Monday, April 23, 2012

Guest Post by Puneeth Ganapathy: Vodafone looks to arbitration, but should it?

The following post is by Puneeth Ganapathy, a 4th year student of the National University of Juridical Sciences (NUJS), Kolkata. Puneeth was a speaker in the NUJS Vis team this year which reached the Round of 32 at Vienna, winning an Honourable Mention for the Respondent Memorial.

Disturbed by the prospects of the government’s proposed retrospective tax amendments that may undo the recent judgment by the Supreme Court granting relief to Vodafone, the company has threatened to institute arbitration proceedings under the India-Netherlands BIT.

The Supreme Court had reversed the judgment of the Bombay High Court which had ordered Vodafone to pay tax amounting to almost $2 bn, relating to its acquisition of Hutchison’s share of the Hutchison-Essar run telecom unit.   The judgment came as a relief and was seen as a boost to foreign investment. However, the government has announced plans to introduce a retrospective tax amendment, effective right from 1964 which could include undoing the Vodafone judgment. In response to this possibility, Vodafone has threatened arbitration proceedings under the Indo-Netherlands BIT, against the making of such retrospective tax legislation.

While Vodafone’s concerns may be genuine, it remains a question as to whether arbitration could really help its case or if it is to be merely a pressurizing tactic. Arbitrations under BIT’s such as the India-Netherlands BIT, generally concern legitimate expectations of investors, fair and equitable treatment, etc. The lack of fair and equitable treatment is in fact, the explicit ground mentioned in the Vodafone press release.

However, there is a certain degree of leeway, given to a State party in such arbitration where questions of regulatory measures, especially those relating to fiscal policies come into play. Such fiscal policies, such as the imposition or amendment of taxes, are considered a legitimate exercise of state sovereignty, and unless they may be demonstrated to be discriminatory or amounting to expropriation, they cast a cloud of exception around a government’s actions. In fact, the tribunal in Feldman v. Mexico stated that excessive taxation could not be seen as expropriation, even when it makes an activity less profitable or uneconomic to continue. Given this standard of deference to a government’s taxation policies, it is not surprising, as mentioned in Prof. Abba Kolo’s article on the subject that out of 22 cases of expropriation filed under the NAFTA, only in one did the claimant succeed in establishing a state-measure to amount to expropriation. The article also generally clarifies the minimal scope of success against a state. Hence, the legitimate expectations of investors and their protections under a BIT seem to be prone to fall flat under the defense of fiscal sovereignty. While the nature and effect of the government’s proposal to retrospectively tax may be an entirely different issue, speaking to the merits of a case, if one ever really arises, precedence shows little chance of success of an investor against a state’s tax measures.

If Vodafone seriously intends to utilize the terms of the BIT it could look at Art. 25 of the Indo-Netherlands BIT. This allows an investor who claims being taxed in violation of the provision of non-discrimination to apply to the competent authority in the country where the company is incorporated. The competent authority would try to come to a mutual agreement with the state that is applying the measure. Then again, the utility of this measure is more doubtful than a possible arbitration itself. Further, Vodafone can undertake this measure only if the government makes a retrospective legislation and once again asks Vodafone to pay the $2bn.

On the other hand, Vodafone could simply sit tight, and rely on the precedence of National Agriculture Cooperative Federation v. Union of India, holding that the tax authorities cannot re-open an assessment after it has been time barred by limitation, irrespective of a retrospective law (but that is again, if the amendment does not amend the limitation period in the act itself).

It is anyone’s guess how things pan out for Vodafone, or how intent the government is at undoing the judgment and pushing away foreign investment. In such a situation, the threat of arbitration seems to be more of a tactical ploy aimed at developing and maintaining consistent corporate pressure against the government’s plans, than a realistically possible remedy to the government making a retrospective legislation.

Sunday, April 22, 2012

A bit too much of BIT? Vodafone's turn to seek investment arbitration with India

Vodafone International Holdings, BV ("VIH"), the Dutch subsidiary of Vodafone, UK has served the Indian government with a notice of arbitration (called a Notice of Dispute) under the India - Netherlands Bilateral Investment Treaty ("BIT").

This is in response to proposals in the Indian Finance Bill 2012, which will apply certain taxation provisions with retrospective effect and overturn the Supreme Court's decision that was in favour of Vodafone.

Vodafone believes that the retrospective tax proposals amount to a denial of justice and a breach of the Indian government’s obligations under the BIT to accord fair and equitable treatment to investors.

India’s Finance Secretary RS Gujral has stated that there is no provision for tax arbitration under the Netherlands India BIT.  From reading the text of the BIT, this inference cannot be clearly drawn. A taxation exception is only clearly mentioned with respect to National Treatment and Most Favoured Nation clauses, in Article 4 of the BIT. 

Another argument of the Indian government is that the BIT is inapplicable since the contract was signed in the Cayman Islands. This is clearly not a ground for inapplicability of a Bilateral Investment Treaty. If the dispute is regarding investment by an investor belonging to one State in the other State, then the clauses of the BIT are applicable. 

A more fundamental question at this stage, however, is whether VIH can, at all, send the notice of arbitration to India, at a stage when no legislation has been passed violating its rights under the BIT. It is indeed questionable whether VIH can send a notice of arbitration in light of the Finance Bill, which is yet to be enacted into binding law.

More reports on this dispute can be found on ILcurryhere, here  and here.

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