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 nontax 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
Rise of Treaty
shopping?
Combined to
extension of
many
substantive
standards
• Sovereign debt restructuring
• Intellectual property rights (trade marks)
• Commercial awards
• Corporate structuring and restructuring to
gain access to IIAs and ISA
• 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)
Which responding
states?
When and which
treaties?
• 15 lost by host
states
• 17 won by states
• Developing
countries
• Mexico, Burundi
Peru,
Venezuela,
Russia, Ecuador,
Argentina
• 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



WTO has clear dispute resolution mechanisms:




“National treatment”
“Most favored nation treatment” (MFN)
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



SCM Agreement prevents tax subsidies



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
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
UNCITRAL
Ad hoc
PCA Rules
ISA
ICSID
Institutional
arbitration
ICC
Arbitral Awards as “Precedent”?
No
In theory
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, stateto-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