Investment arbitration in tax-related investment disputes

The jurisdiction to tax is a fundamental aspect of a state's fiscal sovereignty. Traditionally, arbitration and taxation were viewed as separate fields. However, in the past two decades, tax-related disputes in investment arbitration have surged, with nearly a hundred cases involving taxation measures. Some of the most significant recent decisions in investment arbitration have centered on tax issues, highlighting the growing interaction between taxation and investment law. At first glance, international tax law and international investment law may appear to be two separate fields, but they are in constant interaction. This study examines tax-related investment disputes by focusing on this interaction Trends in international disputes reveal the overlap between international tax law and international investment law. Many foreign investors opt for investment arbitration to resolve tax-related disputes instead of relying on international tax treaties. This preference arises because taxpayers have a limited role in dispute resolution under international tax treaties. While they can initiate the Mutual Agreement Procedure (MAP), they cannot participate once the dispute reaches the international level, as the process is conducted by the competent authorities of the two contracting states. Unlike MAP and tax arbitration under tax treaties, investment arbitration offers taxpayers a direct and independent dispute resolution method. International investment treaties allow investors to bring claims directly against host states, making investment arbitration a depoliticized and efficient dispute resolution mechanism. The enforcement of arbitral awards in investment arbitration is also simplified, favoring investors. Consequently, investment arbitration is seen as a more advantageous option compared to MAP and tax arbitration provided in tax treaties. The introduction of this study highlights the relationship between taxation and investment, focusing on why investment arbitration has become so crucial in resolving tax-related disputes for taxpayers in the context of international tax disputes. The study consists of two main sections. The first section explores the scope of investment arbitration in tax-related matters. The second section examines the investment protection standards afforded to foreign investors concerning taxation. To determine the scope of investment arbitration in tax-related matters, the study first provides an overview of jurisdiction and admissibility, establishing the foundation for understanding investment arbitration. This section would help to identify the legal nature of various aspects determining the scope, beginning with a discussion of jurisdiction and admissibility in general terms. It then examines how consent to arbitration, which forms the basis of jurisdiction, can be granted. The scope of jurisdiction, based on given consent, is discussed under four main headings: personal jurisdiction, subject matter jurisdiction, temporal jurisdiction, and territorial jurisdiction, focusing on the ICSID Convention. The second aspect addresses the arbitrability of tax-related investment disputes. Arbitrability defines which disputes can be resolved through arbitration and acts as a recognition-enforcement barrier. Although ICSID awards are not subject to the recognition and enforcement process, arbitrability is still relevant for some disputes outside ICSID. The arbitrability of tax disputes in arbitration is explained through three scenarios, given the sensitive nature and perception that tax disputes may not be arbitrable. The third aspect clarifies the difference between tax disputes and tax-related investment disputes. This distinction is crucial as international investment treaties and tax treaties have different purposes and effects, leading to distinct types of disputes. The proper tax disputes concern the taxability of a specific transaction, while investment tribunals are tasked with determining whether the respondent State has breached substantive standards of treatment under the investment treaty through the exercise of its authority in the field of taxation, and whether liability arises as a result. Thus, investment arbitration resolves tax-related investment disputes, not tax disputes. Recent decisions highlight this distinction, reflecting the interaction between international investment treaties and tax treaties. States often include provisions in treaties to preserve their taxing powers. Two types of limitations in international investment treaties are taxation carve-outs and tax veto provisions. The final aspect of this section examines these limitations. International investment treaties often include exceptions for important interests, such as protecting life or health and conserving natural resources, to safeguard legislative and regulatory authority. To protect fiscal sovereignty, states include tax carve-out provisions in international investment treaties. The balance between these interests is founded or tried to be found in taxation carve-out provisions in investment treaties. This hard dilemma caused complicated provisions that seem like a Russian doll, "matryoshka". The first possibility of tax carve-out is general exclusion. Such a provision excludes tax matters from the treaty scope of application without any reservation. It is also possible that the investment treaty applies to taxation matters only in limited ways. Another possible carve-out is specific and explicit exclusion based on the distinction between the type of taxes (direct and indirect taxes). Another type that can be found is a conflict clause in favour of tax treaty application. Many treaties distinguish between direct and indirect taxes. A review of existing treaties shows that tax carve-out clauses are relatively new, and most do not fully carve-out tax matters. However, some protections, such as against expropriation and fair and equitable treatment, generally still apply to taxation measures. Tax carve-out provisions are typically undefined in international investment treaties, requiring arbitral tribunals to interpret them. This section analyzes the meaning of terms within carve-out provisions, examining the scope of "tax matters" and "taxation measures". First, the scope of tax matters is examined, evaluating whether four basic scenarios fall within the scope of tax carve-out provisions. Tax matters generally include customs duties and direct-indirect taxes unless otherwise specified. Second, the scope of tax measures within carve-out clauses is addressed, determining whether individual and regulatory measures and court decisions are covered based on the text and context of the treaty. Finally, if a contract exists between the investor and the host state, the nature of the investor's tax-related claims and the status of carve-outs regarding these claims are examined. Another provision limiting the application of investment treaties to tax matters is the tax veto provisions. Some treaties foresee joint consultation on tax measures of the relevant tax authorities. An investor can only submit a claim to arbitration if the competent authorities of both the host and home state do not jointly determine that the measure is not an expropriation. The joint taxation veto allows competent tax authorities to play a larger role in the interpretation of exceptions in tax-related disputes under investment treaties, while also providing a filter for unmeritorious claims. Following this framework, the second section explains the investment protection standards afforded to investors in tax-related investment disputes. Investors often claim violations of protections against expropriation and requirements for fair and equitable treatment in taxation. This section examines these protections, explaining how they apply in the tax context and how arbitral tribunals approach sovereign tax authority. By its nature, taxation involves the taking of the taxpayer's money, but this alone does not constitute taxation compensable. Generally, taxation is not considered expropriation. However, in certain cases, such as excessive and repeated tax practices, tax measures may be deemed expropriatory. A taxation measure can be characterized as either direct or indirect expropriation, largely depending on how the measure is implemented, its operation, its impact, and how the investor frames the claim within the treaty. Direct expropriation occurs when the state explicitly takes ownership or transfers it to itself or a third party. Domestic tax measures may amount to direct expropriation where they involve the direct taking of money or other assets. This is especially discernible in the context of tax refunds because the money (property) is already in the hands of the state. This is particularly relevant in the context of retroactively denied tax refunds, which can amount to substantial deprivation of the owed money. Indirect expropriation involves situations where ownership remains with the owner, but the investment will be deprived of its economic use. Two approaches are used to determine indirect expropriation: one based on the effect on the foreign investment and the other on the measure's purpose. Both approaches are discussed regarding tax measures. It is concluded that quantitative criteria alone are insufficient to determine expropriation; factors like legitimate expectations and discriminatory nature of the tax should be considered. Determining indirect expropriation, especially in tax contexts, requires balancing state measures and investor risks. Arbitral tribunals approach claims of tax measure expropriation with skepticism. If indirect expropriation is established, the conditions for lawful expropriation must be examined. These conditions, briefly explained in this section, require expropriation to be conducted for a public purpose or interest, in a non-discriminatory manner and against the payment of compensation that is prompt, adequate and effective. A distinction is made between expropriations that can be rendered lawful with compensation and those violating conditions other than compensation. It is unlikely that states will provide compensation for expropriatory tax measures once such measures are identified. Different conclusions may be reached for discriminatory tax measures depending on the method used to identify expropriation. The Yukos cases, rare examples of state responsibility for tax expropriation, are discussed. These cases illustrate the disjunction between international investment law and international tax law and the critical role of arbitral tribunals in protecting taxpayer rights. After explaining protections against expropriation in relation to tax measures, the study considers Pillar 2 developments. It briefly discusses Pillar 2 developments, and the rules states may adopt, concluding that these developments are unlikely to result in state liability in investment law for expropriation. The second protection discussed in this section is the fair and equitable treatment (FET) standard. The concept of fair and equitable treatment, which has become one of the fundamental principles of investment law, refers to a number of legal concepts. The principle of non-discrimination in taxation permeates various branches of international law, including World Trade Organization law, Council of Europe and European Union law, international tax treaty law and investment law. Accordingly, this section first assesses the relationship between the principle of non-discrimination in international tax treaties and the concept of fair and equitable treatment. Since the fair and equitable treatment standard would impose a broader obligation on the host or source state than the prohibition of non-discrimination under a tax treaty, it is concluded that no incompatibility arises. The jurisprudence of the tribunals indicates that the fair and equitable treatment obligation includes the obligation to refrain from treating investors and investments in an arbitrary or discriminatory, treat investors and investments in a transparent and consistent manner, avoid radical alteration of the legal and business framework under which the investment was made, refrain from acting in a manner that frustrates the legitimate expectations of an investor and not violating the right to a fair trial and the right to access to justice. These obligations are analyzed under separate headings, with particular emphasis on legitimate expectations, the right to a fair trial and transparency. The status of the fair and equitable treatment obligation vis-à-vis Pillar 2 rules is finally assessed. Even in the absence of a specific commitment by states, the global minimum tax may in practice lead governments to withdraw corporate tax incentives. The compatibility of such measures with the fair and equitable treatment standard depends crucially on the specific situation of the foreign investor. While the tax laws themselves are unlikely to give rise to a legitimate expectation, there are some cases where tribunals have recognized legitimate expectations based on the law. The global minimum tax should also be considered separately in terms of regulatory stability. As the minimum tax is the result of a protracted international debate, it is difficult for foreign investors to argue that these changes were not foreseeable. This means that the GloBE Rules should benefit from a strong presumption of compliance with investment treaties. In conclusion, this study demonstrates that taxation and arbitration are not mutually exclusive concepts. Although states, through various provisions, have attempted to prevent taxation from being addressed in investment arbitration; these provisions are either a minority in the overall body of treaties or are ineffective at preventing taxation claims from being heard in arbitration. Recent investment arbitration decisions and policymakers' concerns indicate that better-designed international rules and policies are needed in this area where tax law and investment law intersect, and that these two areas should cooperate