Download the article as pdf. - Global Investment Protection

Effective investment protection globally
Global Investment Protection AG
Weinplatz 10 | 8001 Zürich | Switzerland | [email protected]
The right timing for restructuring of investments is essential:
Key lessons from Mobil v. Venezuela
The award in the Mobil v. Venezuela case issued on
9 October 2014 highlights again the crucial importance of the right timing for restructuring of investments in order to enjoy the protection of a
Bilateral Investment Treaty (BIT) and be able to start
international arbitration.
The case concerned two large oil extraction and
production operations in Venezuela that were operated by Mobil, an American company, and several of
its subsidiaries. After a couple years of operation,
Venezuela decided to expropriate and nationalize the
investments made by Mobil. In the process leading to
the nationalization of Mobil's assets, Venezuela also
increased several taxes regarding the extraction and
selling of the oil, which was in conflict with the commitments made by Venezuela. During this process,
Mobil had restructured its assets through a Dutch
holding.
The dispute raised three main issues.
First, whether, and if so, from which moment
Mobil's investments were protected when it
restructured through the Dutch holding in order
to be able to enjoy the protection of the BIT
between the Netherlands and Venezuela.
Second, whether the fair and equitable treatment (FET)–standard is applicable to tax measures in the light of the applicable BIT.
Third, whether an award that may be issued
should be net of any taxed to be paid either in
Venezuela or abroad.
1.
The timing of the restructuring determines the
moment of BIT protection
From the outset it is important to note, as the Tribunal correctly did, the basic principle that if the
disputed measure has been publicly announced –
irrespective of whether or not it has been formally
enacted – before the restructuring took place, this
www.globalinvestmentprotection.com
would constitute “an abusive manipulation of the
system of international investment protection”.
It is therefore crucial to determine at what point in
time a dispute “exists” or rather is already “pending”
when the restructuring took place.
The Tribunal considered that comments published in
press reports made in April 2005 by the Venezuelan
Minister of Energy announcing that a bill will be
drafted, which will increase the tax at issue in this
dispute, is the moment when the dispute began to be
“pending”, even though the actual law was formally
enacted only in 2006, i.e., one year later. According
to the Tribunal, this was not a “potential” dispute
relating to a measure to be taken, but a “real” dispute concerning a decision already made, despite the
fact that it had not been enacted at the time. Since
the restructuring through the Dutch holding started
only in October 2005, that is after the dispute
became “pending”, Mobil's investment were not protected under the Netherlands–Venezuela BIT. Consequently, Mobil could not claim any compensation
regarding this tax measure.
This decision underlines very clearly that any public
statements by Government officials – even if only
published in local media – which later involve or concern an investment arbitration dispute will mark the
cut–off date for investment protection. Accordingly,
in order to obtain BIT protection, any restructuring
must have been completed before public statements
regarding the disputed measure have been made, i.e.
before a “potential” dispute becomes a “pending” one.
Obviously, this is a significant limitation of the temporal scope of the BIT protection, which imposes a
heavy burden of proof on the investor to provide
convincing evidence that the restructuring was made
bona fide, that is before the dispute arose – otherwise the investor cannot claim to have legitimate
expectations.
1
Effective investment protection globally
Global Investment Protection AG
Weinplatz 10 | 8001 Zürich | Switzerland | [email protected]
2.
FET–standard does not apply to tax measures
The Netherlands–Venezuela BIT is a “gold standard”
BIT, meaning it provides for the highest possible
investment and investor protection standard.
Therefore, the analysis made by the Tribunal in this
case can be applied to other comparable Dutch, Swiss
or German BITs.
One of the key protection standards in BITs is the fair
and equitable treatment (FET)–standard. In the Tribunal's opinion the FET–standard “may be breached
by frustrating the expectations that the investor may
have legitimately taken into account when making
the investment. Legitimate expectations may result
from specific formal assurances given by the host
state in order to induce investment”. In principle, the
FET–standard is a general standard that applies to all
measures, which fall within the scope of the BIT.
The other two important and generally applicable
standards are the national treatment (NT) standard
and most favoured nation (MFN)–standard. These
standards require the Contracting Parties to accord to
nationals of the other Contracting Party a treatment
that is no less favourable than that accorded to its
own nationals or those of third states.
Regarding taxes, fees, charges, fiscal deductions and
exemptions, Dutch BITs generally require in a specific
provision in the BIT that Contracting Parties grant NT
and MFN treatment to foreign investors.
The problem in this case is that the FET–standard is
not specifically mentioned in the BIT provision dealing with tax measures. The Tribunal accepted the
argument by Venezuela that since the tax provision in
the BIT is the lex specialis dealing specifically with tax
measures, it is to be given priority over the more
general provision which contains the FET–standard.
Since the more specific provision does not explicitly
mention the FET–standard, the Tribunal concluded
that Venezuela is only obliged to grant MFN and NT
treatment, but does not have to observe the FET–
standard with regard to tax measures.
The Tribunal thereby limited the general scope of
application of the FET–standard by allowing Contracting Parties to treat foreign investors unfairly
when it comes to tax measures. In other words, as far
www.globalinvestmentprotection.com
as tax measures are concerned, only violations of the
MFN and/or NT–standards give rise to a breach of the
BIT and thus enable an investor to claim compensation.
This interpretation of the scope of the FET–standard
seriously reduces the level of investment and investor protection. This is particularly the case because
tax measures are increasingly the main issue in
investment arbitration cases – as is the case in the
renewable energy sector. Consequently, it requires
additional efforts of argumentation from the investor to prove that tax measures are violating the
MFN and/or NT–standards, which is far more difficult to prove than a violation of the FET–standard.
3.
Awards should be net of any domestic taxes
The issue of protection against taxation of an award
is not often explicitly raised by the investor and thus
not decided by the Tribunal. However, in this case,
Mobil expressly asked the Tribunal that the compensation should be calculated and payable in an amount
net of any taxes, domestic or foreign.
Accordingly, Mobil requested that the compensation
be calculated on an after–tax basis and that the
quantum of the compensation be increased (i.e.
grossed up) to include the amount of any tax levied
by Venezuela and the amount of any tax liability that
may be incurred as a result of the award.
Regarding foreign taxation, Mobil contended that
there is a risk that other jurisdictions will seek to impose taxes that would have been prevented in the
absence of the expropriation. According to Mobil,
such taxation would constitute additional consequential damages. In other words, Mobil wanted to make
sure that the award will not be taxed – neither by
Venezuela nor by any other country such as the
Netherlands or the US.
The Tribunal decided that regarding taxation by
Venezuela, the compensation awarded to Mobil has
been calculated taking into account all taxes to be
paid to the Venezuelan authorities. As a consequence, that compensation should be paid net of any
Venezuelan tax.
2
Effective investment protection globally
Global Investment Protection AG
Weinplatz 10 | 8001 Zürich | Switzerland | [email protected]
However, regarding taxation by other countries, the
Tribunal considered this claim to be “speculative and
uncertain” and therefore dismissed that claim.
In the end, Mobil has obtained the guarantee that
the award will be net – at least as far as taxation
levied by Venezuela is concerned. But there always
remains the possibility that other jurisdictions may
tax the award or parts of it, which effectively reduces
the actual amount of compensation. In other words,
an investor faces the risk of being compensated
insufficiently. Consequently, it is important that any
quantum calculation by the investor is grossed up to
include all potential domestic and foreign tax
payments.
Key lessons
This award highlights the following key lessons:
the restructuring of investments must have
been concluded before the disputed measure
has been made public through any means of
media – even if the measure has not yet been
officially enacted;
the FET–standard typically will not apply to tax
measures, unless the BIT explicitly expands the
FET–standard to tax measures;
investors should expressly request the Tribunal
to award the compensation net of any domestic
and foreign taxes.
Nikos Lavranos
Head of Legal Affairs
Global Investment Protection AG
Nikos Lavranos is an experienced negotiator and policy advisor on Bilateral Investment Treaties (BITs)
as well as an expert in European law and public international law.
Prior to joining Global Investment Protection AG Mr. Lavranos acted as the Senior Trade Policy Advisor responsible for
Bilateral Investment Treaties (BITs) and investment issues in the Dutch Foreign Ministry and previously the Ministry of
Economic Affairs. In this capacity he was the Chief Negotiator for the Netherlands and Representative of the Netherlands
in the Trade Policy Committee (TPC) of the EU and in the Investment Committee (IC) of the OECD.
Recently, Mr. Lavranos has also been appointed Secretary–General of the European Federation for Investment Law and
Arbitration (EFILA) established in Brussels.
Over the past years he has advised many investors on investment law and arbitration issues.
www.globalinvestmentprotection.com
3

Download Report