A Comparison of Arbitration Provision under Bilateral Investment Treaties, Free Trade Agreements and Tax Treaties

Cym Lowell

Julien Chaisse

Hafiz Choudhury

The global context Change in international business

Growth of services in international trade in a regime designed originally for trade in goods

Growth in intercompany transactions of global business Growth in international trade

A globalized supply chain – centralization of certain functions, assets and risks in principal entities

Growth in tax treaties and non-tax agreements Some numbers

DTAs - approx. 3600 v. Bilateral Investment Treaties (BITs) – just over 3000 (400 in 1990)

Increasingly South-South, not just North-South BITs do differ between countries

Goals In program, arbitration in a variety of other non-

tax areas has been mentioned E.g. spoke of

Inexperience of developing countries Concerns from governments on arbitration

For tax way forward, there is mush to be learned from these other contexts

Includes investment and trade agreements, commercial, state-to-sate and so on

Look first at trends and practices in BITs covering arbitration and rule making

Trends in investment rule-making

Trends in IIAs signed, 1983–2013 (UNCTAD, World Investment Report 2014 at 115.

Negotiate and you shall arbitrate!

Known ISDS cases, annual (1987-2013) UNCTAD, 2014

Qualitative changes

Rationae materiae

expansion to include

intangible assets

• Sovereign debt restructuring• Intellectual property rights (trade marks)• Commercial awards

Rise of Treaty shopping?

• Corporate structuring and restructuring to gain access to IIAs and ISA

Combined to extension of

many substantive

standards

• FET, FPS, expro, NT

Contrast between BITs and DTAs Tax treaties share a DNA / limited variations Variable of adjustment is the facts Tax treaties are the primary source of rights and

obligations for both nations and taxpayers with respect to tax matters

BUT, many other international treaties/agreements also affect taxation Agreements may extend new or alternative rights (e.g., dispute

resolution) Agreements may affect national tax rules Agreements may offer rights that strongly influence tax planning

Investment disputes dealing with tax matters

32 disputes

(at least)

• 15 lost by host states

• 17 won by states

Which responding states?

• Developing countries

• Mexico, Burundi Peru, Venezuela, Russia, Ecuador, Argentina

When and which treaties?

• NAFTA, ECT• Various BITs (US

but also China, Netherlands, UK)

Awards date

Breaches

Examples: Vodafone Vodafone’s tax dispute with India is currently

in arbitration Vodafone invoked India-Netherlands Bilateral

Investment Protection and Promotion Agreement Issue arises from 2007 purchase of $11B telecom

business from Hutchison Whampoa Tax cost to Vodafone could be $3B+ In September 2014 parties agreed to extend

deadline for selection of third arbitrator Vodafone states it is open to negotiation

Examples: Yukos Yukos arbitration decision in July 2014 vividly

illustrates the importance of non-tax treaties Former shareholders claimed that tax

assessments amounted to expropriation Permanent Court of Arbitration agreed and

awarded $50 billion, to be paid by January 2015 Award would have been higher, except for

misconduct by claimants Tax treaties could never effectively grant this

level of relief

WTO/trade agreements and tax

Trade agreements – multilateral, regional and bilateral – are also non-tax treaties that affect tax matters

Trade and investment agreements differ but most promise “National treatment” “Most favored nation treatment” (MFN)

WTO has clear dispute resolution mechanisms: Initial consultations can be seen as equivalent to MAP DSB Panel results in remedies binding for both countries. AB provides a forum for review.

Takeaway for tax disputes Clear process, timelines, institutional structure. Remedies are binding and enforceable.

Trade and tax disputes GATT ensures rights relating to trade in goods

Key terms in Art. III - “so as to affect protection”, “affecting their internal sale”, “internal taxes”

Application to indirect taxes is clear; application to direct taxes may not be clear

SCM Agreement prevents tax subsidies Must be a “financial contribution”, - present when “Government

revenue that is otherwise due is not collected” Foreign Sales Corporation (FSC) decision

GATS agreement on services Carve out for DTAs and provision on equitable and effective

imposition or collection of direct taxes WTO Panel Panama-Argentina – violation of MFN principle by

Argentina on transactions between Argentinean residents with listed countries (incl. Panama) and also NT on entry of funds.

Multiplicity of venues for BIT arbitration

ISA

Ad hoc

UNCITRAL

PCA Rules

Institutional arbitration

ICSID

ICC

Arbitral Awards as “Precedent”?

In theory

No

Perhaps as non-binding ‘subsidiary means of

determination of rules of law’

Art. 38(1)(d) Statute of ICJ(‘judicial decisions

and the teachings of the most highly qualified

publicists’)

ICSID Convention, Art. 48, decisions binding on

the parties only

Other Comments Investment case-law?

Tribunals inclined to rely on precedent However, some inconsistencies

Variations in drafting, new issues ISA should be quick and inexpensive:

it has become expensive and slow States have been forced to re-engineer their

definitions

ICC Process and Study BEPS Action # 14 identifies “obstacles” to

arbitration They are not identified We know from BIT, WTO and so on that all countries,

developed and developing, engage in a variety of arbitration formats

This experience should provide a base for optimism in the tax context

ICC Process and Study ICC commenced arbitration at same time as original

post League of Nations took over tax treaty in 1926 Today, ICC Arbitration Commission and Court of Int’l

Arb have extensive experience in commercial, state-to-state, investment and other arb contexts

Other groups do as well ICC Tax’n Comm’n has consulted with its Arb

Comm’n colleagues to ascertain if the same “obstacles” existed in these other areas at an early date Answer: yes

ICC Process and study Based on experience, ICC identifies

elements of developing successful arbitration programmes: Develop thorough understanding of “obstacles” Identify common objectives of the parties Study experience of successful Dis res

mechanisms in other areas Outline proposed approach to address “obstacles”

in the tax context Develop broad consensus

ICC Process and study Implement with an institution having broad experience

in administering cases through Dis res mechanisms in other contexts

Study to be undertaken By ICC with other groups – e.g., UN, World Bank, IMF,

Civil Society, NGOs and others with common interest

Lessons for Arb of Tax Disputes Epochal change is coming in our tax world

from BEPS, source country and other demands. Context: Countries: tax base protection MNEs: focus on ETR planning to take maximum

advantage of regimes and prepare for disputes Disputes will proliferate

Enhanced Dis Res is critical for all parties

Selling points for all countries In present world economy, buy-in is

necessary by developing and developed countries.

Steeper curve ….. Must be commonly perceived benefits Look at experience in trade and investment

area.

Conclusions Process Structure

BIT: successful but demonstrate need for states to design detailed system other arbitrators take over / far from being a mature regime

Trade Commercial State-to-state

ICC Study Organizational Framework