Empirical Study: Tax-related Measures in Investor-State Arbitration

Danielle Morris, Yarik Kryvoi, Sam Winter-Barker, Tunç Savaş, Empirical Study: Tax-related Measures in Investor-State Arbitration (BIICL & WilmerHale 2024)

42 Pages Posted: 22 Feb 2024

See all articles by Danielle Morris

Danielle Morris

WilmerHale LLC

Yarik Kryvoi

The British Institute of International and Comparative Law (BIICL)

Sam Winter-Barker

WilmerHale LLC

Tunc Savas

WilmerHale LLC

Date Written: 2024

Abstract

The number of tax-related disputes is steadily rising. While only 17 tax-related disputes were filed before 2000, 74 such disputes have been filed since then, including a number of cases involving multi-billion-dollar claims. In particular, 43 tax-related disputes were filed between 2000-2010. This period saw a flurry of tax-related cases due to windfall oil profits taxes and the economic crisis in Argentina.

The object of tax-related disputes is not the correctness of domestic law application. The object of an investment arbitration is not to decide the dispute under domestic law, but to establish if the taxation measure in question breaches standards of protection under an investment treaty or provisions of an investment contract (most frequently fair and equitable treatment and indirect expropriation). In other words, tribunals under investment treaties and investment contracts do not operate as courts of appeal to re-hear disputes under domestic tax law.

Most tax-related disputes arise out of treaties. Treaty- and treaty-and-contract-based disputes make up 77% of all tax-related investment disputes. Since 2000, the number of contract-related disputes has been in decline. The decline is possibly due to the increasing prevalence of investment treaties and the use of investment arbitration. Contract-based disputes account for nearly a quarter of cases.

Investors in tax disputes tend to come from the “Global North.” The vast majority of investors in tax-related treaty cases have come from North America and Western Europe, in line with trends in investment arbitration overall. Over half of respondents have been States in South America, Eastern Europe, and Central Asia. In contrast to treaty-based tax-related disputes, contractual disputes have shown a broader geographic distribution of investors, with nearly half coming from outside of North America and Western Europe.

Most treaties contain no tax carve-outs but States increasingly include them in more recent treaties. States are increasingly including tax carve-outs in investment treaties to exclude taxation measures from some or all of the protections of the treaty. Although treaties with tax carve-outs amount to only 10% of investment treaties overall, over 40% of treaties entered into force since 2010 include tax carve-outs.

Capital-exporting States more frequently include tax carve-outs in their treaties. Canada, the United States, Singapore and Japan all have 20 or more investment treaties with tax carve-outs. The vast majority of States have five or fewer such treaties. Most commonly, States exclude taxation measures entirely in tax carve-outs, but also “claw-back” certain protections, most commonly unlawful expropriation. Tax carve-outs generally exclude FET claims, but assuming such a claim passes jurisdictional muster, an investor’s chance of success on an FET claim is much higher (44%) than its chance of success on an expropriation claim (30%).

Tax carve-outs rarely preclude tax-related claims. Tax carve-out provisions barred less than one-fifth of tax-related claims and so do not have an overly significant effect on preventing tax-related claims. Investors were also able to bring claims covered by any tax claw-backs in the relevant treaty.

Tax claims arise in a variety of sectors, particularly in energy. Over one-third of treaty-based and treaty-and-contract-based tax-related claims arise in the oil, gas, and mining sectors. Investors have challenged a multitude of types of tax measures, including corporate income tax, VAT or sales tax, and import/export taxes, with an increasing percentage of claims over time challenging a combination of measures in a single arbitration. Almost two-thirds of all contract-based tax-related investment disputes relate to the oil, gas, and mining sector – an even more pronounced distribution than in treaty-based tax-related disputes.

Investors have more success with both jurisdiction and merits in contract disputes. While treaty-based disputes deliver mixed results in terms of jurisdiction/admissibility of tax-related claims, investors did not face such hurdles in contract-based disputes. Investors in contractual disputes also have a higher success rate than investors in treaty disputes. Investors have succeeded in 60% of contractual tax-related investment disputes, higher than the success rate in treaty-based tax-related claims (~45%). However, significantly fewer investors prevail in all treaty-based disputes (~30%).

Keywords: tax disputes, isds, taxation, international arbitration, tax treaties

JEL Classification: K40, K41, K33, K42, K49

Suggested Citation

Morris, Danielle and Kryvoi, Yarik and Winter-Barker, Sam and Savas, Tunc, Empirical Study: Tax-related Measures in Investor-State Arbitration ( 2024). Danielle Morris, Yarik Kryvoi, Sam Winter-Barker, Tunç Savaş, Empirical Study: Tax-related Measures in Investor-State Arbitration (BIICL & WilmerHale 2024), Available at SSRN: https://ssrn.com/abstract=4704750

Danielle Morris

WilmerHale LLC

3139 Research Boulevard
Dayton, OH 20037
United States

Yarik Kryvoi (Contact Author)

The British Institute of International and Comparative Law (BIICL) ( email )

Charles Clore House
17 Russell Square
London, WC1B 5JP
United Kingdom

HOME PAGE: http://www.kryvoi.net

Sam Winter-Barker

WilmerHale LLC ( email )

Tunc Savas

WilmerHale LLC ( email )

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