whether the measure is not an expropriation.” The investor may to arbitration if the tax authorities did not agree to consider the issue, or otherwise failed to agree that the measure is not an expropriation. Thus, where the tax authorities decided that the alleged taxation measure is not expropriatory, that puts an end to the claim; the investor cannot proceed with the arbitration since the tax authorities’ determination is final and binding on both the investor and the arbitral tribunal. A similar provision is found in post 2004 U.S. Free Trade Agreements and most of Canada’s Bilateral Investment Treaties (BITs) as well as the Japan-Mexico is the possibility of denying the private investor the opportunity to present its case – on an important issue of alleged deprivation of its property rights - before a neutral and independent tribunal that is a matter of greatest concern from the jurisprudential and academic perspectives.
In Feldman v. Mexico, award of December 16, 20002, the tax authorities vetoed one of the three alleged measures but could not agree on the other two measures and so the arbitration went ahead on those. Para. 116. In April 2008, the US and Canada issued a joint declaration that a new tax introduced by the Canadian government in October 2006 did not constitute an expropriation under NAFTA. The joint determination has the effect of blocking the expropriatory taxation claim by a group of U.S. investors who had indicated their ‘intent’ to sue Canada in October 2007 following a decision by Canada to introduce a tax on so-called Income Trusts in the energy sector. See, “Canada, U.S.A. agree to nip expropriation claim in bud in tax case”, Investment Arbitration Reporter, vol.1 No. 3, June 18, 2008. For an analysis of the Canadian measure, see, Y. Fortin, Taxation of Income Trusts: Is it worth the Cost and the Turmoil?, available at: L. Peterson, NAFTA Safety Valve comes to Rescue, Embassy Magazine, June 25, 2008, available at:http://embassymay.ca/papers/views/.2008.Canfor Corp. v. U.S., Decision on Preliminary Question, June 6, 2006 at 118 where the tribunal noted that NAFTA’s mandate under Art. 102 (1)(e), was an efficient and effective procedures for the resolution of disputes. J. Byrne, NAFTA Dispute Resolution: Implementing True Rule Based Diplomacy through Direct Access, 35 Texas I.L.J. (2000) 415. On the other hand, it could be argued that the tax carve out or veto in such investment treaties evidences the fact that despite their rule-based formulation, the state parties never “intended to extend an unbounded offer to arbitrate disputes arising from any regulatory or other measure taken by the state.” Bjorklund (2001) supra (n. 8), at 190.international law and most domestic laws, the issue of whether or not an administrative measure amounted to expropriation of private property is a legal question to be answered by the courts or an arbitral tribunal rather than by an administrative agency or agencies of the government. This is because apart from being a constitutional question, it also about how to strike a balance between the protection of private property on one hand and legitimate regulation of same by the state on the other. It is only fair and equitable that such a decision should be made by a neutral and independent tribunal rather than the administrative agency whose actions formed the basis of the dispute. Viewed from this perspective and considering the political and economic significance of the flexibility of the state to tax, it might be argued that the expropriatory tax provision of the Energy Charter Treaty probably strike a fair balance between the conflicting objectives.
To a large extent, the tax veto procedure is akin to the much criticised Mutual Agreement Procedure under Double Taxation Treaties.Such criticisms include:
Firstly, the competent tax authorities are no
neutral arbiters of the dispute. To the contrary, they are interested-parties to the case; being the very department whose conduct is either in question (in respect of the host state) or might be in future (with regard to the home state).Hence it is probably in the self-interest of both authorities to agree that the disputed measure is not an expropriation. For as professor Ratner noted, having been defendants in alleged expropriatory claims by in therefore, and especially the most powerful ones, now have a strong interest in ensuring that NAFTA’s aim of cross-border trade and investment is not interpreted to impose obligations to compensate investors simply because bona fide regulations have a serious economic impact on the investor. TheyAltman, supra (n.2), especially chap. 5; Park & Tillinghast, supra (n.6); R. Green, Anti-Legalistic Approaches to Resolving Disputes between Governments: A Comparison of the International Tax and Trade Regime, 23 Yale J. Int’l. L. (1998) 79; A. Gildermeister, Arbitration of Tax Treaty Disputes: The 2008 Model for Income Tax Treaty, TDM (2007). Indeed, all the state parties to NAFTA including the U.S. have had to defend themselves against expropriatory tax claims or potential claims by foreign investors. As such it is in their collective self-interest to take a common joint approach on the issue that preserves each state’s fiscal sovereignty. This is examplified by the NAFTA Free Trade Commission’s binding interpretation of Article 1105 in 2001 following the Pope & Talbot award. See C. Brower, W(h)ither International Commercial Arbitration?, 24(2) Arb. Int’l. (2008) 181 at 189; C. Brower II, Why the Free
