Lima Arbitration

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THE NEW FACE OF INVESTMENT ARBITRATION: NAFTA CHAPTER 11 The competing characterizations of tax may be distinctions without a difference, however. Fiscal measures inevitably involve an element of expropriation. The only question is whether they are «normal» taxes or are the type of punitive measure intended to confiscate foreign investment. The problematic nature of using arbitration to settle claims that taxation constitutes «creeping expropriation» was foreseen when NAFTA was drafted. The Chapter 11 dispute resolution process would be misused and corrupted if «ordinary» fiscal measures gave rise to expropriation claims. Consequently, the fiscal administrations of host and investor countries have been given the task of making a preliminary cut between normal and abnormal taxes. If an alleged expropriation is accomplished through «taxation measures,» the competent fiscal authorities of the relevant states may veto the investor’s right to arbitrate. 130 At the time of advising the host state of its intention to commence arbitration, the investor must also submit the tax measure to the appropriate fiscal authorities. The investor may proceed to arbitration only if the competent authorities «do not agree to consider the issue or, having agreed to consider it, fail to agree that the measure is not an expropriation.» 131 This awkwardly drafted «negative deadlock» provision gives the competent authorities six months to decide the question, failing which the investor may proceed to arbitration. 132 In attempting to distinguish normal from exces- 130 NAFTA Article 2103(6) states that Article 1110 provisions concerning expropriation «shall apply to taxation measures except that no investor may invoke that Article as the basis for a claim [for investment dispute resolution], where it has been determined pursuant to this paragraph that the measure is not an expropriation.» NAFTA, supra note 1, art. 2103(6), 32 I.L.M. at 700. Thus far, at least one case (the Feldman Karpa claim against Mexico) implicated tax measures. The competent authorities agreed that one of the three measures was not an expropriation, and thus the arbitration did not go forward on that question. As to two other measures, however, there was no agreement, and thus for those issues the arbitration proceeded. See Feldman Karpa v. United Mexican States, ICSID Case No. ARB(AF)/99/1, Award (Dec. 16, 2002), http://www.naftaclaims.com. 131 It is uncertain whether an investor’s disregard of reference to the competent authorities (either in bad faith or due to an innocent misunderstanding) would provide an opportunity for sua sponte intervention by tax authorities. Whether or not permitted, state intervention would not seem mandated. Rather, without an opinion from the relevant fiscal authorities, an expropriation claim would lie beyond the arbitrators’ jurisdiction. 132 The English language version contains a slight ambiguity, providing for arbitration to go forward «[i]f the competent authorities do not agree to consider the issue or, having agreed 48 LIMA ARBITRATION. N° 1 - 2006
GUILLERMO AGUILAR ÁLVAREZ / WILLIAM W. PARK sive taxation, fiscal authorities inevitably can be expected to rely on culturally influenced notions of tax. 133 NAFTA does not suggest that tax matters cannot be arbitrated. Rather, the treaty says that fiscal authorities in host and investor states together may block the arbitral proceedings by agreeing «that the [tax] measure is not an expropriation.» 134 Thus if the United States is accused of expropriating a Canadian investor’s property, investment arbitration would be barred only if both the U.S. Department of the Treasury and the Canadian Department of Finance concluded that no expropriation had taken place. 135 Presumably the Canadian authorities would hesitate to acquiesce to the plundering of its citizens merely because such theft was dressed in fiscal garb. Thus the capital exporter’s government is given a protective role, in that refusal to join the veto authorizes arbitration. The tax veto by its terms applies only to claims of improper expropriation under NAFTA Article 1110. By contrast, claims for breaches of other host state duties, such as «fair and equitable treatment,» might possibly escape the jurisdiction of the respective national fiscal authorities. to consider it, fail to agree that the measure is not an expropriation within a period of six months of such referral [by the investor].» NAFTA, supra note 1, art. 2103(6), 32 I.L.M. at 700. To interpret the six month limit as applying only to competent authorities who agreed to hear the matter (as contrasted to ignoring or refusing to consider the investor’s request), would make little sense in this context. 133 For example, Americans can be expected to look to the U.S. tax system, based on the same approach used to characterize «income tax» for purposes of the foreign tax credit. See, e.g., Treas. Reg. § 1.901- 2(a) (1983); Bank of America Nat’l Trust & Savings Ass’n v. United States, 459 F.2d 513, 515 (Ct. Cl. 1972) («It is now settled that the question of whether a foreign tax is an ‘income tax’ ... must be decided under criteria established by our revenue laws and court decisions, and that the foreign tax must be the substantial equivalent of an income tax as the term is understood in the United States.»). 134 The text of NAFTA Article 2103(6) does not make clear whether a «tax veto» requires unanimity of all three competent authorities or only from the tax administrations of the investor and host state. In practice only the latter two administrations would be directly concerned, although the third country might argue for inclusion on the theory that such decisions have policy implications affecting all NAFTA members. 135 See NAFTA, supra note 1, Annex 2103(6), 32 I.L.M. at 702. The competent authority for the United States would be the Assistant Secretary of the Treasury (Tax Policy), for Canada it would be the Assistant Deputy Minister for Tax Policy, and for Mexico it would be the Deputy Minister of Revenue of the Secretaría de Hacienda y Crédito Público (Ministry of Finance and Public Credit). LIMA ARBITRATION. N° 1 - 2006 49
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EL ARBITRAJE DEL CIADI Y EL DERECHO
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LOS MEDIOS «ALTERNATIVOS» DE SOLU
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AUDIENCIA PÚBLICA DEL CONGRESO DE
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ARBITRAJE Y GRUPOS DE SOCIEDADES. E
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CONFLICTUANDO EL CONFLICTO. LOS CON
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EL ARBITRAJE EN LA DOCTRINA CONSTIT
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