Tax Gross-Up Claims in Investment Treaty Arbitration
Nhu-Hoang Tran Thang1
RECENTLY, INVESTORS HAVE CLAIMED “TAX GROSSED-UP DAMAGES”, or a
damage amount that takes into account the eventual taxation of the award by the defending
State. Unfortunately, arbitral tribunals facing this issue have not yet seized the opportunity to
express their views on the appropriateness of such claims in investment treaty arbitration2.
The paucity of authority in both international doctrine and jurisprudence is not surprising. Not
only are claims for tax gross-up in contemplation of future taxation recent, but the topic also
calls for overlapping considerations of international law (where the legal basis for
compensation of investors is to be found), national law of the host State (according to which
tax consequences need to be assessed), complex economic calculations (which are sometimes
beyond law practitioners’ and arbitrators’ full comprehension), as well as political
considerations inherent to any mixed arbitration involving a sovereign State. This article
attempts to identify the underlying arguments for such claims and draw the attention of
practitioners and arbitrators to an issue that they are likely to face more frequently in the
future.
1
2
Student at the Ecole de Formation Professionnelle des Barreaux de la Cour d’Appel de Paris in Paris, France.
Corn Products International, Inc. v. United Mexican states, ICSID Case No. ARB(AF)/04/1, Decision on the
Correction and Interpretation of the Award, Mar. 23, 2010; Chevron Corporation (USA) and Texaco
Petroleum Company (USA) v. Republic of Ecuador, Partial Award on the Merits, Mar. 30, 2010; Siemens
A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award, Feb. 6, 2007; PSEG Global Inc. and Konya
Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award,
Jan. 19, 2007. Tax gross-up claims in these cases are analyzed in Section IV(A) infra.
I.
DEALING WITH TAX ISSUES IN A PARTICULAR CONTEXT
The very topic of tax gross-up claims calls for a threshold question: are we dealing with a tax
issue or a damages issue? According to Robert Wood, a practitioner who has written
extensively on the subject in US law, the latter is correct, “though it is undeniable that you
must be tax conversant to prove and quantify your claim for ‘tax damages’.”3 In mixed
arbitrations involving sovereign States, this entanglement of two areas of the law requires
extra caution. Whilst States are now commonly condemned by international tribunals to
compensate investors whose rights were violated, taxation remains a protected government
tool through which States express their imperium4. The interference of an arbitral tribunal
with the State power to tax the award is thus a sensitive issue. This is only complicated by the
fact that this interference deploys its effects after the award is rendered, a time at which the
tribunal is no longer apprised of the matter for which the State consented to arbitration.
II.
THE ONLY WAY TO BE MADE WHOLE?
A. The Chorzów Factory standard in international law
The leading argument for tax gross-up claims is, as one would expect, that tax gross-up is
necessary in order for claimants to be made whole. A claim for full reparation of harm caused
by a State is fully supported in international law. The cornerstone decision relating to the full
reparation standard of compensation is the Chorzów Factory case decided by the Permanent
3
4
R. W. Wood, “To Tax Gross Up Or Not To Tax Gross Up?” 19 (1) California Tax Lawyer 14 (2010).
As Professor Le Gall notes, “peu de réglementations juridiques incarnent autant l’imperium de l’Etat que la
fiscalité, récif sur lequel s’ancre le pouvoir régalien de lever l’impôt.” J.-P. Le Gall, “Fiscalité et arbitrage”,
1994 (1) Rev. Arb. 3 (1994). See also Ceskoslovenska Obchodni Banka, A.S. v. Slovak Republic, ICSID Case
No. ARB/97/4, Award, Dec. 29, 2004, para. 367 in which the tribunal seemed to distinguish Slovakia as the
tax authority and as a party to the dispute, respectively: “[i]ncome taxes are an act of government (‘fait du
prince’ ) that are out of the parties’ control and are unrelated to the obligation of one party to fully compensate
the other part for the harm done.”
Court of International Justice in 19285. This case established the following principle:
“reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been
committed.”6
The question is thus whether grossing-up an arbitral award for taxes is necessary to pursue
this legitimate goal. An affirmative answer would necessarily imply that the taxes would not
have been due by the investor should the State’s wrongful act have not been committed. US
law, which is potentially the source that inspired investors making tax gross-up claims,
provides some guidance with regard to this issue.
B. The US law approach
The US Internal Revenue Code provides that a damages award is income and thus taxable7.
Litigants have claimed that adverse tax consequences should be taken into account by US
courts when awarding damages, but this remains a very debated issue8. As Wood explains,
courts’ reluctance to decide on such claims is primarily due to the fact that taxes must be paid
by claimants in any case. The most solid argument for tax gross-up is therefore that, in a
specific case, the defendant’s breach has itself caused the adverse tax consequences9. This
5
Case Concerning the Factory at Chorzów (Germany v. Poland), 1928 P.C.I.J. (ser.A) No. 17 (September 13).
The Chorzów Factory case is deemed to embody the content of customary international law on damages. See
S. Ripinsky & K. Williams, Damages in International Investment Law 35 (BIICL 2008) (“The Chorzów
Factory decision is the authority most frequently cited by international tribunals in investor-state disputes
involving matters of compensation. The dicta of the PCIJ in this case have come to be treated by international
tribunals as reflecting customary law.”); I. Marboe, Calculation of Compensation and Damages in
International Investment Law 27 (OUP 2009) (“The leading international case in this connection is the
judgement of the PCIJ in the Factory at Chorzów case.”); T. Wälde & B. Sabahi, “Compensation, Damages
and Valuation” in P. Muchlinski, F. Ortino & C. Schreuer (eds), Oxford Handbook of International Investment
Law 1056 (OUP 2008) (“The classic starting point in a damages analysis is the 1928 PCIJ judgement in the
Chorzów Factory case”).
6
Case Concerning the Factory at Chorzów, supra note 5, p. 47.
7
I.R.C. § 61 (2009). The IRC provides for the exclusion of some categories of damages, the most relevant
example being the damages awarded to victims of personal injuries or sickness, see I.R.C. § 104 (2009).
8
R. W. Wood, “To Tax Gross Up Or Not To Tax Gross Up?”, supra note 3, p. 14.
9
Id. (“This is a kind of but-for causation reminiscent of tort actions.”)
view appears to be in line with the Chorzów Factory standard, which seeks to re-establish the
plaintiff in an ex-ante status.
The practical application of this line of thinking is not easy when considering the assessment
of tax consequences.
The US courts jurisprudence nevertheless provides more detailed
reasoning on the topic than international case law.
In the recent case Eshelman v. Agere Systems Inc.10, the Third Circuit Court of Appeals
reviewed the decision of a District Court to gross-up an award of damages. Joan Eshelman
was suing her ex-employer, Agere Systems, for discrimination in violation of the Americans
with Disabilities Act. The jury had awarded her back pay and the amount of 200,000.00 USD
as damages, including 6,893.00 USD for adverse tax consequences.11 The Court of Appeals,
which affirmed the District Court’s decision, evoked important principles on both propriety
and limits of this remedy.
First, the Court emphasized the discretionary power of courts in awarding adequate reparation
to claimants under antidiscrimination statutes12.
Second, the Court discussed the rationale for tax gross-up. After examining the argument of
Ms. Eshelman13, the Court reviewed the pertinent applicable precedent and held that the
District Court had rightly awarded gross-up for taxes. It explained its decision in the
10
Eshelman v. Agere Systems Inc., 554 F. 3d 426 (3rd Cir. 2009). See also the leading case Home Savings of
America, FSB v. US, 399 F.3d 1341, 1356 (“We adopt the rule … that a tax gross-up is appropriate when a
taxable award compensates a plaintiff for lost monies that would have been taxable”).
11
Id., p. 430
12
Id., p. 440. See also p. 441 (“We hold that a district court may, pursuant to its broad equitable powers granted
by the ADA, award a prevailing employee and additional sum of money to compensate for the increased tax
burden a back pay award may create.”) See also Sears v. Atchinson Topeka & Santa Fe Railroad Co., 749 F.2d
1451, 1456 (10th Cir. 1984) (“We hold that the district court did not abuse its discretion when it included a tax
component in the back pay award to compensate class members for their additional tax liability as a result of
receiving over seventeen years of back pay in one lump sum. As we stated in our prior opinion, the trial court
has wide discretion in fashioning remedies to make victims of discrimination whole.”)
13
Eshelman v. Agere Systems Inc., supra note 10, p. 441 (“The Supreme Court made clear that back pay awards
under discrimination statutes are taxable … Further, ‘backpay awards are taxable in the year paid’ …
Accordingly, employees may be subject to higher taxes if they receive a lump sum back pay award in a given
year … meaning the employee would have a greater tax burden than if she were to have received that same
pay in the normal course.”)
following terms: “[o]ur conclusion is driven by the ‘make whole’ remedial purpose of the
antidiscrimination statutes. Without this type of equitable relief in appropriate cases, it would
not be possible ‘to restore the employee to the economic status quo that would exist but for
the employer’s conduct’.”14
Finally, the Court reviewed the factual evidence produced in the District Court trial and
emphasized both the need to tailor tax gross-up decisions to the circumstances of each case15
and placing the burden of proof on the plaintiff16.
Accordingly, whilst awarding tax gross-up, the Court of Appeals immediately specified the
limited scope of its decision.
[W]e hasten to add that in so holding, we do not suggest that a
prevailing plaintiff in discrimination cases is presumptively entitled
to an additional award to offset tax consequences above the amount
to which she would otherwise be entitled. Employees will continue
to bear the burden to show the extent of the injury they have
suffered. The nature and amount of relief needed to make an
aggrieved party whole necessarily varies from case to case.17
This express limitation is welcome. Indeed, as Wood notes, the decision is “likely to influence
tax damage claims in the future.”18
14
Id., p. 442.
Id. See also Sears v. Atchinson, supra note 12, p. 1456 (“[T]his case presents special circumstances in view of
the protracted nature of the litigation.”)
16
Eshelman v. Agere Systems Inc., supra note 10, p. 442 (“In support of her motion for relief, Eshelman
submitted an affidavit from an economic expert who calculated the amount of tax-effect damages based upon
the back pay award, the applicable tax rates, and Eshelman’s income tax returns for the appropriate years.”) It
bears emphasizing that Agere did not rebut the affidavit.
17
Id.
18
R. W. Wood, “To Tax Gross Up Or Not To Tax Gross Up?”, supra note 3, pp. 14-15 (Mr Wood nevertheless
acknowledges that “it is not the first court to go down this path. The case law has continued to bumble along,
and whether a plaintiff can obtain tax damages is often unclear.”) Apart from the recent and leading Eshelman
v. Agere and Sears v. Atchinson cases, respectively, a number of decisions grossing-up awards for taxes can
be found. Examples include O’Neill v. Sears Roebuck & Co., 108 F..Supp. 2d 443 (E.D.Pa. 2000), and EEOC
v. Joe’s Stone Crab Inc., 15 F. Supp. 2d 1364 (S.D. Fla. 1998).
15
C. Is there any guidance to be found in US law for investment treaty arbitration?
It appears that US courts’ reasoning on tax gross-up claims as described above can serve as a
starting point for international law. Indeed, the purpose of grossing-up is the same in US
courts, that is to “make the claimant whole”, which corresponds to the standard set by the
Chorzów Factory case.
Should arbitral tribunals in investment cases thus accept the principle that tax gross-up is
necessary to achieve the “full reparation” objective set by customary international law? Such
conclusion would be hasty.
First, the above mentioned cases in which adverse tax consequences were incorporated in the
calculation of damages were very fact-specific and decided under statutes that granted courts
broad equitable powers19. But most importantly, like in Eshelman v. Agere Systems Inc., these
decisions set the many conditions that need to be fulfilled in order for tax gross-up to be
granted20.
19
See G. D. Polsky & S. F. Befort, “Employment Discrimination Remedies and Tax Gross Ups” 90 Iowa L.
Rev. 67, 70 (“The resolution of the gross-up issue depends ultimately on whether the federal antidiscrimination remedial provisions permit judges to shift the liability for these adverse tax consequences from
the plaintiff … to the defendant …The potential vehicle for this shift is the broad equitable powers conferred
upon courts to fashion relief in order to make victims of discrimination whole.”) This peculiarity of the
mentioned cases does not alter their relevance as arbitral tribunals are deemed to have discretionary power for
determining the adequate amount of compensation in investment cases. See S.D. Myers, Inc. v. Government of
Canada, UNCITRAL, Partial Award, Nov. 13, 2000, para 309; see also CMS Gas Transmission Company v.
Argentine Republic, ICSID Case No. ARB/01/8, Award, May 12, 2005, para 409.
20
Accordingly, tax-gross-up in investment arbitration should be limited to cases in which the adverse tax
consequences are a direct result of the internationally wrongful act, the claimant has produced sufficient
evidence that these consequences will effectively preclude them to return to an ex ante status; and, more
generally, where justice considerations justify it. With regard to this last condition, it should be noted that in
US case law, successful tax gross-up claims were made by victims of discrimination, not investors who are in
essence risk takers.
In addition, tax gross-up claims have been unsuccessful in a number of cases tried before US
courts21. Most of these claims were primarily dismissed because the plaintiff would have paid
taxes in any event, the but-for causation link being therefore absent. As Wood notes:
[w]hen taxes are payable in any event, a tax claim against the
defendant may seem spurious. But it is often not so clear whether
taxes would be payable (and if so, to the same magnitude) if not for
the defendant’s conduct. This can lead to complex calculations and
alternative positions some courts call ‘speculative’.22
Complex calculations may be implicated in the assessment of some tax-related claims, going
beyond the threshold issue of causation23. Such calculations may lead claimants to make
assumptions as to the adverse tax consequences they will allegedly suffer. These assumptions
are sometimes deemed speculative, leading US courts to “be unwilling to reflect tax
consequences in their awards.” 24
This element of uncertainty may also be significant in investment treaty arbitration.
21
See Bank of America, FSB v. Doumani, 495 F.3d 1366, 1375 (2007), in which the Court affirmed the US
Court of Federal Claims’ decision not to gross-up damages as taxability was ambiguous (“The trial court
acknowledged Home Savings [leading case on tax gross-up] but also noted that gross up awards are rarely
warranted when the tax rate is uncertain …In the present case, the trial court examined the record and found
the record very ambiguous on the taxability of the recovery”); Dashnaw v. Peña, 12 F.3d 1112, 116 (D.C. Cir.
1994) (“Absent an arrangement by voluntary settlement of the parties, the general rule that victims of
discrimination should be made whole does not support ‘gross-ups’ of back-pay to cover tax liability”); Centex
Corp. v. US, 55 Fed. Cl. 381, 388-9 (2003) (“It is true that gross-up of damages is sometimes appropriate to
account for income taxation… [but] an award from this court to compensate plaintiffs for the loss of that
money is not subject to income tax. It represents income already taxed. If we grossed-up damages, in other
words, and the judgement later was not taxed, it would result in a windfall to the plaintiffs.”); Medcom
Holding Co. v. Baxter Travenol Lab., 106 F.3d 1388, 1404 (7th Cir. 1996); Citizens Fed. Bank, FSB v. US, 59
Fed. Cl. 507 (2004) (“Courts generally do not gross-up damage awards to take into account the plaintiff’s tax
liability on the award unless a plaintiff can show with reasonable certainty that the gross-up is necessary to
make plaintiff whole, the award will be subject to taxation and, for purposes of calculating the gross-up, that
the award will be taxed at a certain rate”).
22
R. W. Wood, “To Tax Gross Up Or Not To Tax Gross Up?”, supra note 3, p. 16.
23
An example of the complexity of calculations involved can be found in the La Salle v. FSB case, in which the
Court heard several experts before taking into account the likely taxation of the award. Interestingly, the court
came to a cautious conclusion: “[i]t is only a possibility, and not a high one in our view, that the award will not
be taxed. We cannot ignore the fact that, as a general proposition, amounts received as damages in litigation
are taxable as income.” Having reached this conclusion, the Court then had to examine the many variables
affecting the taxation such as the tax rates, the structure of the corporate claimant, the corporate alternative
minimum tax etc. La Salle Talman Bank, F.S.B. v. US, 64 Fed. Cl. 90, 116 (2005).
24
R. W. Wood, “To Tax Gross Up Or Not To Tax Gross Up?”, supra note 3, pp. 17-18. Mr Wood underlines the
lack of tax expertise of judges to determine the amount of tax-related damages.
III.
THE SPECULATIVE ELEMENTS
A. The assessment of adverse tax consequences in the host State’s legislation
We have seen above that US courts have struggled with US tax issues explained by US tax
experts. An arbitral tribunal deciding on a tax gross-up claim in investment treaty arbitration
may face similar difficulties, only with the international dimension adding to the complexity
of the issue.
The fact that one member of the tribunal may be of the nationality of the host State is unlikely
to significantly reduce this difficulty. Indeed, the probability that the tribunal will include a
national of the defendant State is already low. If this is the case, the chances that this
arbitrator be an expert in the host State’s tax law are slim. Indeed, arbitrators appointed in
investment treaty arbitrations are primarily well regarded experts of international law who
have devoted the major part of their career to international law issues.
It remains that, should claimants produce adequate evidence of the effective impact of taxes
on the reparation they seek, there would be no reason why the arbitrators would not include
them in their calculation of damages. Unfortunately the parties and their counsels are not
better armed to deal with complex tax issues in foreign laws. Local counsels and experts are,
of course, important to the understanding of the applicable tax legislation. But given the
dimension of an investment treaty case, parties and their counsels are likely to agree that
efforts and expenses should concentrate on more crucial aspects of national law, generally
aspects that will relate to the establishment of the State’s liability.
In any event, once the obstacle of dealing with a foreign law is overcome, the complexity
inherent to tax issues might remain. As mentioned above, a plethora of variables may need to
be taken into account25. One issue is whether the award will be qualified as income or capital
in the local law, and then whether it is taxable. The solution may vary among jurisdictions26.
The legal status of the claimants would also play an important role, as well as the sometimes
very sophisticated structure of corporate claimant that are parties to investment treaty
arbitrations. If the award is deemed taxable, complicated calculations might become
necessary, and, in some instances, carrying with them excessive uncertainty27.
Arbitral tribunals do not relinquish their duty to answer a claim simply because its requires a
complex analysis. The reason why the issue has not been examined in detail by arbitral
tribunals so far may well be that investors have not met the evidentiary standard required to
support their claims.
B. Tax avoidance measures available to investors
Another speculative element of tax gross-up claims is the possibility that investors can avoid
paying taxes on the award. Examples of options available to investors include setting off tax
debts due to the State with the taxes due on future profits, thus including taxes eventually due
on the award; or the possibility of assigning rights on the award to a shell company or a
subsidiary located in a tax haven jurisdiction.
25
See La Salle Talman Bank, F.S.B. v. US, supra note 24.
In a cross-border situation, one factor that is likely to differ from State to State is the basis on which the award
might be taxed. See S. Ripinsky & K. Williams, Damages in International Investment Law, supra note 4, p.
403 (“[S]ome jurisdictions impose tax based on the source of income, rather than on (or as an alternative to)
domicile or residence of a taxpayer.”)
27
It should also be noted that, should arbitral tribunals start to reason at length on tax issues, a number of
questions might follow-up. For instance, should the tribunals take into account the positive tax consequences
that the defendant’s breach might have caused? Shall they examine whether the investor would be granted a
tax credit in its home jurisdiction against the local taxes paid on the award?
26
The uncertainty of the amount by which the award is to be grossed-up is already a concern,
but the uncertainty as to the very payment of such taxes is even more worrisome. This would
have the effect of inflating the quantum significantly without justification, thus thwarting the
full reparation objective set in the Chorzów Factory standard.
The technicalities implicated by tax gross-up calculations, combined with the alternative
options available to investors who wish to avoid paying taxes on the award, can sometimes
taint this head of damages with speculation and uncertainty28.
IV.
THE SOLUTIONS
As mentioned above, the case law on tax gross-up is scarce and does not address the
appropriateness of such claims in investment treaty arbitration. Rather, arbitral tribunals have
come up with creative solutions to avoid grossing-up awards.
A. The decisions on tax gross-up in investment treaty arbitration case law
In Corn Products v. Mexico29, the investor had not claimed tax gross-up. However, after it
found out that the award might be taxable by the defendant, the investor asked the tribunal for
28
This would be at odds with an established line of jurisprudence in investment arbitration which dictates that
damages be demonstrated with a sufficient degree of certainty. See, for example, Asian Agricultural Products
Ltd. v. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award, June 27, 1990, para. 106 (“[T]he
tribunal comes to the conclusion that neither the ‘goodwill’ nor the ‘future profitability’ of [the investment]
could be reasonably established with a sufficient degree of certainty”); Merrill & Ring Forestry L.P. v.
Government of Canada, UNCITRAL, ICSID Administered Case, Award, Mar. 31, 2010, paras 262-4; PSEG v.
Turkey, supra note 2, paras 310-15. Whilst the argument that respondent States should bear the burden to
prove that claimant will be able to avoid paying taxes on the award can legitimately be pursued, the author is
of the contrary opinion. Indeed, it seems sound that the sufficient certainty standard apply to the payment of
damages if it applies to the quantum of damages, the latter element lacking any sense without the first being
proven.
29
Corn Products v. Mexico, supra note 2. The decision on the correction and interpretation of the award was
rendered on 23 March 2010 but is not public. However, information on its content is available on the
Investment Arbitration Reporter website, <http://www.iareporter.com>, last visited July 27, 2010.
a correction of the award to make sure that it would not be taxed, the quantum having been
calculated net of taxes. The arbitral tribunal amended the award to make it payable to Corn
Products International Inc., a US company, rather than to its Mexican subsidiary.
In Chevron and Texaco v. Ecuador30, the claimants argued that the quantum of their damages
should be calculated on a net of taxes basis, but committed to paying any taxes due on the
award. The tribunal recognized that the tax-related arguments of the claimants called for a
detailed analysis and decided that the quantum would be dealt with in a second partial award.
The tax issues, though, focused on the calculation of the claimants’ loss, rather than on a
possible taxation of the award. Indeed, the tribunal did not have to examine this question as
the defendant promised not to tax the award, “invit[ing] the Tribunal to include a proviso in
its Award that Supplemental Awards may be issued if any taxes were collected by Ecuador on
the net amount of the Award”31.
The Tribunal wishes to make clear that the issue of taxes in this case
goes to the calculation of the quantum of the Claimants’ loss … As
to the eventual tax treatment by Ecuador of a Final Award by this
Tribunal, the Tribunal notes Ecuador’s representation that no further
taxes will be imposed by it on an Award that takes into account the
tax that would have been payable by the Claimants if no breach had
occurred … and that no penalties or interest on late tax payment
will be assessed. In light of this representation, the Tribunal
considers it unnecessary to address the Respondent’s proposal that
the Tribunal include a proviso in this Award that Supplemental
Awards may be issued in the event of any taxes being collected by
Ecuador on the amounts to be paid to the Claimants.32
30
Chevron & Texaco v. Ecuador, supra note 2, paras 506-17 and 540-55.
Id., para. 543.
32
Id., para. 553.
31
In Siemens v. Argentina33, the tribunal decided that “any funds to be paid pursuant to th[e]
decision [were to] be paid in dollars and into an account outside Argentina indicated by the
Claimant and net of any taxes and costs”.
In PSEG v. Turkey34, the investors claimed a gross-up for “applicable Turkish taxes to the
compensation awarded to the Project Company”35. The Claimants were not claiming this
gross-up if the compensation was to be awarded to the parent company PSEG Global. The
tribunal, noting that the Project Company was a wholly owned subsidiary of PSEG Global,
decided that nothing justified the award of compensation to the Project Company. The
tribunal thus concluded that “[t]he question of the tax gross up [was] … no longer relevant in
this context”36.
B. Lessons learnt from US and investment treaty arbitration case law
It follows from the above description of cases that no investment arbitration tribunal has ever
grossed-up an award for taxes. Rather, arbitral tribunals have avoided the question by making
sure that the payment of the award would take place out of the respondent’s territory or
acknowledged the latter’s pledge not to tax the award.
The debate seems to have focused on one issue: the avoidance of double taxation. Tribunals
thus seem to recognize that calculating the amount of losses on a post-tax basis and omitting
33
Siemens v. Argentina, supra note 2, para. 403 (11).
PSEG v. Turkey, supra note 2, paras. 338-40.
35
Id., para. 338.
36
Id., para. 340.
34
to gross-up the award would lead to an unfair result for the claimants. This is in line with the
very few commentaries on the topic37.
Overall, tribunals appear not to have analyzed the issue in depth because they had not been
presented very detailed arguments by claimants. It is only logical that they have not followedup with an examination of the local taxes and certainty of the taxation as the burden of proof
lies on the party who claims compensation38. Investors who want to make a tax gross-up
claim and their counsels should make every effort to provide the tribunal with the as detailed
and certain evidence as possible on the adverse tax consequences they will face.
Claimants must also demonstrate that they will not be able to avoid the payment of these
taxes. In Chevron and Texaco v. Ecuador, the claimants, when arguing their case for a tax
gross-up, had pledged to pay any taxes due on the award. The proposal shows that the
claimants were conscious of the tax planning measures available to investors. However, such
a promise is not, in the author’s opinion, sufficient “evidence” that taxes will effectively be
paid on the award, because the tribunal lacks jurisdiction to monitor the proper enforcement
of the award after it is rendered. Relying on national courts to enforce such a promise is too
risky and would offer unscrupulous investors the opportunity to gain a windfall.
37
See M. Kantor, Valuation for Arbitration 193 (Kluwer 2008) (“It is of course important to remind an expert
witness using the after-tax method to gross-up the resulting lower … amount for income taxes. Otherwise, the
successful claimants will be paying income tax on the compensation award, which itself was reduced on
account of that taxation ─ an obvious instance of double counting.”); S. Ripinsky & K. Williams, Damages in
International Investment Law, supra note 5, p. 403 (“Generally, to the extent that the compensation itself is
calculated in a way that accounts for applicable taxes, it would appear inappropriate to impose additional taxes
on the awarded amount as this would lead to under-compensation. Conversely, if applicable taxes are not
substracted when calculating compensation, they can be withheld subsequently.”); T. Wälde & B. Sabahi,
“Compensation, Damages and Valuation”, supra note 5, p. 1112 (“Care must be taken not to allow for double
reduction, for example, as part of the valuation process and by exposure of the award to subsequent taxation.”)
38
S. Ripinsky & K. Williams, Damages in International Investment Law, supra note 5, p. 162 (“[I]t is always the
claimant who alleges that it has suffered a loss as a result of the respondent’s conduct; therefore, the claimant
bears the burden of proof in relation to the fact and the amount of loss, as well as to the causal link between
the respondent’s conduct and the loss.”); T. Wälde & B. Sabahi, “Compensation, Damages and Valuation”,
supra note 5, p. 1110 (“ Essentially, the claimant has to prove damages and their likely causation by conduct
contrary to the treaty obligations.”)
The author agrees with the cautious approach of arbitral tribunals. Indeed, the example of
Chevron and Texaco v. Ecuador illustrates the complexity of tax-related damages. In that case
the tribunal itself recognized that: “[t]he tribunal … heeds the Claimants’ warning that the
issue of taxes may be more complex than at first appears.”39The first partial award on the
merits was rendered in March 2010 and an expert procedure on taxes is currently ongoing.
The final award will thus be delayed significantly, and such delay is not welcome in
investment treaty arbitrations which already require long procedures that usually last several
years.
Another important reason why arbitral tribunals should continue to decline grossing-up
awards for taxes is because they might open the door to overcompensation. As mentioned
above in section III (B), the investors could easily avoid paying the taxes on the award.
The Chorzów Factory standard set the objective of full reparation, which should not lead to
under-compensation nor overcompensation. As Professors Schreuer and Sabahi note, “[t]he
more extensive and less solid the scope for compensation awarded, the less will investment
arbitration acquire the political acceptance it still needs”40.
39
40
Chevron & Texaco v. Ecuador, supra note 2, para. 554.
T. Wälde & B. Sabahi, “Compensation, Damages and Valuation”, supra note 5, p. 1112.