Lima Arbitration

GUILLERMO AGUILAR ÁLVAREZ / WILLIAM W. PARK
tantamount to the expropriation of a loan or debt security merely because they
impose an increased cost that causes debtor default. 126
Of special interest are the limitations on investment arbitration that implicate
tax and finance, two areas of particular sensitivity to economic sovereignty.
As discussed below, member states have the right in certain circumstances to
block or to modify Chapter 11 arbitration in both of these domains.
2. Expropriation Through Fiscal Measures
a. Distinguishing Abusive Taxation
Few areas illustrate the complex interaction of arbitration and sovereignty concerns
more sharply than taxation. The power to raise revenue by forced levies is an
attribute of sovereignty that is less negotiable than others. 127 Yet uncompensated
nationalization often takes the form of excessive fiscal measures, designed either to
force the foreign owner to abandon an investment by taxing away its economic
value, or to subject an investor’s competitors to a more favorable tax regime. While
escaping precise definition, such subtler forms of expropriation can arbitrarily deprive
an investor of wealth as effectively as explicit nationalization.
Such «creeping expropriation» does not lend itself to surface-level analysis.
Distinctions must be made between normal and excessive taxation, a task
that implicates culturally influenced notions of the «right» level of tax. 128 From
one perspective, taxation constitutes a form of asset seizure (echoed in the
American catch phrase «the power to tax is the power to destroy») 129 in which
fiscal authorities take money from its current owner (the taxpayer) and give it
to someone else (the state).
126
Id. art. 1110(8), at 642.
127
One remembers that it was a tax revolt that forced King John of England to sign the
Magna Charta in 1215. And few scholars challenge Lord Mansfield’s «Revenue Rule» preventing
enforcement of foreign tax judgments. See Holman v. Johnson, 98 Engl. Rep. 1120,
1121 (K.B. 1775). For later articulations of this principle, see United States v. Boots, 80 F.3d
580 (1st Cir. 1996); HM Queen v. Gilbertson, 597 F.2d 1161 (9th Cir. 1979).
128
Justice Holmes distinguished between a penalty intended as a «discouragement» to behavior
and a tax that «may be part of an encouragement [to actions] when seen in its organic
connection with the whole.» Compañía General de Tabaco de Filipinas v. Collector of
Internal Revenue, 275 U.S. 87, 100 (1927).
129
The phrase originated in McCulloch v. Maryland, in which the United States Supreme
Court struck down a state tax on a federally chartered bank. 17 U.S. (4Wheat.) 316, 327 (1819).
LIMA ARBITRATION. N° 1 - 2006 47