ISDS and tax havens
In addition to structuring their investments to minimise their tax bills – including through the use of tax havens – multinational companies and their teams of corporate lawyers are increasingly also looking at where to strategically place subsidiaries in order to take advantage of trade and investment treaties that give them access to ISDS.
“Investors can structure investments in such a way as to attract optimal treaty protection – for example, by incorporating an intermediary investment vehicle in a state with a [bilateral investment treaty] in force with the host state,” is how the law firm Freshfields Bruckhaus Deringer put it in a briefing on these agreements. “Once a dispute arises investors can use [investment treaties] as leverage in negotiations with the host state.”40
Investors that set up ‘mailbox companies’ in the Netherlands to benefit from its favourable tax regime, for example, can also access the vast web of Dutch investment treaties signed with more than 80 other countries.41 Research published last year revealed how more than 10% of all known investment treaty claims have made use of Dutch agreements – with 75% of these cases “brought on by mailbox companies with no real economic substance in the Netherlands.”42
At least 20 of the UK’s bilateral investment agreements, signed with countries from Belize to Turkmenistan, were expressly extended “by diplomatic notes” to cover investors from Jersey and Guernsey and the Isle of Man, giving companies registered in these tax haven crown dependencies access to ISDS through Britain’s treaties. Several of the UK’s treaties have also been extended to cover investors from Hong Kong, the Cayman Islands, or the Turks and Caicos.43
In one ongoing case, the Canadian mining company Gabriel Resources is using its subsidiary in the tax haven of Jersey to claim protection under a treaty signed between the UK and Romania.44 The company is suing Romania for halting the controversial Rosia Montana gold mine in Transylvania that has been the subject of mass opposition from local communities fearful of its environmental impact.45
Many ISDS cases also involve investments made in developing countries through tax havens. A case brought by the UK company Rurelec against Bolivia, for example, which ended in a multi-million dollar award against the country, centered on investments made by Rurelec in the Bolivian energy sector via intermediaries registered in the British Virgin Islands.46
The threat of TTIP
If passed, TTIP along with the proposed Trans-Pacific Partnership (TPP) deal between the US and countries in the Asia-Pacific region, would dramatically expand the global reach of the ISDS system to cover record levels of global foreign direct investment.47
In response to public outcry – and opposition from some EU member states including Germany – the European Commission has unveiled proposals to reform the ISDS system and replace it with an international Investment Court System. But this actually risks further cementing the system, by making it seem more ‘legitimate’, rather than removing the special facility through which multinationals can challenge laws, regulations, and other state actions taken in the public interest.48
And like other treaties that give multinationals access to this system, TTIP says little about investors’ responsibilities. There is no comparable system of international justice for states to hold multinational corporations to account for their actions, and while expanding corporate power with sweeping rights and protections, investors’ obligations are rarely if ever enshrined in these treaties.
If a state has a dispute with a corporation over its tax bill, it can’t launch an ISDS case – this is a one-way system, accessible only to foreign investors (domestic companies can’t use it either). And of course if a state takes action against a multinational over a tax dispute, it could soon find itself in the dock facing an expensive ISDS claim.
Notes
1. Vodafone vs India (2014), UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http://investmentpolicyhub.unctad.org/ISDS/Details/581
2. Perenco vs Ecuador (2008), UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http://investmentpolicyhub.unctad.org/ISDS/Details/317
3. “Decision on Remaining Issues of Jurisdiction and Liability,” Perenco vs Ecuador, 12 September 2014, http://www.italaw.com/sites/default/files/casedocuments/italaw4003.pdf
4. “ICSID tribunal renders interim decision on Ecuador’s environmental counterclaim in long-running dispute,” Investment Treaty News, 26 November 2015, https://www.iisd.org/itn/2015/11/26/icsid-tribunal-renders-interim-decision-on-ecuadors-environmental-counterclaim-in-long-running-dispute-perenco-ecuador-limited-v-republic-of-ecuador-icsid-case-no-arb-08-6/
5. Micula vs Romania (2005), UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http://investmentpolicyhub.unctad.org/ISDS/Details/180
6. “Awards and Decisions,” Investment Treaty News, 14 May 2014 https://www.iisd.org/itn/2014/05/14/awards-and-decisions-15/
7. “The European Commission prohibits Romania from compliance with an ICSID Award: implications for the enforcement of intra-EU investment treaty awards?” Herbert Smith Freehills Public International Law Notes, 16 April 2015, http://hsfnotes.com/publicinternationallaw/2015/04/16/the-european-commission-prohibits-romania-from-compliance-with-an-icsid-award-implications-for-the-enforcement-of-intra-eu-investment-treaty-awards/
8. Cargill vs Mexico (2005), UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http://investmentpolicyhub.unctad.org/ISDS/Details/204, and Archer Daniels Midland vs Mexico (2004), http://investmentpolicyhub.unctad.org/ISDS/ Details/167, and Corn Products vs Mexico (2004), http://investmentpolicyhub.unctad.org/ISDS/Details/166
9. “Public health cost of global (corn) trade,” Institute for Agriculture and Trade Policy blog, 7 February 2011, http://www.iatp.org/blog/201102/public-health-costof- global-corn-trade
10. “Statement by US Trade Representative Susan C. Schwab on Mexico’s Repeal of Discriminatory Beverage Tax,” Office of the United States Trade Representative, January 2007, https://ustr.gov/about-us/policy-offices/press-office/press-releases/archives/2007/january/statement-us-trade-representative-susan-c
11. Tullow vs Uganda, ICSID website, https://icsid.worldbank.org/apps/icsidweb/cases/ Pages/ casedetail.aspx?caseno=ARB/13/25&tab=PRO
12. Anders Reimers Larsen, “Uganda Revenue Authority vs Tullow,” ActionAid, 17 July 2014, http://www.actionaid. org.br/en/uganda/2014/07/uganda-revenue-authority- vs-tullow
13. “Tullow Oil to Settle Uganda Tax Dispute for $250 Million,” Bloomberg, 22 June 2015, http://www.bloomberg.com/news/articles/2015-06-22/tullow-oil-to-settle-uganda-tax-dispute-for-250-million
14. See, for example: Vattenfall vs Germany (2009), UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http://investmentpolicyhub.unctad.org/ISDS/Details/329, and Phillip Morris vs Uruguay (2010), http://investmentpolicyhub.unctad. org/ISDS/Details/368
15. Longyear vs Canada, UNCTAD Investment Policy Hub, Investment Dispute Settlement database http://investmentpolicyhub.unctad.org/ISDS/Details/570
16. “Ukraine faces trio of claims over gas reforms,” Global Arbitration Review, 16 February 2015, http://globalarbitrationreview.com/news/ article/33551/ukraine-faces-trio-claims-gas-reforms/
17. See annex: List of tax-related ISDS cases, which includes short summaries of the tax-related aspects of 40 cases filed by foreign investors since 1995. In addition to these cases, Spain has been sued in more than 20 separate cases filed by investors in the renewable energy sector, challenging reforms including new taxes and subsidy cuts.
18. “Give Us A Break: How big companies are getting tax free deals,” ActionAid, 2013, http://www.actionaid. org/publications/give-us-break-how-big-companies-are- getting-tax-free-deals
19. “Healthy Revenues: How the extractives industry can support Universal Health Coverage in Sierra Leone,” Health Poverty Action, June 2015, https://www.healthpovertyaction.org/wp-content/uploads/downloads/2015/06/Healthy-Revenuesextractives-industry-Sierra-Leone-report-June-2015.pdf
20. Matthew Hodgson, “Investment Treaty Arbitration: How much does it cost? How long does it take?” Allen & Overy, 18 February 2014, http://www.allenovery.com/ publications/en-gb/Pages/Investment-Treaty-Arbitration- How-much-does-it-cost-How-long-does-it-take-.aspx
21. Successful investors are more likely to recover costs (53%), than successful states (38%), according to research by law firm Allen & Overy. “Investment Treaty Arbitration: How much does it cost? How long does it take?”18 February 2014, http://www.allenovery.com/ publications/en-gb/Pages/Investment-Treaty-Arbitration- How-much-does-it-cost-How-long-does-it-take-.aspx
22. Adrian Rodriguez, “International Arbitration Claims against Domestic Tax Measures Deemed Expropriatory or Unfair and the Inequitable,” IADB Occasional Paper, January 2006, https://publications.iadb.org/bitstream/handle/11319/2746/International%20Arbitration%20Claims%20against%20Domestic%20Tax%20Measures%20Deemed%20Expropriatory%20or%20Unfair%20and%20the%20Inequitable.pdf?sequence=1
23. Matthew Davie, “Taxation-Based Investment Treaty Claims,” Journal of International Dispute Settlement, 11 February 2015, http://jids.oxfordjournals.org/ content/6/1/202.abstract
24. “About Vodafone India,” Vodafone.in website, http://www.vodafone.in/about-us/home
25. “The Vodafone decision – a synopsis,” KPMG News Flash, KPMG in India, 20 January 2012 https://www.kpmg.com/in/en/services/tax/flashnews/ kpmg-flash-news-vodafone-international-holdings-bv.pdf
26. A 2014 IMF policy paper notes: “The tax treatment of gains on indirect transfers of interests in assets is a controversial issue—and one of particular importance to many developing countries.” It says: “The laws of many developing countries need strengthening if they are to tax gains on such indirect transfers.” http://www.imf.org/external/np/pp/eng/2014/050914.pdf
27. “Govt to retrospectively tax Vodafone deal,” Business Today, 16 March 2012, http://www.businesstoday.in/ union-budget-2012-2013/budget-news/budget-2012- vodafone-deal-tax/story/23264.html
28. Vodafone vs India (2014), UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http://investmentpolicyhub.unctad.org/ISDS/Details/581
29. “Open to out-of-court settlement of legacy tax issues: Hasmukh Adhia,” The Economic Times, 27 December 2015, http://articles.economictimes.indiatimes. com/2015-12-27/news/69334717_1_third-arbitrator-yves-fortier- tax-demand
30. Remya Nair and Saurabh Kumar, “New Bilateral Investment Treaty Text Gets Approval,” Livemint.com, 17 December 2015, http://www.livemint.com/Politics/ Di6UHjBQPhJXnf8IMrcrDK/ New-bilateral-investment-treaty- text-gets-approval.html
31. Tom Jones, “Canada NAFTA claimants no longer at loggerheads,” Global Arbitration Review, 17 September 2015, http://globalarbitrationreview.com/ news/article/34148/canada-nafta-claimants-nolonger- loggerheads/
32. See: “Spain – as a respondent state,” UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http://investmentpolicyhub.unctad.org/ ISDS/CountryCases/197?partyRole=2
33. Sebastian Perry, “Emergency award enforced against Ukraine,” 1 July 2015, http://globalarbitrationreview. com/news/article/33936/emergency-award-enforced- against-ukraine/
34. See annex: List of tax-related ISDS cases, eg. EnCana vs Ecuador, Occidental vs Ecuador
35. Kyriaki Karadelis, “Russia faces claim from ExxonMobil,” Global Arbitration Review, 2 April 2015, http://globalarbitrationreview.com/news/article/33695/ russia-faces-claim-exxonmobil/ “Exxon v Russia: What are the possible legal outcomes?” CIS Arbitration Forum, 27 April 2015, http://www.cisarbitration.com/2015/04/27/ exxon-v-russia-what-are-the-possible-legal-outcomes/
36. Energy Charter Treaty, Article 21: Taxation, http://www.ena.lt/pdfai/Treaty.pdf
37. William W Park, “Arbitrability and Tax,” in L Mistelis & S Brekoulakis (eds), Arbitrability: International & Comparative Perspectives, 2009, p. 179-205, http://www.arbitration-icca.org/media/4/54080822237337/media012409314487590tax_and_arbitration_w_w_park.pdf
38. Matthew Davie, “Taxation-Based Investment Treaty Claims,” Journal of International Dispute Settlement, 11 February 2015, http://jids.oxfordjournals.org/ content/6/1/202.abstract
39. Timothy Lyons, “Treaty Arbitration: The limited role of tax carve-outs in BITs,” Global Arbitration Review, 30 July 2015, http://globalarbitrationreview.com/ journal/article/34005/
40. “Bilateral Investment Treaties: Managing the risk of government intervention,” Freshfields Bruckhaus Deringer, June 2010 http://www.freshfields.com/ uploadedFiles/SiteWide/Knowledge /Bilateral%20 investment%20treaties%20Managing%20the%20 risk%20of%20government%20intervention.pdf
41. “Netherlands,” UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http:// investmentpolicyhub.unctad.org/IIA/CountryBits/148 risk%20of%20government%20intervention.pdf
42. “Socialising Losses, Privatising Gains. How Dutch investment treaties harm the public interest,” Roeline Knottnerus, Roos van Os, Hilde van der Pas, Pietje Vervest (2015), TNI, SOMO, Both Ends, MilieuDefensie https://www.tni.org/en/DutchBITs
43. “England & Wales,” Global Arbitration Review, 18 September 2015 http://globalarbitrationreview.com/know-how/topics/66/jurisdictions/65/england-wales/#ftr_28
44. Gabriel Resources vs Romania, UNCTAD Investment Policy Hub, Investment Dispute Settlement database, http://investmentpolicyhub.unctad.org/ISDS/Details/632 The UK-Romania treaty, signed in 1996, was extended “by diplomatic notes” in March 1999 to cover Jersey, Guernsey and the Isle of Man. “England & Wales,” Global Arbitration Review, 18 September 2015 http://globalarbitrationreview.com/know-how/ topics/66/jurisdictions/65/england-wales/#ftr_28
45. Save Rosia Montana Campaign, http://www.rosiamontana.org/
46. “Awards and Decisions,” Investment Treaty News, 14 May 2014 https://www.iisd.org/itn/2014/05/ 14/ awards-and-decisions-15/
47. According to estimates from the Public Citizen NGO in the US, TTIP would enable more than 47,000 US-owned subsidiaries currently operating in the EU to launch ISDS attacks on European policies and government actions. Public Citizen, “Investor-State Attacks against European Policies via CETA and TTIP”, 2014, https://www.citizen.org/documents/EU-ISDS-liability.pdf
48. S2B Network, “ISDS: Courting foreign investors,” 2015 http://www.s2bnetwork.org/isds-courting-foreign-investors/ and Gus Van Harten, “Key Flaws in the European Commission’s Proposals for Foreign Investor Protection in TTIP,” 2015, Osgoode Legal Studies Research Paper No. 61/2015. http://ssrn.com/abstract=2692122