures.331 Russia’s intent was put into effect by the tax measures and consequent auctions and liquidation proceedings, whereby Yukos’ assets were expropriated by removing them from the company and from certain individuals’ control332 (mainly its then-CEO, Mikhail Khodorkovsky, and Platon Lebedev who was the president of Group Menatep (now GML) which had a controlling interest in Yukos). The RosInvest tribunal determined that there was a complete taking of Yukos’ assets as a result of the tax measures constituting an expropriation of the RosInvest claimant’s shares in Yukos.333 The cumulative effect of Russia’s tax measures were judged as being an unlawful expropriation of Yukos’ assets.334 The RosInvest decision clearly shows that Yukos was expropriated with intent and effect through measures kick-started by the Russian Tax Ministry. The Quasar tribunal determined that the Tax Ministry’s tax assessments were, rather than being the consequences of sham transactions, actually sham tax assessments.335 The Quasar tribunal also decided that Russia was hostile towards Yukos by invalidating the trading companies’ exports but still making Yukos liable for VAT in excess of US$13.5 billion on the basis of being the true seller, and then not allowing Yukos (as the true seller) to apply for the VAT refunds—effectively the state tried to have it both ways.336 Also, by not giving Yukos a moment to catch its breath and dispose of its assets in an orderly fashion to cover the tax assessments, the Tax Ministry did not act like a legitimately operating tax authority would.337 This included the Tax Ministry’s refusal to wait for three years before acting on the writ of execution (it acted immediately, giving Yukos five days to pay its tax debts). Although tax authorities should seek to collect monies expeditiously, that aim should be balanced with rational care and the right of the taxpayer.338 Such rationality was accorded to Rosneft when it became liable for YNG’s tax debts with a scheduled quarterly payment over five years agreed to by the Tax Ministry.339 The failure of the Tax Ministry to work with or even respond to Yukos’ multiple settlement requests was ‘disturbing to say the least’340 and if the real intent was to collect legitimately owed taxes, Russia could have come to a satisfactory conclusion that did not involve the liquidation of Yukos.341 The quick sale of an asset the size of YNG and the lack of investigation by Russia before dismantling a company of Yukos’ magnitude342 proved that the intent and effect of the tax assessments was to subjugate Yukos rather than to collect taxes.343 Therefore, the real goal behind the tax assessments against Yukos was a ploy to expropriate Yukos and not to legitimately collect taxes.344 The tribunal found the VAT assessments made against Yukos for $13.5 billion and the subsequent disapproval for Yukos to apply for VAT refunds were ‘confiscatory to a degree which comes close to validating the claims [of expropriation] in their entirety on this basis alone’.345 The Quasar tribunal ultimately determined that Russia expropriated Yukos.346 The RosInvest and Quasar cases can be distinguished from all those cases discussed in this article and is decisive proof of the authors’ view first written above that arbitral tribunals require a total deprivation of investment (over and above substantial deprivation) to find tax measures to be expropriatory.347 Clearly, the expropriation of Yukos could not have occurred without intent through tax measures which were discriminatory, extraordinary, and lacking due process, and of course, therefore, not bona fide measures of general taxation which is permitted under international law. Intent, therefore, will in most cases automatically be a requisite part of a total deprivation of investment. 14. UNILATERAL REPUDIATION OF TAX CONCESSIONS Some of the cases discussed thus far have involved a unilateral repudiation of contractually agreed tax concessions by the host state. The balance employed by investment tribunals is clearly inclined towards the prevalence of tax sovereignty, save for circumstances where the repudiation is such that deprives the investment of any economic value or otherwise constitutes a taking. In theory, it is not clear whether this prevalence of qualified tax sovereignty is the result of a unique rule attributable to the fundamental nature of sovereignty (lato sensu) under customary law, or rather a distinct exception to the rule whereby states must not only honour their agreements but they cannot invoke domestic laws as justification for violating their international obligations. The better view is that the attributes of sovereignty, including economic self-determination, dictate that, save for expropriation there are no restrictions on the state to legislate as regards its domestic fiscal policy.348 This conclusion is drawn from the fact that despite the otherwise binding (contractual) nature of tax stabilization clauses, these have been struck down by courts in liberal democracies on the ground that they effectively inhibit the constitutional ability of the state to legislate in certain areas.349 Not surprisingly, arbitral tribunals have categorically denied the right to executive necessity in respect of developing nations in disputes with companies from their developed counterparts, arguing that international law (ie the institution of stabilization clauses) overrides any domestic laws, namely the unfettered power of government to legislate.350 Although this tension is hard to reconcile, it seems that contemporary investment tribunals have distanced themselves from the pro-investor nationalization awards of the 1970s and 1980s and without expressly referring to the doctrine of executive necessity, in practice they view tax measures as largely falling within its remit. In a recent case entertained by the Caribbean Court of Justice (CCJ), a last instance court for Caribbean island-states, a newly elected Belize government repudiated a tax concession granted to a group of companies by means of a settlement deed negotiated by its predecessor.351 The concession was adhered to by the parties for a period of two years notwithstanding the fact that it had not been approved by the Belize legislature, was confidential (hence non-transparent), and was manifestly contrary to the country’s tax laws. The successor government repudiated the concession and the private parties initiated arbitral proceedings which rendered an award for damages which they subsequently sought to enforce in Belize. The issue of enforcement ultimately reached the Caribbean Court of Justice which was asked to assess the government’s claim that the violation of fundamental constitutional rules and the interests of the people of Belize dictate that the award in question violates Caribbean and international public policy. The Court upheld these claims, arguing that public policy should be assessed by reference to ‘the values, aspirations, mores, institutions and conception of cardinal principles of law of the people of Belize’352 as well as international public policy.353 The tax concession could only be considered illegal if it was found to breach ‘fundamental principles of justice or the rule of law and must represent an unacceptable violation of those principles’.354 The Court did not expressly say that such tax concessions were repugnant per se or that they gave rise to a legitimate human rights defence, but in the opinion of the authors this is certainly implicit. What the Court did emphasize, however, is that tax concessions, even those subject to conduct-based estoppel such as the one at hand, are procedurally unfair or illegitimate because they violate fundamental principles of constitutional legal order and to ‘disregard these values is to attack the foundations upon which the rule of law and democracy are constructed’.355 This conclusion that tax measures possess a strong constitutional foundation is significant because many of the existing tax concessions in the developing world, particularly in mining and natural resources, have come about as a result of advice received by the World Bank (WB) whereby it was urged that to attract investors the host states’ should apply a profit-based tax regime.356 According to this, host states should not expect returns immediately but wait until the investor has recouped his capital and other expenses—which in the case of mining are significant—and the investment starts to generate profits for the investor. As a result, states were urged not to demand royalties (in any case they should not exceed 2%), import or export taxes and make special allowances for corporate tax.357 A number of countries, especially in Africa, subscribed to these rather generous tax concessions, which in conjunction with poor drafting, corruption and lack of expert advice, effectively culminated in the generation of immense profits with little, if any, benefits to the impoverished local populations. A scholar that conducted extensive research on post-WB tax concessions in three resource-rich sub-Saharan nations found that they received only a miniscule amount of revenues, whether in the form of direct taxes or revenues, as compared to the investors.358 In the case of Zambia, for example, the royalty rate was set at 0.6% of the gross value of the minerals produced. Investors were exempted from payment in the first five years and in any event this was deductible against their income tax. Even so, royalty payments were agreed to be deferred when the investors’ cash operating margins fell below zero. Although one may perhaps presume that profit would be made from corporate tax which was set at 25%, investors were in fact allowed to deduct up to 100% of their capital expenditures, in addition to price participation payments and were freed from customs and excise duties for items related to their production activities. Moreover, investors are allowed to carry losses forward for 10 and 20 years on the basis of first-in-first-out. Despite the obligation to pay some other minor taxes, mining investors in Zambia were exempted from paying any withholding tax on dividends, royalties and management fees to shareholders or affiliates. Equally, there were no restrictions in place as regards transfer pricing which has allowed investors to offset losses incurred by other affiliates across the world with huge profits in Zambia and elsewhere. Estimates clearly show that Zambia’s profits from its mines were manifold, even with a much smaller production, prior to their privatization at the advice of the WB. Tax repudiation does not only concern a fair reassessment of existing tax regimes, as would be the case for a revision of the aforementioned Zambian paradigm, but also disputes as to the investor’s tax compliance. In many cases, host states claim that the investor intentionally overstates his expenses and costs to decrease his taxable profits. This may be achieved ‘lawfully’ as is the case with dubious transfer pricing accountancy or conversely by concealing the true budget. In both cases, not only is the level of tax payments unfair, in addition to the state suffering a loss, but moreover the shareholders of the company manipulating its profits equally incur a loss of profit. In 2009, arbitral proceedings were commenced by the Karachaganak Petroleum Operating Company (KPOM), an oil and gas joint venture in Kazakhstan’s largest field, requesting among others the reimbursement of retrospective crude export duty payments. The Kazakh government, through its state-owned oil company (KazMunayGas (KMG)) retorted that following independent auditing KPOM was unable to account for a sum close to $400 million declared as major expenditures. The dispute was ultimately settled before the tribunal was ever constituted and the terms of the settlement saw KMG acquire a 10% equity in KPOM, half of which was financed by a KPOM loan, while the other half in the form of an undisclosed settlement arising from the two arbitral claims and counterclaims (ie export duty payments and overstated expenses).359 State practice concerning unilateral tax repudiations (short of expropriation) is of a 2-fold nature. On the one hand, countries may expressly enact new tax legislation affecting businesses on their territory or subject to their laws, whereas on the other they may engage in overt or concealed statements or agreements360 and/or seek to settle disputes before an award is rendered. The latter may entail a degree of resource nationalism, as is the case with Ecuador or indeed the Nyerere doctrine in the aftermath of colonization, but in the vast majority of cases there is no claim by the host state of an intent to nationalize nor is there any use of self-determination arguments, even if it is ultimately claimed that existing tax concessions are unfair.361 By way of illustration, Kazakhstan enacted a sweeping tax code in 2009 which replaced existing royalties with a natural resource extraction tax calculated on the basis of recoverable reserves and global crude prices in any given year. Whatever its impact on investors it was argued that it is fair for producing nations to impose tax in correlation with global market prices. Although the Kazakh government initially stipulated that the changes will not affect investments guaranteed by tax stabilization clauses, senior officials continue to describe these clauses as unfair, but stop short of making any direct claims of unilateral repudiation.362 This state practice is speculative and uncertain and hence difficult to quantify. However, given our observations throughout this article, particularly on the basis of available investment awards, where a host state violates the terms of a tax stabilization clause investment tribunals would have a hard job balancing between breach of contract and tax sovereignty. The damage would have to be sustained but it would no doubt be mitigated, perhaps even considerably, by the following factors: (i) the duration of the contract and the profit accrued to the investor at the time of the breach;(ii) the unfair nature of the tax concession, if any; (iii) the absence of negotiating parity between the parties when the contract was signed, if any; (iv) relevant international standards and practice and; (v) the good faith of the host state, reflected either in its prior consultation with the affected investors or the efforts taken to mitigate as far as possible any negative impacts. Such an outcome in favour of the host state would be undeniable in the absence of a stabilization clause and hence the breach of a clearly unfair stabilization clause with the adoption of tax measures consistent with international practice would hold significant sway with investment tribunals. Several tribunals have made it clear that a state can be liable for tax expropriation if there is a breach of legitimate expectations, the basis of which is a stabilization clause. The rationale inherent in this connection between stabilization clauses and legitimate expectations is addressed in the following sections through the ‘eyes’ of relevant awards. 15. LEGITIMATE AND REASONABLE EXPECTATIONS OF THE INVESTOR In Feldman, under Mexico’s IEPS law, the presentation of detailed invoices to receive tax refunds had been a condition since 1 January 1987 and continued throughout the time the claimant, Feldman, invested in Mexico in April 1990 until 1 January 1998 when the law was amended to allow tax rebates only to the first sale of cigarettes in Mexico.363 Therefore, the invoice requirement was always written law and although it was not always applied364 it was not expropriatory and constituted a reasonable legal requirement backed up by rational policy—that is, the Mexican tax authorities could straightforwardly, accurately, and without overstatement, analyse and process the tax amounts for which rebates were sought.365 Indeed, without the invoices, the claimant was unable to know and declare precisely the amounts of tax rebates CEMSA would be owed366 and had on some occasions used formulas to estimate the tax refund amounts accepted in 1992, but were grossly overstated in later years.367 The fact that the tax law’s invoice requirement was always law since Feldman’s investment in Mexico albeit without ever having been enforced could not give him a legitimate expectation that enforcement of the tax laws would not change. As noted by the tribunal, ‘tax authorities in most countries do not act in a consistent and predictable way’.368 Therefore, a line of conduct by tax authorities (ie their enforcement or non-enforcement of tax laws) cannot give an investor a legitimate expectation that such conduct would continue and there can be no expropriation on those grounds. In EnCana, part of the indirect expropriation claim was based on a legitimate expectation to receive VAT refunds. The EnCana tribunal recognized that a tax expropriation can occur if specific commitments have been made by the host state as regards tax measures,369 such as a tax stabilization clause.370 Without a commitment being made by a host state to an investor/investments, the host state is entitled to change its tax laws as it sees fit, with the investor having ‘neither the right nor any legitimate expectation that the tax regime will not change, perhaps to its disadvantage, during the period of investment’371 (authors’ emphasis). There was no such commitment made by Ecuador in EnCana. Therefore, if the economic benefit from the investment is reduced by taxation, in the absence of a specific commitment made by the host state to the investor, tax measures will not be expropriatory. Similarly, in Cargill, the tribunal rejected the notion that an investor could have reasonable investment-backed expectations that the tax law will remain stable unless such expectations arise from contract or quasi-contractual bases.372 In Link Trading, the tribunal determined that tax measures that violate obligations given by the state to an investment can be abusive373 and in turn abusive tax measures can amount to expropriation.374 In that case, however, the tribunal agreed with Moldova’s position on the 10-year guarantee, concluding that Moldova did not make any specific obligations to maintain the customs and tax regimes applicable to the claimant’s customers buying in the Free Economic Zone of Chisinau (Moldova) where the claimant had its business.375 The claimant could not, therefore, have had a legitimate expectation that the tax regime would not change and so there was no expropriation on that basis. In El Paso, El Paso claimed that ‘[i]nvestors have a reasonable and legitimate expectation to be able to adjust their fixed assets for tax purposes in periods of high inflation.’376 This argument was rejected by the tribunal because there is no duty on a state to adapt its tax regime in foreign investors’ best interests.377 Therefore, the calculation of taxes which is merely unfavourable to a foreign investor does not equate to expropriation.378 In Occidental II, the arbitration concerning Ecuador’s Law 42 that resulted in the Burlington arbitration, was found by the tribunal to be in breach of the participation contracts and, therefore, flouted the claimants’ legitimate expectations. In that arbitration, however, Law 42 was not considered to be a tax.379 The analysis of the above tax arbitrations has shown that arbitral tribunals are willing to find a state liable for expropriation if a legitimate expectation has been breached, but investors cannot have legitimate expectations that the tax regime, both in terms of tax laws and enforcement of those laws, will not change, unless there is a contractual/quasi-contractual obligation thereto. Hence, the state’s power to tax, including its power to amend and create new tax laws, supersedes investors’ expectations that are based on anything other than contractual/legal obligations given by the state to the investor/investment. In the alternative, an arbitral tribunal could still require a substantial deprivation of an entire investment even though contract rights have been repudiated.380 The issue of investors’ legitimate expectations has, in some respects, found greater credence in the context of minimum standard of treatment, namely the fair and equitable treatment standard (FET).381 In the recent Micula award,382 the tribunal clearly emphasized that in the context of FET, absent a stabilization clause, investors must expect legislation to change.383 Like the national treatment standard, FET does not require a substantial deprivation of investment, and therefore claimants could potentially have a greater chance of success for breach of legitimate expectations in relation to the tax regime applicable to them under the FET standard. In fact, stabilization clauses aside, a shift in the tax regime applicable to investments can result in a violation of FET if the investments were made on the basis of receiving tax incentives (and others) under a legislative regime for a specific period of time.384 A repudiation of or a substantial change to those incentives will violate FET if: (i) the state has made a promise or assurance; (ii) the promise or assurance is relied on by investors as a matter of fact; and (iii) such reliance was reasonable.385 As the tribunal in Micula stated: it cannot be fair and equitable for a state to offer advantages to investors with the purpose of attracting investment in an otherwise unattractive region … and then maintain the formal shell of the [incentive] regime but eviscerate it of all (or substantially all) content.386 16. CONCLUSION Available case law and state practice clearly demonstrate that the application of domestic tax measures affecting investments in the host state constitute lex specialis to the general framework of expropriation under customary international law. Unlike other national measures clad with the attire of formal law and contrary to the rule whereby states cannot invoke their domestic legislation to evade their international obligations, tax measures are viewed as intrinsic to (or inseparable from) the fundamental attributes of sovereignty, in much the same manner as self-defence (mutatis mutandis). Despite its reverence this is nonetheless a qualified sovereignty, stopping short of expropriation, whether direct or indirect. In the EnCana case, for example, a direct expropriation claim would have otherwise been successful, albeit the tribunal required the violation of particular conduct requirements, although the role of conduct requirements is to differentiate between lawful and unlawful expropriation. The lex specialis character of tax measures is further confirmed in the Burlington award, which no doubt constituted a substantial deprivation as no major oil company would likely invest hundreds of millions of dollars to pay a 99% tax to make a mere $30 million a year, or only 37.7% of the value of a barrel of oil. If the Burlington case concerned measures other than tax, the finding of the tribunal would have been in favour of expropriation on the basis of a breach of legitimate expectations coupled with substantial deprivation. Investment tribunals are unlikely to lower the threshold of state liability for expropriation arising from tax measures and are in fact likely to view the substantial deprivation standard very strictly and in a manner that requires a total deprivation of property. This is clearly evident in the Yukos cases, where the host state engaged in a total deprivation of the investors’ profits and in fact the tax assessments were so vast that they went above and beyond Yukos’ net income for the relevant periods of tax assessments. A finding of liability for tax expropriation will always be embarrassing for the host state as it communicates utter disregard for investors and constitutes an abuse of the tax power. It is for this reason that tribunals are prepared to give the benefit of the doubt to the host state, as in EnCana. No such leeway is afforded to host states in respect of tax measures that violate the national treatment principle. Unlike tax expropriation, violation of the national treatment principle provides few difficulties for investment tribunals because where there is a like investor/investment, if the foreign investor/investment is treated less preferentially than the host state’s investor/investment this alone suffices for liability to arise. There need not be an abuse of power by the state, whether nationality-based discrimination is present or not. This is evident from the vast number of tax arbitrations that succeeded on the merits in the national treatment claims but failed on expropriation for the same tax measures.387 Finally, state practice confirms the position adopted by investment tribunals, particularly the affirmation of the state’s power to tax as enshrined in bilateral tax treaties without being disputed or in any other way distorted in BITs. States are aware of the qualified limits of this sovereign power and with the exception of very few cases where tax expropriation was blatant, in all other cases, whether leading to arbitration or not, host states demonstrated an inclination to retain the investment productive and profitable, and there was no serious counterclaim (at a political level) by the investor’s state of nationality that the host state is not entitled to amend its domestic tax regime. No doubt, a change of tax regime in breach of a stabilization clause will incur liability for the host state. Perhaps, the next phase of argumentation by host states will involve human rights claims, including economic self-determination, particularly in respect of tax concessions entered into under terms that were coercive, corrupt or largely unfair to the host state. Whatever the case, the lex specialis character of domestic tax measures in the field of international investment law will remain valid for the foreseeable future. 1 Nearly 200 years ago, in the US case of McCulloch v Maryland (1819) 17 US 327, the judge presiding over the case, Chief Justice Marshall, correctly asserted that ‘ … the power to tax involves the power to destroy … ’. 2 See El Paso Energy International Company v Argentine Republic, ICSID Case No ARB/03/15, Award of 31 October 2011, para 290. 3 See, for example, art 77 of the EC–Chile FTA which applies the national treatment principle in respect of internal taxes to imported goods. Given that importers of goods engage in trade and not investment, a violation of this provision does not give rise to international investment arbitration (IIA). 4 Trade liberalization encompasses tariff barriers and non-tariff barriers. As far as the former is concerned, the term tariff is broad and includes practices such as duties, surcharges, and export subsidies. Non-tariff barriers include licensing requirements, quotas and arbitrary standards, among others. 5 In the 1970s, developed countries were allowed to grant preferential tariffs to imports from least developed nations, a system known as Generalized System of Preferences (GSP), which constituted an exception to the most favoured nation (MFN) principle, itself a cornerstone of the General Agreement on Tariffs and Trade (GATT) and later the WTO. This was formalized in 1979 through an instrument known as the Enabling Clause, arts 1, 5, and 7. See ‘Differential and more favourable treatment reciprocity and fuller participation of developing countries’, Decision of 28 November 1979. This remains in force under art 1(b)(iv) of the 1994 WTO Agreement. 6 WTO, Mexico – Tax Measures on Soft Drinks and Other Beverages, adopted on 24 March 2006; the same tax measures were subject to investment arbitration between Archer Daniels Midland Company and Tate & Lyle Ingredients Americas Inc v United Mexican States, (ICSID Case No ARB(AF)/05/05), Final Award of 21 November 2007, Corn Products International Inc. v United Mexican States, ICSID Case No ARB(AF)/04/01, Decision on Responsibility of 15 January 2008, and Cargill Incorporated v United Mexican States, ICSID Case No ARB(AF)/05/2, Award of 18 September 2009. 7 Joint tax vetoes and tax exclusions [because relevant matters are ordinarily the subject matter of other bilateral or multilateral tax treaties] constitute standard clauses in many contemporary BITs and FTAs. See A Kolo, ‘Tax “Veto” as a Special Jurisdictional and Substantive Issue in Investor-State Arbitration: Need for Reassessment?’ (2008–09) 32 Suffolk Transnatl L Rev 475. 8 For example, art 25 OECD Model Tax Convention and art 7 of the EC Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises was adopted in 1990 [EU Arbitration Convention], 90/436/EEC, OJ L 225 (20 August 1990). See I Bantekas, ‘The Mutual Agreement Procedure and Arbitration of Double Taxation Disputes’ (2008) 1 Colombian YBIL 182. 9 The 2006 Protocol Amending the Convention between the USA and Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes provides for mandatory arbitration in respect of certain cases in the mutual agreement procedure (art 25). 10 See AD Christians, ‘Tax Treaties for Investment and Aid to Sub-Saharan Africa’ (2005) 71 Brooklyn LR 639. 11 See generally G Kofler, M Poiares Maduro and P Pistone (eds), Human Rights and Taxation in Europe and the World (IBFD, Amsterdam, 2011). 12 The ECtHR has never suggested that the levying of religious tax (the so-called Kirchensteuer) violates art 9 ECHR, whereas the German Federal Constitutional Court has tried to limit some of the unintended effects of this unique tax. By way of illustration, in case BVerfg, 1BvR 3006/07 (2 July 2008) it found that a levy ordinarily charged for abandoning the registers of a particular religion was unconstitutional. See also National & Provincial Building Society, Leeds Permanent Building Society and Yorkshire Building Society v United Kingdom (1997) 25 EHRR 127 para 80: ‘a contracting state … when framing and implementing policies in the area of taxation, enjoys a wide margin of appreciation and the [ECtHR] will respect the legislature’s assessment in such matters unless it is devoid of reasonable foundation’. 13 Ferrazzini v Italy (2002) 34 EHRR 45, para 29; confirmed in Jussila v Finland (2007) 45 EHRR 39. 14 OAO Neftyanaya Kompaniya Yukos v Russia, Eur Ct HR Application No 14902/04, Judgment of 17 January 2012 (Yukos v Russia) paras 561 and 564. 15 ibid para 565. 16 ibid para 646. 17 ibid paras 621 and 646. 18 ibid para 656. 19 ibid para 657. 20 By way of illustration, the European Court of Justice (ECJ) has been criticized for its failure to declare that juridical double taxation should be prohibited as discriminatory, especially as regards its judgments in Damseaux v Belgium, Case C-128/08, judgment (16 July 2009) para 27 and Kerckhaert and Morres, Case C-194/06, judgment (14 November 2006) paras 19–24. The result in these cases is a violation of the right to property, enshrined in art 17 of the EU Charter of Fundamental Rights, by reason of confiscatory double taxation to which the parties are subjected (in this case cross-border inheritance). 21 art V(2)(a) 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 330 UNTS 38. 22 Particularly after Mitsubishi Motors Corp v Soler Chrysler Plymouth Inc, 473 US 614; see I Bantekas, ‘The Foundations of Arbitrability in International Commercial Arbitration’ (2008) 27 Aust YBIL 193. 23 See WW Park, ‘Arbitrability and Tax’ in LA Mistelis and SL Brekoulakis (eds), Arbitrability: International and Comparative Perspectives (Kluwer, 2009) 179, 181. 24 See, for example, Portuguese Law/Decree No 10/2011 on tax arbitration, in respect of which commentators suggest that it has increased tax arbitration manifold. 25 See, for example, Ecuador v Occidental Exploration & Production Co (OEPC), [2006] EWHC 345 (Comm), where the court (not an investment tribunal) looked to the tax exclusion stipulations of art X of the 1993 US–Ecuador BIT rather than Ecuadorian claims that tax was not arbitrable under its laws. 26 By way of illustration, South American rules of civil procedure require that all tax disputes be settled by national judicial authorities and they, therefore, face a conflict between a ‘prohibition on submitting tax disputes to arbitration and international commitments to be bound by arbitration when there is an arbitration clause in a treaty’. See N Quiñones Cruz, ‘International Tax Arbitration and the Sovereignty Objection: The South American Perspective’ (2008) Tax Notes Intl 533, 540. 27 See R O'Keefe and CJ Tams (eds), The United Nations Convention on Jurisdictional Immunities of States and Their Property: A Commentary (OUP, 2013) 277. 28 art 19, ICSID Additional Facility Rules. 29 Metalclad Corp v Mexico, ICSID Case No ARB(AF)/97/1, Award, 30 August 2000, para 70; Total SA v Argentina, Case No ARB/04/1, Decision on Liability, 21 December 2010, para 40. 30 CMS Gas Transmission Co v Argentina, ICSID Case No ARB/01/8, Award, 12 May 2005, para 121, where the tribunal rejected the claim that the severity of the Argentine crisis should allow the country to give priority to its fundamental human rights obligations. 31 In BCB Holdings Ltd and The Belize Bank Ltd v Attorney General of Belize [2013] CCJ 5 (AJ) the Belize Finance Minister had granted tax waivers in a unique deed but did not subject it to parliamentary approval. Although the award was rendered free of any public policy claims, in BCB Holdings Ltd LCIA Case No 81169, Award of 29 August 2009, such claims were sustained at the phase of enforcement. See paras 3 and 61 of the CCJ judgment. 32 art 2(2), Spanish Arbitration Act, Law No 60/2003 (as amended in 2011); Greek Law 3943/2011 on tax evasion. 33 See Greek Supreme Special Court judgment 24/1993 that held that tax disputes with foreign investors are beyond any doubt arbitrable. 34 County of Mobile v Kimball (1880) 102 US 691, 703; see also Houck v Little River Drainage District (1915) 239 US 254 (Mr Justice Hughes) 264, expressly stating that a state’s power to tax is ultra vires if it is abusive and ‘as a result of its arbitrary character is mere confiscation of particular property’. Equally confirmed in A Magnano Co v Hamilton, (1933) 292 US 40, 44. 35 See, for example, Kügele v Polish State, Case No 34, (1932) Annual Digest 24, 69, which rejected the argument that an increase in taxes (a licence fee in the case at hand) may be confiscatory, although the tribunal did not necessarily reach the conclusion that this was generally impossible under all circumstances. 36 One should distinguish between jurisdiction and locus standi for IIA from the existence of expropriation as such under international (including customary) law. That is why the tribunal in Link-Trading Joint Stock Company v Department for Customs Control of the Republic of Moldova, UNCITRAL Arbitration, Final Award, 18 April 2002, para 64, award iterated that tax is expropriatory where it violates a BIT or other treaty or where the taxes themselves constitute abusive takings. See also T Wälde and A Kolo, ‘Confiscatory Taxation under Customary International Law and Modern Investment Treaties’ (1999) 4 CEPMLP J <http://www.dundee.ac.uk/cepmlp/journal/html/vol4/article4-17.html> accessed 25 May 2010. 37 Duke Energy International Peru Investments No 1 v Peru, ICSID Case No ARB/03/28 is the only case to the best knowledge of the authors where a tax claim (based on a violation of the parties’ stabilization clause) was submitted on the basis of the parties’ contract rather than a BIT. 38 See, for example, art 2103(6) NAFTA; art 21.3(6) DR-CAFTA; art 21(5) ECT; art XII(4) Canada–Ecuador BIT; art 170(4)(b), Japan–Mexico BIT; art 21(2) US Model BIT; art 16, Canada Model BIT; art 28, Norwegian Model BIT. 39 This is explicit in art 16(1) of the 2004 Canadian Model BIT and art 3(4) of the 2008 German Model BIT which excludes the application of national and MFN treatment to advantages provided in other bilateral tax treaties; equally, art 28(2), Norwegian Model BIT and art 196(3), EC–Chile FTA. 40 UNCTAD, ‘Taxation’ (2000) Series on Issues in International Investment Agreements, Doc No UNCTAD/ITE/IIT/16, 36 <http://unctad.org/en/docs/iteiit16_en.pdf> accessed 16 May 2014. 41 For example, art 13(1), 2004 Canadian Model BIT; art 1110(1) NAFTA; art 9, EC–RSA FTA. 42 El Paso award (n 2) para 292. 43 art VIII(5)(b), Draft MAI. 44 OECD Negotiating Group on the MAI, ‘The Multilateral Agreement on Investment- Draft Consolidated Text’ Doc No DAFFE/MAI(98)7/REV1 (22 April 1998) 86; see also art 6(2) of the Norwegian Model BIT. 45 art III, US–Egypt BIT. 46 UNCTAD, Expropriation (UNCTAD Series on Issues in International Investment Agreements II (2011) Doc UNCTAD/DIAE/IA/2011/7) 133. 47 art 5, 1999 Argentina–New Zealand BIT; art 8, 1999 New Zealand–Chile BIT; art 5, 1988 New Zealand–China BIT (with exchange of notes). 48 See William W Park, ‘Arbitration and the Fisc: NAFTA’s “Tax Veto” ’ (2001) 2 Chi J Intl L 231. 49 See H Lauterpacht, ‘The Problems of Jurisdictional Immunities of Foreign States’ (1951) 28 BYBIL 220, 237. 50 In Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v Mongolia (Award on jurisdiction and liability, 28 April 2011) the arbitrators refused to assert jurisdiction for examining substantive tax disputes. 51 Yukos Capital SarL v OJSC Rosneft Oil Company [2011] EWHC 1461 (Comm) 122; Tullow Uganda Ltd v Heritage Oil and Gas Ltd, Heritage Oil plc [2013] EWHC 1656 (Comm); Government of India v Taylor [1955] AC 491 (HL) 511. 52 Agreement between the Government of the Republic of Costa Rica and the Government of Canada for the Promotion and Protection of Investments, signed 18 March 1998 (Canada–Costa Rica BIT). 53 Eudoro Armando Olguin v Republic of Paraguay, ICSID Case No ARB/98/5, Award of 26 July 2001 para 84. 54 CME Czech Republic BV (The Netherlands) v Czech Republic, Arbitration under the UNCITRAL Rules, Partial Award of 13 September 2001 para 607. 55 art VIII(5)(b), Draft MAI; social securities are likely to be interpreted by an arbitral tribunal as taxes—Hellenic Electric Railways Ltd v Government of Greece, Ad Hoc Arbitration, Geneva, Award of 18 March 1930, in which the arbitral tribunal rejected the distinction between social security contributions and taxes. 56 EnCana Corporation v Republic of Ecuador, LCIA Case No UN3481, Award and Partial Dissent of 3 February 2006 (EnCana, EnCana Award or EnCana Dissent). 57 EnCana award, para 142(2). 58 Antoine Goetz and Others v Republic of Burundi, ICSID Case No ARB/95/3, Award of 10 February 1999 (Goetz I); Antoine Goetz and Others & et SA Affinage des Metaux v Republic of Burundi, ICSID Case No ARB/01/2, Award of 21 June 2012 (Goetz II); Archer Daniels (n 6); Burlington Resources Inc v Republic of Ecuador, ICSID Case No ARB/08/5, Decision on Jurisdiction of 2 June 2010 and Decision on Liability of 14 December 2012 (Burlington); Cargill (n 6); Corn Products International Inc v United Mexican States, ICSID Case No ARB(AF)/04/01, Decision on Responsibility (Redacted Version) of 15 January 2008 (Corn Products); El Paso (n 2) Decision on Jurisdiction of 27 April 2006 and Award of 31 October 2011 ; Marvin Roy Feldman Karpa v United Mexican States, ICSID Case No ARB(AF)/99/1, Award of 16 December 2002 (Feldman); Occidental Exploration and Production Company v The Republic of Ecuador, LCIA Case No UN 3467, Award of 1 July 2004 (Occidental). 59 EnCana award (n 56) para 142(3). 60 ibid para 142(4). 61 ibid. 62 ibid. 63 See generally EnCana award (n 56) paras 169–200. 64 On conduct of the courts, see section below on The Yukos Affair; see also generally RosInvest Co UK Limited v The Russian Federation, SCC Case No V 079/2005, Award on Jurisdiction of 1 October 2007 (RosInvest Jurisdiction Award) and Final Award of 12 September 2010 (RosInvest); Quasar de Valores SICA V SA, ORGOR DE V AWRES SICA V SA, GBI 9000 SICA V SA, ALOS 34 SL v The Russian Federation, SCC Case No 24/2007, Award of 20 July 2012 (Quasar); and Yukos v Russia (E Ct HR). 65 EnCana award (n 56) para 182. 66 EnCana award (n 56) para 179. Similarly, if an investor is exempted from paying taxes (ie there is no need to go through the refund route because the tax is not paid in the first place) and that tax advantage is revoked, the revocation of the tax advantage can constitute an indirect expropriation. 67 R Dolzer and C Schreuer, Principles of International Investment Law (2nd edn,OUP, 2012) 119; see also Waste Management Inc v Mexico, ICSID Case No ARB(AF)/00/3, Award of 30 April 2004 (Waste Management II) para 141; Middle East Cement Shipping and Handling Co SA v Egypt, ICSID Case No ARB/99/6, Award of 12 April 2002, in which the tribunal accepted that a licence granted to the investor for the bulk importation and storage of cement was an investment (para 101) under the Egypt–Greece BIT, and that the revocation of the licence amounted to an expropriation of the licence (as an investment) (para 107). 68 Feldman (n 58) para 101. 69 GC Christie, ‘What Constitutes a Taking of Property Under International Law’ (1962) 38 Brit YB Intl L 307, 338. 70 Feldman award (n 58) para 102. 71 Feldman award (n 58) para 103; EnCana award (n 56) para 177; El Paso award (n 2) para 290; Link-Trading award (n 36) para 68; in RosInvest (n 64), Russia argued that there is a presumption of legality for tax measures under international law (RosInvest award, para 188) and that taxation measures are lawful from a public international law perspective, do not generally constitute expropriation and states have a wide margin of discretion in exercising their tax powers (RosInvest award, para 476). The RosInvest tribunal agreed with Russia that tax authorities may have a certain discretion and the right to change their positions regarding interpretation and application of tax laws but are still subject to objectivity and fairness by an arbitral tribunal to determine whether such measures are bona fide or not (RosInvest award, para 496). 72 EnCana award (n 56) para 177. 73 ibid 74 ibid. 75 ibid. 76 Feldman award (n 58) para 91; Occidental award (n 58) para 85; Archer Daniels award (n 6) para 238; EnCana award (n 56) para 177; Burlington award (n 58) para 392. 77 Archer Daniels award (n 6) para 238. 78 Cargill award (n 6) para 16. 79 ibid para 17. 80 ibid. 81 EnCana award (n 56) para 179. 82 art I(g), Canada-Ecuador BIT. 83 EnCana award (n 56) para 182. 84 ibid para 182. 85 art VIII(1), Canada–Ecuador BIT 86 art I(j), Canada–Ecuador BIT; EnCana award (n 56) para 117. 87 EnCana award (n 56) para 182. 88 Occidental award (n 58) paras 81 and 86. 89 art I(1)(a)(iii), US–Ecuador BIT. 90 ibid. 91 Occidental award (n 58) para 86. 92 ibid at para 89. 93 EnCana award (n 56) para 183. 94 EnCana award (n 56) para 183, citing art I(j), Canada–Ecuador BIT which provides a definition of ‘returns’. 95 ibid. 96 ibid para 95. 97 ibid para 185. 98 ibid. 99 ibid para 186. 100 ibid para 186. 101 ibid para 186 and 187. 102 Ecuador’s Interpretative Law No 2004-41 of 11 August 2004 (Interpretative Law) contained an interpretation of art 69A of Ecuador’s Internal Tax Regime Law (ITRL) that had permitted refunds of VAT paid in inputs for exported ‘fabricated’ goods. The Interpretative Law clearly stated that ‘petroleum is not a good that is fabricated’ for the purposes of art 69A ITRL, thereby ruling out VAT refunds for inputs in oil exploration and exploitation under art 69A ITRL. 103 EnCana award (n 56) para 188. 104 Occidental award (n 58) paras 143 and 152. 105 EnCana award (n 56) para 189. 106 ibid para 190. 107 ibid para 191. 108 EnCana award (n 56) paras 192–5; the EnCana tribunal arrived at this decision by adopting the position of the Waste Management award, whereby ‘the mere non-performance of a contractual obligation’ (emphasis added) does not equate to a taking of property or a measure tantamount to expropriation (Waste Management award (n 67) para 174). 109 EnCana award (n 56) para 194. 110 ibid para 195. 111 ibid para 194. 112 ibid para 196. 113 Factor X was a formula in the participation contracts which set the participation percentages between Petroecuador and the oil companies and outlined that any changes in the tax regime would result in adjustments to the participation percentages to absorb the increase or decrease in taxes, maintaining the economic balance of the contracts. (EnCana award (n 56) para 31 and Occidental award (n 58) para 97). The EnCana and Occidental contracts did not, however, contain provisions on VAT and its reimbursement (EnCana award (n 56) para 150 and Occidental award (n 58) para 143). 114 ibid; the Occidental tribunal emphasized that the SRI’s decisions appeared to be founded on reason and fact, not prejudice or preference (Occidental award (n 58) para 163). The SRI tried to bring some resemblance of order to the variety of contradictory practices, rules and regulations dealing with the VAT refund issue (Occidental award (n 58) para 163). 115 EnCana award (n 56) para 196; in addition, Ecuador’s Tax Court and Supreme Court had differences of opinion which suggested proper due process (para 196). 116 ibid para 197. 117 ibid. 118 Compañía de Desarrollo de Santa Elena, SA v The Republic of Costa Rica, ICSID Case No ARB/96/1, Final Award of 17 February 2000 (Santa Elena) para 68; some tribunals and scholars have labelled expropriations that lack compensation as unlawful whereas others have not. We are of the opinion that an expropriation that lacks compensation is not de facto unlawful (unless it also violates the pertinent conduct requirements) and is unlawful only when the host state has obviously expropriated investment and refused to compensate the investor. In all other situations litigation is required to determine the existence of expropriation and in such circumstances it would be unfair to brand the action as unlawful if it has not violated the conduct requirements. 119 Occidental award (n 58) para 86. 120 T Wälde and A Kolo, Investor-State Disputes, ‘The Interface Between Treaty-Based International Investment Protection and Fiscal Sovereignty’ (2007) 35(8/9) Intertax 424, 445. 121 Dolzer and Schreuer (n 67) 115. 122 Olguin (n 53). 123 ibid para 84. 124 ibid. 125 The tribunal in Sea-Land Service, Inc v The Islamic Republic of Iran, Ports and Shipping Organisation, Award No 135-33-1 of 22 June 1984, 6 Iran–USCTR 149, came to a similar conclusion, requiring at the very least proof of deliberate governmental interference in a company’s use and benefit of its investment. (6 Iran–USCTR 149, 166); M Brunetti, ‘The Iran-United States Claims Tribunal, NAFTA ch 11 and the Doctrine of Indirect Expropriation’ (2001) 2 Chi J Intl L 203, 207. 126 Campbell McLachlan QC, Laurence Shore and Matthew Weiniger, International Investment Arbitration – Substantive Principles (OUP 2008) 292. 127 Emilio Agustín Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, Award of 13 November 2000, para 64. 128 ibid. 129 art 13(1), ECT; see also majority of UK BITs, such as art 5(1), UK–Turkey BIT and art 4(1) UK–Malaysia BIT; similar can be found in various Swedish BITs such as art 4(1), Sweden–Argentina BIT and art 4(1) Sweden–Russia BIT; see also Siemens AG v Argentina, ICSID Case No ARB/02/8, Award of 6 February 2007, para 270. 130 Compañiá de Aguas del Aconquija SA and Vivendi Universal v Argentine Republic, ICSID Case No ARB/97/3, Award of 20 August 2007 (Vivendi II) para 7.5.20. 131 Metalclad Corporation (n 29) para 103. 132 ibid. 133 ibid; Although the Metalclad definition of expropriation is within the context of NAFTA, expropriation provisions in the international investment universe are all almost identical in form and/or effect and NAFTA jurisprudence is assumed to reflect applicable standards under customary international law, as a result, among others, of having been applied in non-NAFTA cases. 134 EnCana award (n 56) para 194. 135 EnCana award, Dissent (n 56) para 6. 136 The decisions are said to be defunct on the basis that oil companies did have a legal right to tax refunds under Ecuadorian law and Andean Community law as decided by the Occidental tribunal (Occidental award (n 58) paras 143 and 152) and for argument’s sake considered correct by the EnCana tribunal (EnCana award (n 56) para 189) and Ecuadorian courts had on occasion ruled that oil companies were due VAT refunds (Occidental award (n 58) paras 141 and 143). 137 EnCana award, Dissent (n 56) para 7. 138 Quasar award (n 64) para 181; El Paso award (n 2) para 290; the Burlington tribunal, however, took the position that there is no presumption of validity in favour of tax measures because the relevant BIT would state the same if that was the true position (Burlington award (n 58) para 365). 139 s712 comment (g), Third Restatement of the Law of Foreign Relations of the United States 1987 (Third Restatement); the Burlington tribunal also made a correlation between confiscatory taxation and expropriatory taxation (Burlington award (n 58) para 394), as have Walde and Kolo (n 120) 441. 140 See Burlington award (n 58) para 455; Archer Daniels award (n 6) para 251; RosInvest award (n 64) para 621(a); Quasar award (n 64) para 79 (referring to the tax assessments against Yukos being ‘shams’). 141 See Occidental award (n 58) paras 163 and 177 on arbitrariness/discrimination without intent. 142 Archer Daniels award (n 6) para 251. 143 Feldman award (n 58) para 118. 144 ibid. 145 Feldman award (n 58) para 15. 146 ibid. 147 ibid para 21. 148 ibid para 109. 149 ibid para 142. 150 ibid. 151 The Mexican tax laws themselves were prima facie measures of bona fide general taxation (ibid para 113). Crucially, Mexico was successful in arguing legitimate polices for the tax law, including the necessity to restrict grey market cigarette exports (ibid paras 115–16 and 136) and illegal re-exportation of Mexican cigarettes back into Mexico (ibid para 136). The application of the tax laws was, however, de facto discriminatory, whereby they were not applied to like-situated Mexican exporters of cigarettes, resulting in Mexico being liable for violating art 1102 of NAFTA (national treatment)—see ibid paras 154–88). 152 Cargill award (n 6) para 109. 153 ibid paras 106 and 217. 154 ibid paras 106 and 217. 155 ibid paras 208 and 219. 156 ibid paras 208 and 220. 157 Cargill Award (n 6) para 368. 158 Burlington award (n 58) para 401. 159 ibid. 160 ibid. 161 ibid para 455. 162 See section on Burlington case below. 163 ibid para 455. 164 ibid para 482. 165 Link-Trading award (n 36) para 87. 166 Feldman award (n 58) para 188; Cargill award (n 6) para 220. 167 Feldman award (n 58) para 152; Cargill award (n 6) para 368. 168 Técnicas Medioambientales Tecmed, SA v United Mexican States, ICSID Case No ARB(AF)/00/2, Award of 29 May 2003, para 115; and MCI Power Group LC and New Turbine Inc v Republic of Ecuador, ICSID Case No ARB/03/6, Award of 31 July 2007, para 300. 169 MCI Power Group, ibid para 300. 170 Telenor Mobile Communications AS v Republic of Hungary, ICSID Case No. ARB/04/15, Award of 13 September 2006, para 65. 171 ibid; Tecmed award (n 168) para 115. 172 MCI Power Group award (n 168) para 300. 173 Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran, the Government of the Islamic Republic of Iran et al, Iran-USCTR, Award No. 141-7-2 of 22 June 1984. 174 Waste Management award (n 67) para 143. 175 Metalclad award (n 29) para 103. 176 Feldman award (n 58) para 142. 177 ibid. 178 Archer Daniels award (n 6) para 246. 179 ibid para 245. 180 Cargill award (n 6) para 368. 181 Link-Trading award (n 36) para 91; the downturn in the business and change in the tax regime coincided in part with the Russian financial crisis of 1998, resulting in the sharp depreciation of the Moldovan currency against the US dollar from September 1998 to September 1999. This was found by the tribunal to actually constitute a stronger causal link to the company’s business misfortunes than the tax measures at hand (Link-Trading award (n 36) para 90). 182 Link-Trading award (n 36) para 91. 183 Goetz II (n 58). 184 Goetz II award (n 58) para 194. 185 ibid para 196. 186 See K Halverson Cross, ‘Sovereign Arbitration’ in RM Lastra and L Buchheit (eds), Sovereign Debt Management (OUP, 2013) 151. Exceptionally, the Cypriot government’s haircut to private deposits in Cypriot banks was characterized at the time as an extraordinary tax to bailout the country’s banking sector. Several mass claims are being organized and it is not unlikely that the tax on deposits constitute a claim for tax expropriation, particularly as the Greece–Cyprus BIT of 1993 provides a very broad definition of investments with many of the depositors being Greeks. 187 El Paso award (n 2) para 95. 188 ibid. 189 ibid; the Public Emergency Law also ‘ … converted US dollar obligations into pesos at the rate of 1:1, a measure known as “pesification”;… effected the conversion, on that basis, of dollar-denominated tariffs into pesos;… eliminated adjustment clauses established in US dollars or other foreign currencies as well as indexation clauses or mechanisms for public service contracts, including tariffs for the distribution of electricity and natural gas;… [and] required electricity and gas companies to continue to perform their public contracts… ’ (ibid). 190 ibid para 282. 191 ibid para 283. 192 ibid para 284. 193 ibid para 285. 194 ibid para 283. 195 ibid para 111. 196 ibid para 283. 197 ibid para 287. 198 ibid para 295, citing El Paso’s memorial at 366. 199 El Paso award (n 2) para 297. 200 ibid para 297. 201 ibid para 298. 202 ibid. 203 ibid para 297. 204 El Paso award (n 2) para 297, citing Argentina’s expert witness, Nouriel Roubini (a leading economist) in Argentina’s counter memorial at 153. 205 ibid. 206 EnCana award (n 56) paras 172 and 178. This was unlike the direct tax expropriation claim in the same case, for which the tribunal only required deprivation of ‘claims to money’, that is, a deprivation of the cash paid for taxes, rather than the much higher threshold of proving a substantial deprivation of the use, control, and economic benefits of the subsidiaries themselves. 207 EnCana award (n 56) para 174. 208 ibid para 177. 209 ibid. 210 EnCana award (n 56) para 174. 211 ibid para 177. 212 ibid. 213 Occidental award (n 58) para 86. 214 ibid para 89. 215 ibid. 216 Companies will seldom invest in a country if 90% of their profits will be taxed by the state because the remaining 10% profit margin would not be worth the investment risk and effort. In Burlington, Ecuador’s denial of Burlington to 62.3% and 73.9% of the value of a barrel of oil was not considered to be a substantial deprivation (see below). 217 In EnCana, the claims to refunds amounted to 10% of transactions associated with oil production and export (EnCana award (n 56) para 177) and since Occidental engaged in the same sector and brought its claim on the premise of similar taxation measures by Ecuador, it is a safe assumption that the value of VAT refunds in Occidental would also have been in the region of 10% of transactions associated with oil production and export. 218 Burlington award, dissent (n 58) para 26. 219 Burlington Resources Inc (n 58) Decision on Liability of 14 December 2012 (Burlington award). 220 Burlington award (n 58) paras 6 and 14. 221 ibid para 14. 222 ibid para 15; Perenco brought their own claim against Ecuador: Perenco Ecuador Limited v Republic of Ecuador, ICSID Case No ARB/08/6, Decision on Remaining Issues of Jurisdiction and Liability, 12 September 2014. 223 Burlington award (n 58) paras 18 and 19. 224 ibid para 138. 225 ibid; the price of oil at the time the Block 7 contract was executed on 23 March 2000 was US$25.11 per barrel (Burlington award (n 58) para 291). 226 ibid para 23. 227 ibid para 24. 228 ibid. 229 ibid para 136. 230 ibid para 137. 231 ibid. 232 ibid para 279. 233 ibid. 234 ibid para 281. 235 Clause 8.1 of the Tarapoa Contract (Burlington award (n 58) para 294). 236 Burlington award (n 58) para 299. 237 ibid. 238 ibid para 139. 239 ibid. 240 ibid para 32. 241 ‘Ecuador: Diversification and Sustainable Growth in an Oil-Dependent Country’ (31 March 2010) World Bank, LCR PREM Report No 46551-EC, 29. 242 Burlington award (n 58) para 142. 243 ibid. 244 ibid. 245 ibid para 185. 246 ibid para 56. 247 ibid par 186. 248 ibid. 249 ibid. 250 ibid. 251 ibid. 252 ibid paras 254 and 337. 253 ibid para 337. 254 Burlington award (n 58) para 424. 255 ibid para 424. 256 ibid para 420. 257 ibid para 425. 258 ibid. 259 ibid para 426. 260 ibid. 261 ibid. 262 ibid para 427. 263 ibid para 430. 264 ibid para 431. 265 ibid para 432; the tribunal in Perenco also decided that ‘Law 42 at 50% did not substantially deprive [Perenco] of its investment, or effectively neutralise the benefit of the investment or rights related thereto, nor did it render Perenco's activities so marginal or unprofitable as to effectively deprive them of their character as investments’ (Perenco award (n 222) para 673). 266 ibid para 434. 267 ibid para 435. 268 ibid para 445; Amortization refers to situations where the capital investment is accounted for/spread over 3–5 years instead of the year the investment was actually made. 269 ibid para 448. 270 ibid para 449. 271 ibid para 450. 272 ibid para 455. 273 ibid para 456. 274 ibid. 275 ibid para 457; the Perenco tribunal also rejected the claim that Law 42 at 99% resulted in expropriation, citing four reasons: (i) Perenco continued to operate the blocks and there was no impairment of any rights of ownership or control (Perenco award (n 222) para 681); (ii) paying the taxes at 99%, although disadvantageous, ‘did not bring the operation to a halt... or... effectively neutralise the investment or render it as if it had ceased to exist’ (Perenco award (n 222) para 685); (iii) throughout 2008 and 2009, Perenco continued to negotiate with the state to reach a mutually satisfactory adjustment which indicated the tax had not ended the investment (Perenco award (n 222) at para 686); and (iv) although arguments of the illegitimacy and draconian proportionality of Law 42 at 99% had merit, a disproportionate measure does not render an expropriation ‘where the evidence of effect indicates otherwise’ (Perenco award (n 222) para 689). The decision by the Perenco tribunal further strengthens the assertion of the authors that total deprivation is required for tax expropriation and that tax is lex specialis under the customary international law of expropriation. 276 ibid dissent at para 23. 277 ibid dissent at para 25. 278 ibid. 279 ibid dissent at para 26. 280 ibid dissent at para 27. 281 ibid. 282 ibid. 283 ibid. 284 There were, at the time of writing and in the best knowledge of the authors, only the RosInvest and Quasar claims that had resulted in the finding of state liability for tax expropriation. Another three Yukos cases also resulted in findings of tax expropriation after this article was authored—see n 285 and n 347 below. The authors are aware of the Revere case (Revere Copper Brass Inc v Overseas Private Investment Corporation, AAA Case No 16 10 0137 76, Award of 24 August 1978), in which the claimant investor succeeded in its compensation claim for tax expropriation by Jamaica. However, the claim was brought against political risk insurers (Overseas Private Investment Corporation—OPIC) rather than the host state, and because it is not conclusive that the claim would not have succeeded if it was brought against the Jamaican state as opposed to an insurance company, we are not including it within our assessment of tax expropriation in investor–state arbitration. 285 A further three arbitrations against Russia for the expropriation of Yukos, the proceedings for which have been consolidated into one, were at the time of writing pending final awards: Hulley Enterprises Limited (Cyprus) v Russian Federation, ECT Arbitration, PCA Case No AA 226; Yukos Universal Limited (Isle of Man) v Russian Federation, ECT Arbitration, PCA Case No AA 227; and Veteran Petroleum Limited (Cyprus) v Russian Federation, ECT Arbitration, PCA Case No AA 228; since writing this article, the final awards (also consolidated) were rendered—see n 347 below. 286 The RosInvest and Quasar arbitral awards themselves, in most part, also focus on the treatment of Yukos as opposed to the investors. 287 ‘Yukos Ten Years On’ (The Yukos Library, 2013) <http://www.theyukoslibrary.com/en/the-yukos-affair-ten-years-on/> accessed 10 January 2014. 288 Quasar (n 64) para 102. 289 OAO Yuganskneftegaz (YNG) was: (i) valued by the Quasar claimants as at least US$15 billion (ibid para 84); (ii) sold at auction for US$9.4 billion which was just over half of its appraisal value by Russia’s own advisors (ibid para 163); (iii) valued before its auction by investment bankers at US$22 billion (RosInvest Jurisdiction Award (n 64) para 2, quoting the claimant’s Request for Arbitration); and (iv) valued by Russian-state-owned oil company Rosneft, YNG’s ultimate post-auction owner, at US$57.7 billion (Quasar award (n 64) para 84). 290 Quasar award (n 64) para 162. 291 RosInvest award (n 64) para 76. 292 See RosInvest award (n 64) paras 70–76; and Quasar award (n 64) para 104, quoting the claimants’ Statement of Claim. 293 RosInvest Jurisdiction Award (n 64) para 2, quoting the claimant’s Request for Arbitration. 294 Quasar award (n 64) para 47, quoting the claimants’ Statement of Claim. 295 Quasar award (n 64) para 66. 296 RosInvest award (n 64) para 460. 297 ibid para 426. 298 ibid paras 424–25. 299 ibid para 4, quoting the Claimant’s Post-Hearing Reply Brief; Quasar award (n 64) para 75. 300 Quasar award (n 64) para 134. 301 ibid para 142. 302 ibid para 144. 303 The creditors decided to liquidate rather than accept Yukos’ proposals to deal with remaining tax debts by selling some US$15.7 billion of assets and using the remaining assets to generate approximately US$3 billion per year to pay off any outstanding tax debt, as well as using funds held in the Netherlands to pay off other creditors such as the SocGen consortium (Quasar award (n 64) para 143). 304 Quasar award (n 64) para 147. 305 RosInvest award (n 64) para 494. 306 Quasar award (n 64) para 47. 307 Quasar award (n 64) para 47, quoting claimants’ Statement of Claim. 308 RosInvest award (n 64) para 4, quoting the Claimant’s Post-Hearing Reply Brief; and ‘Timeline’ (The Yukos Library) < http://www.theyukoslibrary.com/en/library/timeline/> accessed 16 May 2014. (The Yukos Library: Timeline). 309 RosInvest award (n 64) paras 69–70. 310 ibid para 444. 311 ibid para 453. 312 ibid para 539, quoting Prof Peter Maggs’ Report I, 173. 313 ibid para 537. 314 ibid. 315 Quasar award (n 64) para 41. 316 RosInvest award (n 64) para 262. 317 ibid para 273. 318 Quasar award (n 64) para 160. 319 RosInvest award (n 64) para 449. 320 ibid. 321 Quasar award (n 64) para 54. 322 RosInvest award (n 64) para 450. 323 ibid para 452. 324 ibid para 453. 325 ibid para 454. 326 ibid para 620(a). 327 ibid para 620(b). 328 ibid para 620(c). 329 ibid para 620(d). 330 ibid para 620(e). 331 ibid para 621. 332 ibid para 621. 333 RosInvest award (n 64) paras 624–25. 334 ibid para 633. 335 Quasar award (n 64) para 79. 336 ibid para 80. 337 ibid para 170. 338 ibid para 174. 339 ibid para 175. 340 ibid para 103. 341 ibid; an investigation would have been required to decide whether Yukos could actually pay its tax debts over a period of time—which, with the increase in oil prices, such a scenario would have been plausible (ibid). 342 ibid. 343 ibid. 344 ibid para 177. 345 Quasar award (n 64) para 82. 346 ibid para 186. 347 The final award for the three consolidated arbitrations against Russia, brought under the ECT, by Hulley, Veteran and Yukos Universal (n 285) was made by that arbitral tribunal on 18 July 2014 (henceforth together referred to as the Yukos Universal award). The evidence in the ECT arbitrations suggested to the tribunal that ‘the primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets’ (Yukos Universal award para 756), with two stand-out mistreatments being the US$13.5 billion VAT (and fines) assessments for exported oil (which is VAT-exempt) and the auction of YNG for far less than its value (Yukos Universal award para 1579). The tribunal decided Yukos was indirectly expropriated (Yukos Universal award para 1580). As to the conduct requirements: (i) the expropriation of Russia's largest taxpayer was profoundly questionable, even if its assets became state-owned (Yukos Universal award para 1581); (ii) the mistreatment of Yukos compared with other oil companies who participated in tax avoidance schemes ‘may well have been discriminatory’ (but the tribunal did not decide that issue) (Yukos Universal award para 1582); (iii) the expropriation of Yukos was not carried out with due process of law (Yukos Universal award para 1583); and on the compensation requirement (iv) there was no compensation whatsoever and therefore no prompt, adequate and effective compensation (Yukos Universal award para 1584). The claimants were altogether awarded over US$50 billion (Yukos Universal award para 1827) plus US$60 million in legal fees and EUR €4.2 million in arbitration costs (Yukos Universal award para 1887). The decision in the ECT Yukos arbitrations further confirms the conclusion of the authors that total deprivation is required for tax expropriation (as well as intent, which would be implicit if the effect is a total deprivation) and that tax is lex specialis under international laws governing expropriation. 348 See also USA v Winstar Corp et al, 518 US 839 (1996) where the US Supreme Court held that an agreement by the government to compensate a contracting party as a result of a legislative change by no means suggests a surrender of sovereignty. 349 Watson's Bay and South Shore Ferry Co Ltd v Whitfield [1919] 27 CLR 268, 277; Redericktiebolaget Amphitrite v King [1921] 2 KB 500, 503. These cases support the so-called doctrine of executive necessity. The idea is that the contracts or promises made by the government are unenforceable in the public interest if they fetter the future competence and powers of the executive. This has not, however, precluded British courts from ruling that changes in local taxation laws abroad affecting foreign investors are arbitrable—potentially giving rise to indirect or creeping expropriation. See Ecuador v Occidental Exploration & Production Co (OEPC) [2006] EWHC 345 (Comm). 350 See AGIP v Congo (1982) 21 ILM 726 and Texas Overseas Petroleum/California Asiatic Oil Co(TOPCO) v Libya (1978) 17 ILM 3, 12. An extract from the arbitral award in Copper Revere and Brass Inc v OPIC (1978) 17 ILM 1343, para 44, is instructive: ‘Inevitably, in order to meet the aspirations of its people, the Government may for certain periods of time impose limits on the sovereign powers of the State, just as it does when it embarks on international financing by issuing long term government bonds on foreign markets. Under international law the commitments made in favour of foreign nationals are binding notwithstanding the power of Parliament and other governmental organs under the domestic Constitution to override or nullify such commitments.’ 351 BCB Holdings Ltd (n 31). 352 ibid para 23. 353 ibid para 27. 354 ibid para 28. 355 ibid para 59. 356 A variant of this tax regime is now a standard contractual term for oil and gas production operations, namely the production sharing agreement (PSA), whereby the investor typically recovers capital and operating costs in the form of a share in crude production at the beginning of its cycle. Once the investor’s costs are reimbursed the remainder of the output (profit oil) is shared among the state and the investor in accordance with an individually agreed formula, which typically encompasses all other applicable taxes. 357 World Bank, The Strategy for African Mining (World Bank, 1992) 29ff. 358 R Nshala, ‘Dispossession through Liberalisation: How Sub-Saharan African Nations Lost Sovereignty over Mineral Resources’ SJD thesis, Harvard Law School (Harvard Law School Library, 2012) 360–70. 359 S Perry, ‘Kazakhstan Settles Billion-Dollar Oil Claims’ (2011) GAR <http://globalarbitrationreview.com/news/article/30045/kazakhstan-settles-billion-dollar-oil-claims> accessed 17 December 2011. 360 Especially, concessions or PSAs governed by private law, in which case the confidentiality clause prevents the agreement from parliamentary scrutiny and approval. 361 See generally, TM Franck, Fairness in International Law and Institutions (OUP, 1998) 25–46, where he focuses on the procedural legitimacy of international rules by reference to four distinct properties of the rule. These are its coherence, determinacy, symbolic validation through ritual and pedigree, and its adherence to a normative hierarchy. Franck’s idea of procedural legitimacy, through the interaction of these properties, concerns the degree to which the rule will be obeyed by states and not if it is necessarily perceived as fair by individual stakeholders. 362 R Kennedy, ‘Resource Nationalisation Trends in Kazakhstan, 2004-2009’ (March 2010) Russ-Casp Working Paper 7–8. 363 Feldman Award (n 58) para 119. 364 ibid. 365 ibid para 129. 366 ibid para 130. 367 ibid para 131. 368 ibid para 113. 369 EnCana award (n 56) para 173. 370 ibid. 371 EnCana award (n 56) para 173. 372 Cargill award (n 6) para 290 (this point arose in the disposition of the fair and equitable treatment claim—the decision was not repeated in the expropriation section of the award). 373 Link-Trading award (n 36) para 64. 374 ibid. 375 Link-Trading award (n 36) para 86. 376 El Paso award (n 2) para 295, quoting El Paso’s Memorial, 362. 377 ibid. 378 ibid. 379 Occidental Petroleum Corporation and Occidental Exploration and Production Company v Republic of Ecuador, ICSID Case No ARB/06/11, Award of 5 October 2012, para 527. 380 Burlington award (n 58) para 453. 381 See El Paso award (n 2) paras 350–64; Ioan Micula, Viorel Micula, SC European Food SA, SC Starmill SRL and SC Multipack SRL v Romania, ICSID Case No ARB/05/20, award of 11 December 2013, paras 527–29. 382 ibid. 383 ibid para 666; see also Paushok award (n 50) para 305, and Perenco award (n 222) para 586. 384 ibid paras 677–86. 385 ibid para 668. 386 ibid para 687. 387 Archer Daniels, Cargill, Corn Products, Feldman, and Occidental. © The Author 2015. Published by Oxford University Press. All rights reserved.For Permissions, please email: journals.permissions@oup.com

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Arbitration InternationalOxford University Press

Published: May 6, 2015

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