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Tax disputes out of investment pacts
January, 15th 2016

The model bilateral investment treaty (BIT) cleared by the Union Cabinet last month makes it easier than what a draft version had proposed for foreign companies investing in India to seek judicial remedies in case of expropriation.

However, the final treaty (BIT) still keeps taxation out of its ambit, with the idea that foreign companies finding themselves in a tax row with the government will not be able to invoke the investment treaty their parent country has signed with India, as is the case at present.

The final model BIT, cleared by the Cabinet on December 16 and uploaded on the finance ministry website on Thursday, has removed two key contentious clauses from its draft version. The draft BIT had proposed to make it difficult for foreign companies to seek arbitration against Indian authorities through restrictions on dispute-resolution tribunals and their jurisdiction.

It had stated tribunals would not have jurisdiction to re-examine any legal issue settled by, or review judgments of, an Indian judicial authority. They also could not question India's determination of whether a measure was taken for the public purpose or in compliance with its law.

Tax disputes out of investment pacts The draft treaty had stated that India would not nationalise or expropriate any asset unless the law was followed, was for the public purpose, and fair compensation was paid. Public purpose is not defined in any treaty India has signed with other nations. It is kept ambiguous on purpose.

While that still holds true in the final model BIT, it states that dispute-resolution tribunals, including foreign tribunals, can question the public purpose and can re-examine a legal issue settled by Indian judicial bodies.

"The model BIT is certainly better than the draft BIT in that it is more balanced towards the rights of investors," said Prof Prabhash Ranjan of South Asian University.

"The only issue is that taxation is a big part of any legal dispute. Keeping taxation out will still limit legal options for the investor. Especially, if there is confiscatory taxation," Ranjan said and added that Indian companies investing abroad would also be affected if they faced tax disputes in any of their markets.

BIT is expected to replace the existing bilateral investment protection and promotion agreements (BIPPAs). It is expected to be signed with all the countries India has bilateral investment treaties with. India has signed BIPPAs with 72 nations. It has signed but not enforced BIPPAs with an additional 11 nations.

British telecom major Vodafone had invoked the India-Netherlands BIPPA, seeking international arbitration in its long-drawn Rs 20,000-crore tax dispute following the cancellation of conciliation talks. Similarly, Finnish mobile handset maker Nokia resorted to this for resolving the tax department's claim of liability, existing and anticipated, for seven years from 2006-07. Cairn Energy, too, recently demanded compensation under the ambit of the India-UK BIPPA, from India for the Rs 10,200-crore tax notice slapped on Cairn India.

Some other essential features of the model BIT include an enterprise-based definition of investment, non-discriminatory treatment, protection against expropriation, a refined Investor State Dispute Settlement (ISDS) provision requiring investors to exhaust local remedies before commencing international arbitration, and limiting the power of tribunals to awarding of monetary compensation.

Another related development is that the government issued an official memorandum along with the BIT that states the finance ministry's department of economic affairs will lead all negotiations with various countries not only on BITs but also on investment-related chapters in Comprehensive Economic Cooperation/Partnership Agreements and Free Trade Agreements (FTA). Ranjan said this would create some bureaucratic confusion. Giving the example of FTAs, he said, "It is better if one ministry handles all negotiations. FTAs are handled by the commerce ministry. You cannot have separate negotiations with the finance ministry on the chapters related to investment. This may create more complications."

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