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.

1 comment:

  1. Puneeth,

    You are somewhat correct in noting the difficulty in establishing the expropriatory nature of taxation measures under international investment law. However, as states seek to find new and more innovative ways to expropriate, there is a realization that taxation measures can, in fact, be expropriatory. What is the threshold here is another matter, however, it cannot be said that since taxation is a facet of fiscal sovereignty of the host state, it cannot amount to expropriation under any circumstance.

    I am slightly more sympathetic to Vodafone's argument on FET. Specifically, Vodafone claims denial of justice in the present case. Here, it may be possible to characterize the retrospective amendment by the Indian parliament as a "targeted legislation" aimed at undoing the Supreme Court's judgment. The logic is summarized by Paulsson in his Hersch Lauterpact Memorial Lecture on DoJ: "a more straightforward analysis may lead to the conclusion that the legislature itself has interfered in the judicial process to such an extent as to create a denial of justice." Consider, for example, Stran Greek Refineries and Stratis Andreadis v. Greece (ECHR -- cited by Paulsson, as well) which involved the legislative annulment of an arbitral award. The European Court of Human Rights in that case held that Greece "infringed the applicants’ rights under Article 6 para. 1 (art.6-1) by intervening in a manner which was decisive to ensure that the – imminent – outcome of proceedings in which it was a party was favourable to it" (para. 50).



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