Bridge the gap with EU, UK on taxation issues

Can India convince the EU and the UK for a complete carve-out for all kinds of taxation measures from the purview of the investment treaty or FTA?

There is an intimate connection between a country’s sovereign right to tax and its international law obligations under investment treaties. Over the years, foreign investors have brought numerous claims against States challenging taxation measures as alleged breaches of investment treaties before investor-State dispute settlement (ISDS) tribunals. This includes the investment treaty claims brought about by companies such as Cairn, Vodafone, and Vedanta against India due to the imposition of retroactive taxes. Owing to the increasing number of such claims, many countries have started carving out taxation measures from the ambit of investment treaties, as highlighted in a report of the Vidhi Centre for Legal Policy, an independent think tank, and BMR Legal, a law firm.

India’s stand on the issue of taxation assumes importance considering India’s ongoing free trade agreement (FTA) and investment treaty negotiations with several countries, including the European Union (EU) and the United Kingdom (UK) (AFP)

India is one such country whose stated position, as evident from the 2016 model Bilateral Investment Treaty (BIT), is that all taxation measures are excluded from the scope of the investment treaty, that is, a tax measure cannot breach investors’ rights under a particular treaty. Furthermore, to completely oust the jurisdiction of an ISDS tribunal, the 2016 Model BIT provides that the host State has the sole discretion to determine whether a contested measure under the BIT pertains to taxation. Also, such a determination is non-justiciable, that is, it cannot be arbitrated before an ISDS tribunal.

India’s stand on the issue of taxation assumes importance considering India’s ongoing free trade agreement (FTA) and investment treaty negotiations with several countries, including the European Union (EU) and the United Kingdom (UK). Given the history of foreign corporations facing tax-related regulatory troubles in India, India’s negotiating partner countries appear to have concerns. Seemingly, they would like to have protection under international law for their investors if they were to face a Vodafone-kind situation again. Perhaps it is for this reason that the EU’s publicly available textual proposal for the ongoing investment protection agreement negotiations with India does not remove taxation measures from the ambit of the treaty. The EU’s proposal contains a limited carve-out, which is restricted to the most favoured nation (MFN) provision. All other investment protection provisions apply to taxation measures. Thus, there seems to be a gap between India and the EU on the issue of taxation.

It is interesting to note that the EU’s stated position on this issue vis-à-vis India is different from the stand that the EU has taken in its investment treaties with countries such as Vietnam and Singapore signed a few years ago. The EU-Vietnam and EU-Singapore investment treaties carve out taxation measures from several provisions of the treaty, not just the MFN provision. Thus, Articles 4.4(3) and 4.6(4) of the EU-Vietnam and EU-Singapore investment treaties, respectively, firewall the State’s tax measures, aimed at preventing the avoidance or evasion of taxes, from treaty claims. Likewise, both treaties shield the host State’s actions of imposing taxes, that differentiate between taxpayers based on rational criteria, from treaty claims. In short, there is due regulatory latitude afforded to the State’s bonafide taxation measures.

The critical question is why the EU’s public position on taxation measures vis-à-vis India is narrower. Is it because of the way India has treated foreign investors in the past or is it part of a negotiating strategy? At any rate, the carve-outs in the EU-Vietnam and EU-Singapore investment treaties are nowhere as broad as the one in India’s 2016 Model BIT. India wishes to exclude all taxation measures without clarifying the purpose behind such measures. Arguably, this may even put discriminatory and abusive taxation measures outside the purview of ISDS tribunals, which may turn out to be a serious concern for foreign investors.

The UK situation is no different. If the investment chapter in the UK’s latest FTAs with Australia and New Zealand constitutes the latest evidence of British treaty practice on this issue, one finds limited carve-out for taxation measures. For instance, taxation measures are not outside the scope of the expropriation provision in both treaties. Likewise, barring some exceptions, the MFN and national treatment provisions apply to taxation measures. Thus, the State’s taxation measures are open to challenge before an ISDS tribunal.

Can India convince the EU and the UK for a complete carve-out for all kinds of taxation measures from the purview of the investment protection agreement and FTA’s investment chapter, respectively? We will have to wait and watch.

Prabhash Ranjan is professor and vice dean, Jindal Global Law School.

The views expressed are personal.