Taxation and Expropriation in International Investment Arbitration

In recent decades, there has been a significant increase in the number of international investment arbitration cases involving disputes over taxation. As taxation measures are a core part of the State’s inherent police power, there are extensive debates regarding the criteria for when an investment treaty obligation is violated and how to balance States’ police power to tax with protection of foreign investors’ interests. As most investment treaties do not exempt taxation-related expropriation claims, taxation cases often include a claim that the host State has indirectly expropriated the investment interest through the taxation-related measures. This Article conducts an extensive analysis and examination of investor-state dispute settlement (“ISDS”) cases involving indirect expropriation claims targeting host States’ taxation measures and shows that taxation-related claims generally fall within three regulatory spaces. The examination of these cases also shows that ISDS tribunals have adopted quite divergent approaches when assessing taxation-related expropriation claims, namely, the “qualified police power” approach, the “sole effects” approach, and the “fact-based, case-by-case, cumulative” approach. In order to resolve the discrepancy and uncertainty existing in current arbitral jurisprudence, this Article proposes a “Two-Prong” methodology to conduct expropriation analysis using the restructured “Balanced Effects & Police Power” approach, with the first prong using the redefined “effects” test to assess whether there is a level of interference amounting to substantial deprivation of investors’ investment interests and the second prong utilizing the “qualified police power” doctrine to assess whether the interference amounts to compensable expropriation.