2015 ARM: Montreal, Canada June 1

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2 Scope of Presentation Why this is a current topic Countries of investment covered Protections afforded investors Some investor wins Special aspects of tax cases 2

3 Leading International Business Topic June 12, 2015, Right and left decry trade pact's secretive tribunals [C]ritics of the Trans-Pacific Partnership have a lot to complain about the system of secretive tribunals that allow foreign corporations to sue governments if they believe a country's laws unfairly diminish their profits, [c]alled the Investor-State Dispute Settlement (ISDS) model 3

4 Leading International Business Topic Should NZ worry about investor-state disputes? 4

5 Leading International Business Topic 5 LeMonde Editorial June 17,

6 Leading International Business Topic Transatlantic Partnership Talks: Members of the European Parliament in bitter split on EU- US trade 10 June 2015 One of the thorniest issues is investor protection. There is widespread opposition to commercial arbitration panels, called Investor- State Dispute Settlement (ISDS), where firms can sue national governments. 6 6

7 Leading International Business Topic

8 Leading International Business Topic 8 8

9 Leading International Business Topic 9 9

10 Countries Covered U.S. has more than 60 BITs and FTAs, and more planned (e.g. Transpacific Partnership and Transatlantic FTA) NAFTA- Canada and Mexico DR-CAFTA - Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua 10

11 Countries Covered Other U.S. BITs and FTAs in the Americas: Argentina, Chile, Colombia, Grenada, Jamaica, Panama, Peru and Uruguay. This presentation focuses on NAFTA Chapter 11 There are also more than 2,500 non-u.s. BITs and FTAs. 11

12 U.S. citizens U.S. companies Which Investors Protected - even if wholly non-u.s. owned - but Mexico and Canada can deny benefits if U.S. operations are insubstantial (See St. Mary s, below) U.S. stockholders of NAFTA subsidiary can claim for their own loss Controlling U.S. stockholders can claim for their NAFTA subsidiary s loss 12

13 Which Investments Are Protected? Future and existing investments in the other country included Tangible assets, such as production facilities and real estate Intangible assets, such as patents, copyrights, trademarks, franchises Governmentally or privately granted licenses or concession agreements Stock, debt, joint venture interests, and profit-sharing interests Foreign sub stock and the sub s assets are investments Export opportunities to other country NOT protected (Apotex) 13

14 Environmental lawyers Tax lawyers IP lawyers Contract lawyers Trial lawyers Which Lawyers Can Use NAFTA? 14

15 Indirect or direct expropriation Protections Against Discriminatory treatment relative to local or any third country investors Treatment that is not fair and equitable, or provides less than full security Local content minimums, local sales maximums, or other performance requirements Blocking repatriation of cash flows 15

16 Procedural Aspects Minimum 6 month and maximum 3 year from injury time periods Direct investor injury and indirect-through-investment injury allowed Arbitration rules ICSID or UNCITRAL Waiver by investor of local damage claims. Exhaustion of local remedies needed? 16

17 Ethyl Corp. 17

18 Ethyl Corp. v. Canada Ethyl Corp. U.S. chemical company manufactured MMT, a widely used performance enhancing gasoline additive suspected of posing environmental and health risks. Through its Canadian subsidiary, Claimant was the sole distributor of MMT in Canada. Canada passed legislation banning the import and inter-provincial trade of MMT, after apparent public health concerns and allegations that the chemical caused the malfunction of automobile emission diagnostic systems. The law banned the import and trade of MMT between provinces but did not preclude the production and use of MMT in Canada. 18

19 Ethyl Corp. Claimant asserted that Canada breached its NAFTA obligations because the legislation afforded it less favorable treatment than domestic investors in like circumstances and constituted an indirect expropriation of its Canadian investment. Claimant argued that MMT, as an octane enhancer, was in like circumstances with, and competed against, other domestic ethanol products. 19

20 Ethyl Corp. Canada s substantive response to the claim was that the legislation was a lawful exercise of its regulatory and police power. But the parties reached a settlement. Canada s decision to settle was likely driven, in part, by the lack of conclusive scientific data to support its ban on MMT. 20

21 Ethyl Corp. Point: Domestic environmental regulations could impact the rights of foreign investors so as to give rise to claims of expropriation and unfavorable national treatment. Point: Foreign investors should not be burdened with the mandate of a detrimental regulation in the absence of strong scientific evidence supporting the regulation. Result: Claimant withdraws its claim and Canada repeals the ban on MMT, publicly declares the safety of MMT, and pays millions in damages to Claimant. 21

22 S.D. Myers 22

23 U.S.-Plaintiff Prevailing NAFTA Cases S.D. Myers v. Canada Privately held U.S. waste management company, located in Ohio, disposed of imported waste from Canada containing polychlorinated biphenyls (PCB) at its U.S. facility. Canada temporarily banned the export of PCB waste. The U.S. waste management company has a sister affiliate in Canada with some nexus to the operation, which the Tribunal held was an investment. 23

24 S.D. Myers Claimant asserted that the ban violated Canada s obligation to provide treatment no less favorable than it provides to domestic waste companies, and to provide a minimum standard of fair and equitable treatment in accordance with international law. Claimant also argued that the ban constituted an expropriation of its investment. Canada argued that the temporary ban was for environmental and public health reasons, although official documents and statements demonstrated an additional motive in protecting domestic interests. 24

25 S.D. Myers Tribunal agreed that the ban was discriminatory and in violation of the national treatment guarantee NAFTA provides to U.S. investors because Claimant was in like circumstances with Canadian PCB remediation firms, and thus the export ban discriminated against U.S. firms to the benefit, and also following the lobbying, of Canadian firms. Tribunal also found that the protectionist ban breached the fair and equitable treatment provision. 25

26 S.D. Myers Tribunal further found no legitimate environmental reason for the ban, and that the primary purpose of the ban was to protect the domestic waste disposal industry at the expense of a U.S. competitor. The ban did not constitute a prohibited performance requirement as no defined requirement was imposed on Claimant. Similarly, the ban was not tantamount to expropriation because of the temporary nature of the ban. 26

27 S.D. Myers Following the Tribunal s decision, Canada petitioned the Canadian Federal Court to overturn the award, on the basis that the Tribunal exceeded the scope of the arbitration agreement and that the award violated public policy. But the Court denied the petition finding the Tribunal did not act outside its mandate under NAFTA and Canadian law provides that courts give deference to international arbitration awards. Result: Claimant prevails and Canada is liable for damages. 27

28 Pope & Talbot 28

29 U.S.-Plaintiff Prevailing NAFTA Cases Pope & Talbot v. Canada U.S. corporation, through its Canadian subsidiary in British Columbia, produced softwood lumber and exported most of it to the U.S. Canada allocated yearly quotas for qualifying exporters and assessed export fees for exports in excess of these quotas. The export quota applied similarly to lumber companies in British Columbia and three other provinces; however, companies in the remaining provinces were not subject to the export quota. 29

30 Pope & Talbot Claimant asserted that the export quota violated Canada s NAFTA obligations under national treatment, minimum standard of treatment, prohibited performance requirement, and expropriation provisions. Tribunal initially determined that Canada s action in administering the export quota, and not the SLA, was the measure at issue and the basis for a claim under NAFTA. Tribunal found that while access to U.S. markets was a protectable investment, the extent of profit loss did not satisfy the threshold for an expropriation. Tribunal also found that the export quota was not a prohibited performance requirement because there was no requirement imposed on minimum lumber sales in Canada, merely an export fee that deterred sales abroad. 30

31 Pope & Talbot Tribunal rejected the claim for breach of the national treatment provision because there was no evidence Claimant received unfavorable treatment as compared to domestic companies because the quota system was reasonably related to preventing countervailing duties by the U.S., and affected provinces were all the largest producers of softwood lumber in Canada. Tribunal reasoned that a claim of unfavorable national treatment can be defeated by showing a reasonable nexus to rational government policies that (1) do not distinguish, on their face or de facto, between foreign-owned and domestic companies, and (2) do not otherwise unduly undermine the investment liberalizing objectives of NAFTA. 31

32 Pope & Talbot Point: Because Claimant was disadvantaged to the same extent as domestic companies in the quota-imposed provinces, there was no discrimination under national treatment. Point: A foreign investor's Canadian subsidiary s access to markets abroad constitutes a protected investment. Tribunal concluded that Canada did not provide Claimant with a minimum standard of treatment because its procedures for verifying quota allocations were not fair and equitable and included unnecessary demands, threats, and misrepresentations by officials. Result: Claimant prevails solely on the minimum standard of treatment claim and is awarded minor damages. 32

33 Mobil v. Canada U.S.-Plaintiff Prevailing NAFTA Cases Two large U.S. oil companies, through their respective Canadian subsidiaries, engaged in petroleum development projects as part of offshore oil extraction operations in Newfoundland and Labrador. Canadian Newfoundland and Labrador Petroleum Board promulgated guidelines requiring firms involved in the petroleum project in the Newfoundland offshore region to pay millions for research and development, and education and training, within the province. The guidelines required the firms to pay a fixed percentage of project revenues. 33

34 Mobil 34

35 Mobil Prior to the enactment of NAFTA, members could list non-conforming legislation for exemption from NAFTA obligations. Canada listed an Act, regarding Newfoundland oil development, that provided for companies to contribute to a benefits plan that included expenditures for research and development but did not specify an amount. Claimants argued that the guidelines were not reserved under this exemption because the introduction of a R&D fee increased nonconformity with other NAFTA provisions. Tribunal agreed that the guidelines increased non-conformity with the prohibition on performance requirements, by imposing a strict fee where there was none before, and concluded that the new and significant legal obligation was not previously reserved by Canada. 35

36 Mobil Claimants argued that the guidelines violated the minimum standard of treatment provision by failing to provide a stable regulatory environment and frustrating the legitimate expectations of investors. Tribunal rejected this argument because there was no evidence that Claimants were induced to invest in the project based on promised regulatory changes, and the guidelines did not amount to grossly unfair or arbitrary conduct in violation of due process. 36

37 Mobil Claimants further asserted that the guidelines constituted a prohibited performance requirement because they required the purchase of research and development services in Canadian territory. Tribunal agreed and found the guidelines to be a prohibited performance requirement because the fees for research and development constituted services that legally required Claimants to undertake expenditures. Result: Claimants win and are awarded damages. 37

38 Bilcon v. Canada U.S.-Plaintiff Prevailing NAFTA Cases A Delaware-based, family-controlled corporation, through its Canadian subsidiary, planned to operate a basalt quarry and marine terminal for the extraction and exportation of basalt in Nova Scotia. Canada conducted a comprehensive environmental assessment of the project and found that the excavation blasting of the quarry posed environmental hazards, particularly for endangered species in the area. Accordingly, both the federal and provincial governments disapproved the project. 38

39 Bilcon 39

40 Bilcon Claimant contended that political interference, the unwarranted extent of the environmental assessment, and the subsequent denial of the project violated NAFTA s minimum standard of treatment, national treatment, and most favored nation provisions. Tribunal found a breach of the minimum standard of treatment because the environmental assessment differed from the standard assessment process and was thus arbitrary, and violated investor expectations given the encouragement and representations made to Claimant by the government, particularly after substantial consequent investment in the project. 40

41 Bilcon Tribunal also found a violation of national treatment because the environmental assessment review panel s denial of the project on grounds of common core values, was unprecedented, not rationally related to government policy, at odds with the liberalizing investment goals of NAFTA, and differed from the treatment afforded to domestic investors engaged in similar environmental assessment reviews. Lastly, Tribunal did not decide the issue of most favored nation treatment given its immateriality in light of its other findings, the lack of attention given to the issue by the parties, and the dearth of valid comparisons with investors from other nations. 41

42 Bilcon Critics of the decision, including the dissenting member of the Tribunal, worried that the decision would further suppress environmental regulation in instances where foreign investor arbitrations could arise. Result: Claimant prevails on the merits and seeks $300 million in damages. The hearing on damages is expected to occur next year. 42

43 U.S.-Plaintiff Prevailing NAFTA Cases Abitibi-Bowater v. Canada Delaware corporation, with headquarters in Canada, planned to close its pulp and paper mill in Newfoundland and Labrador. Shortly after the announcement, the provincial government enacted legislation expropriating Claimant's property and assets used for the generation of hydroelectric energy in exchange for the fair market value of the properties. The legislation also terminated hydroelectric contracts with Claimant and Claimant's timber and water rights, which the government asserted were conditional upon the continuous operation of the paper mill. 43

44 Abitibi-Bowater 44

45 Abitibi-Bowater The legislation did not provide for the payment of the timber and water rights, which are normally not compensable under Canadian law. In response to the legislation, Claimant asserted breaches under the national treatment, most favored nation treatment, minimum standard of treatment, and expropriation provisions of NAFTA. Claimant took issue with the amount of compensation, the deprivation of its rights to seek remedy in the Canadian court system, and the arbitrary, irrational and discriminatory nature of the taking. 45

46 Abitibi-Bowater Facing uncertainty and a difficult defense, particularly on claims of expropriation, Canada settled the claims before an arbitration panel addressed the merits. Canadian federal government did not seek to recover the cost of settlement from the provincial government, however, it stated its future intention to hold provincial governments responsible for damages it pays under NAFTA as a consequence of provincial legislation. Result: Pursuant to the settlement, Canada pays to Claimant approximately $130 million, one of the largest amounts ever for a settlement under NAFTA. 46

47 U.S.-Plaintiff Prevailing NAFTA Cases St. Mary s v. Canada Brazilian-owned U.S. cement corporation, through its Canadian subsidiary, acquired property for a quarry near Ontario for the excavation of aggregate used for cement. Following public protest over the project, and citing groundwater contamination concerns, the municipal government issued a zoning order that stopped the project and disallowed Claimant to seek provincial review of the order. 47

48 St. Mary s 48

49 St. Mary s Claimant asserted that Canada, through its political interference of the project, violated the national treatment, most favored nation treatment, minimum standard of treatment, and expropriation provisions of NAFTA. Specifically, Claimant argued that the permanent nature of the zoning order, the refusal to grant a water permit, and the subsequent refusal to review or allow additional testing was arbitrary, unfair and vexatious and disregarded due process. 49

50 St. Mary s In response, Canada invoked a jurisdictional defense under NAFTA s denial of benefits provision, arguing that Claimant lacked sufficient U.S. business activities to be classified as a U.S. investor because it was wholly-owned by a Brazilian parent company. Arbitration was bifurcated, with the jurisdictional issue requiring the production of documents regarding Claimant s U.S. business activities. Soon after, both parties sought a temporary suspension of the proceedings. 50

51 St. Mary s Claimant also filed an action in Canadian Federal Court challenging the government s invocation of the denial of benefits provision. Before any of the substantive issues with respect to jurisdiction were decided in arbitration or in Court, the parties reached a settlement. Result: Claimant withdraws its claim and receives millions in exchange. However, the settlement requires Claimant to concede that it is not a U.S. investor and lacked standing to bring its claims. 51

52 Metalclad v. Mexico U.S.-Plaintiff Prevailing NAFTA Cases U.S. waste management company acquired a Mexican firm and its permits for a waste management facility and landfill, intending to continue the project located in Mexico. With construction nearing completion, and despite the approval of the federal environmental agency, the municipal government halted the project by denying a building permit over a year after its application. The municipality temporarily enjoined the operation of the landfill, while simultaneous plans for further expansion of the landfill were approved by the federal agency. However, even after near completion of the project, the municipality would not reconsider its denial of the permit. 52

53 Metalclad 53

54 Metalclad As arbitration was initiated, the state governor decreed the landfill site and surrounding area an ecological preserve, thus precluding the use of the site for waste management. Claimant argued that the denial of its plans for the waste management facility and landfill constituted an expropriation and violated the minimum standard of treatment. Tribunal found that under Mexican law, it was only proper for the municipal government to deny the construction permit on physical and not environmental grounds. Further, Mexican officials led Claimant to reasonably believe it had or would have all necessary permits for its landfill project, which denied Claimant a transparent and predictable framework under which to pursue its investment and business plan. 54

55 Metalclad Accordingly, Tribunal determined that Mexico did not treat Claimant fairly and equitably under the minimum standard of treatment because federal and state permits should have been sufficient for the construction and operation of the site. Tribunal found that the totality of the circumstances including the degree of completion of the project, representations made by Mexican officials, and the overall effect of the denial of the building permit was tantamount to an indirect expropriation. The designation of an ecological preserve in the area encompassing the landfill site was further, independent, grounds for a finding of expropriation without just compensation. 55

56 Metalclad On appeal, before the Supreme Court of British Columbia, based on the venue of the arbitration in British Columbia, the Court found that the Tribunal s minimum standard of treatment finding, and to some degree its expropriation finding, incorrectly included transparency as a factor for fair and equitable treatment and incorrectly applied a standard from another NAFTA chapter. However, the Court found no error with the Tribunal s determination of liability for the claim of expropriation based on the designation of the landfill site as an ecological preserve. 56

57 Metalclad Point: Canadian court s review of a factor utilized by the Tribunal for investor claims, when not explicitly contained in the investor protection chapter of NAFTA, is subject to a finding of error and grounds to set aside an award. Result: Claimant prevails and Mexico is liable for millions in damages. On appeal, award is partially set aside but rather than return to the arbitration and continue the appeals process, the parties eventually settle. See the PBS TV show: 57

58 Feldman 58

59 Feldman v. Mexico U.S.-Plaintiff Prevailing NAFTA Cases U.S. citizen, a registered permanent resident but not citizen of Mexico, owned a Mexican corporation that bought cigarettes in Mexico and exported them. Mexico imposed a tax on domestic sales of cigarettes, but rebated the tax if the cigarettes were exported. Unless the Mexican tax were rebated, the Mexican tax plus foreign tax was too high to permits sales. 59

60 Feldman Mexican corporate exporter bought cigarettes from Walmart and Sam s Club rather than manufacturers. The Walmart invoices sometimes did not separately state the tax. Sometimes the tax authorities rebated the tax notwithstanding the absence of receipts showing the tax, but sometimes it did not. The unrebated tax was the source of the case. Mexican law, after years in issue, was changed to prohibit rebates to resellers like claimant, limiting rebates to exports that were first sales. This was acknowledged to be a valid measure aimed at gray-market smuggling of Mexican cigarettes back into Mexico. 60

61 Feldman Panel rejected a claim that Mexico's taxation measures resulted in an indirect expropriation of the claimant's property because the taxation measures were within the police power of Mexico to restrict the gray market and also thereby discourage smoking. Panel relies on the Restatement of Laws: A state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states. 61

62 Feldman Further, not every business problem or unreasonable activity by a tax official amounts to an expropriation. Panel rejects claim based on treatment below minimum standards of international law. Denial of rebates could be rationally explained as directed to discouraging smuggling back into Mexico and to maintain high cigarette taxes to discourage smoking. 62

63 Feldman But the panel found in exporter s favor on the national treatment claim. The Tribunal found that there were Mexican-owned domestic exporters in like circumstances with the claimant that were accorded more favorable treatment, because they were granted rebates without itemized receipts though the claimant was refused them. Since investor-shareholder was a U.S. citizen and not a Mexican citizen, his Mexican registered permanent residence does not disqualify his claim. 63

64 Feldman Procedural point: Absence of evidence that known Mexicanowned companies buying cigarettes from Walmart and Sam s Club were denied rebates, and absence of any explanation for claimant s denial other than Feldman s known U.S. citizenship, shifted burden to Mexico to provide no discrimination. Result: Mr. Feldman wins on non-discrimination grounds. 64

65 Corn Products International 65

66 U.S.-Plaintiff Prevailing NAFTA Cases Corn Products International v. Mexico U.S. company, through its Mexican subsidiary and facilities, manufactured and sold high fructose corn syrup (HFCS) for use in soft drinks sold in Mexico. Mexico alleged that the U.S. took measures limiting the import of Mexican sugar cane in violation of its obligations under NAFTA. In response, and following the failure of other treaty mechanisms to solve the dispute, and in order to protect the Mexican sugar cane industry and its workers, Mexico imposed a tax on drinks sweetened with any sweetener other than sugar cane. 66

67 Corn Products International Claimant argued that the tax violated NAFTA s national treatment obligation by treating the predominantly foreignowned HFCS producers unfairly as compared to the mostly domestic producers of sugar cane. Addressing this claim, Tribunal found that the tax did run contrary to the national treatment obligation. HFCS and sugar cane producers were competing for the same market for soft drink sweeteners, and thus the tax imposed less favorable restrictions on the foreign investors than its domestic sugar cane distributors. 67

68 Corn Products International Claimant also argued that the tax on HFCS-sweetened drinks constituted a prohibited performance requirement that conferred an unfair advantage to Mexican sugar producers whose buyers were exempt from the tax. Tribunal found that the tax did not constitute an illegal performance requirement because no direct cost or requirement was imposed against Claimant by Mexico. In fact, the requirement, if any, was placed on the soft drink manufacturers, and even that was not mandatory. 68

69 Corn Products International Lastly, Claimant asserted that the tax was tantamount to an indirect expropriation of its investment in Mexico. The claim for expropriation was similarly rejected. Tribunal concluded that even if Claimant s operations in Mexico classified as an investment and suffered discrimination, the tax did not amount[] to a substantially complete deprivation of the economic use and enjoyment of the investment

70 Corn Products International In its defense, Mexico asserted that the tax was a countermeasure to mitigate the sugar cane import restrictions imposed by the U.S. Tribunal concluded that investors have separate and district rights under NAFTA, apart from their respective States of origin, finding there is no room for a defense based upon the alleged wrongdoing not of the claimant but of its State of nationality

71 Corn Products International Point: Mexico s tax, even if discriminatory, was not expropriatory unless it had the effect of destroying the business in question. Point: A defense of countermeasures, in response to an alleged breach by a State and party to the treaty agreement, is not available in investor-state disputes, in contrast to international law principles. Result: Claimant wins and Mexico pays damages. 71

72 U.S.-Plaintiff Prevailing NAFTA Cases Archer-Daniels Midland v. Mexico Large U.S. corporation and another U.S. subsidiary of a British multinational corporation, through their joint venture Mexican subsidiary, manufactured and sold high fructose corn syrup (HFCS) in Mexico. Claimants challenged the same Mexican tax on soft drinks containing HFCS at issue in Corn Products International. 72

73 Archer-Daniels Midland Like Corn Products International, Claimants argued that the tax constituted expropriation, violated the national treatment provision, and constituted a prohibited performance requirement. Tribunal rejected the claim of expropriation, finding that Claimants neither sustained a loss of control or ownership nor suffered a degree of deprivation of their economic interest substantial enough to constitute expropriation. 73

74 Archer-Daniels Midland Similar to the decision in Corn Products International, Tribunal held that the tax was in violation of the national treatment obligation. Claimants and Mexican sugar cane producers were in like circumstances because both sold competing products to the soft drink industry. The protectionist intent and effect of the tax resulted in unfavorable treatment on the basis of nationality. Nearly all sugar cane used for soft drinks in Mexico was derived from domestic producers, therefore Mexico s attempt to distinguish discrimination between HFCS and sugar cane producers instead of between foreign and domestic producers was unavailing. 74

75 Archer-Daniels Midland In contrast to the decision in Corn Products International, Tribunal additionally found that the HFCS tax constituted a prohibited performance requirement. Tribunal concluded that the tax conferred domestic advantages to the sugar cane industry, namely the exemption from the tax, which demonstrated a preference for, and an attempt to increase, domestic goods, which detrimentally affected Claimants investment. 75

76 Archer-Daniels Midland Point: U.S. producers of HFCS, and Mexican producers of cane sugar were considered in like circumstances, and thus a tax on HFCS was discriminatory against foreign investors, despite the tax also applying to Mexican producers of HFCS. Point: The distinction between conferring a disadvantage to a foreign investor by directly imposing a tax and conferring a disadvantage by giving a tax advantage to a domestic investor was immaterial for a finding of a prohibited performance requirement. Result: Claimants prevail and Mexico pays millions in damages. 76

77 Cargill v. Mexico U.S.-Plaintiff Prevailing NAFTA Cases Large privately-held U.S. corporation, through its Mexican subsidiary, manufactured and sold high fructose corn syrup (HFCS) for sale in soft drinks. Claimant challenged the same Mexican tax on the soft drink products sweetened with HFCS at issue in Corn Products International and Archer-Daniels Midland. 77

78 Cargill Claimant argued that the tax had substantially diminished the value of its investment in Mexico by depressing the market for HFCS. Claimant asserted claims against Mexico for the breach of its NAFTA obligations of national treatment; most favored nation treatment; minimum standard of treatment; prohibited performance requirement; and expropriation. 78

79 Cargill Similar to the prior decisions involving the HFCS tax, Tribunal found that the HFCS producers were in like circumstances with, and treated less favorably than, Mexican sugar cane producers, and thus the tax violated the national treatment obligation. The Tribunal also found that the tax violated the minimum standard of fair and equitable treatment obligation because the import permit for HFCS was in violation of the minimum standard applied in international law since it was intentionally targeted at Claimant and consequently manifestly unjust. 79

80 Cargill Tribunal rejected Claimant s argument for a violation under the most favored nation treatment obligation because of the lack of comparable investors from other nations for evidence that Claimant received less than favorable treatment as compared to other NAFTA party or non-party investors. Despite business income and foreign property assets potential classification as investments for expropriation, Claimant s claim for expropriation failed to prove a radical deprivation of... overall investment

81 Cargill Like Archer-Daniels Midland, Tribunal found that the tax constituted a prohibited performance requirement. While the tax itself was imposed on soda bottlers and not Claimant, [i]t conditioned a tax advantage on the use of domestically produced sugar cane and was in connection with Claimant s investment. Tribunal reasoned that Claimant, a U.S. investor and producer of HFCS, was in like circumstances with Mexican sugar cane producers and thus the tax unfairly discriminated against it. 81

82 Cargill Tribunal also denied Mexico s defense of a countermeasure, finding that even if the countermeasures were proper against the U.S., they are still wrongful where a party is an investor and not the State. Result: Claimant wins and Mexico pays millions in damages. 82

83 Tax Cases-Special Rules U.S. Treasury must generally approve U.S. investor s suit U.S. approval obtained in Feldman U.S. approval denied in thwarted Gottlieb v. Canada Canadian royalty trust taxation case National treatment generally inapplicable to income tax cases- Feldman was an excise tax case 83

84 Feldman v. Mexico Tax Cases-Special Rules No one has come up with a fully satisfactory means of drawing a line [between] valid regulation and a compensable taking... By their very nature, tax measures, even if they are designed to and have the effect of an expropriation, will be indirect, with an effect that may be tantamount to expropriation. A state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states, if it is not discriminatory... 84

85 Yukos 85

86 Yukos / Casa de Valores Yukos arbitration, the largest arbitration award in world history ($50 billion), resulted from a finding that a Russian corporate tax proceeding was an indirect expropriation and not a valid exercise of taxing authority. Decided under non-nafta Investment Treaties. 86

87 Yukos Key factors finding not a valid tax proceeding: Re-audit of already approved transaction Intercompany transactions ignored rather than transfer-priced Non-statutory theories applied Narrow interpretation of locality-based tax incentives 87

88 Yukos Excise tax treatment different than income tax treatment Jeopardy assessments Government itself bought assets at forced tax sale. Observation: IRS, and probably every other tax authority in the world, has applied these tactics, but not at the same time! 88

89 Yukos France, Belgium and Austria to Seize Russian Assets Over Yukos Dispute - June 18, 2015 Bailiffs in France, carrying out court orders to seize assets belonging to the Russian Federation, have issued seizure notifications to Russia Today s state-funded television network. 89

90 Disclaimer This presentation has been prepared for information purposes only and does not constitute legal advice. Such presentation is not intended to create, and receipt thereof does not constitute, formation of an attorney-client relationship. The presentation should not be relied upon for any purpose without seeking legal advice from licensed attorneys. The authors expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this presentation or related materials and information. Alan S. Lederman