New bilateral treaties to keep tax disputes out of arbitration

NEW DELHI:  India will try and keep its taxation laws out of the ambit of all Bilateral Investment Treaties (BITs) and comprehensive economic pacts that it negotiates. According to top finance ministry officials, an in-principle decision was taken sometime back to phase out all “unequal bilateral investment treaties” which could see companies like Vodafone, Cairn, etc., seeking arbitration against Indian tax demands.

Last week, Vodafone won an international arbitration award involving a retrospective tax dispute. “Quite some time back we had decided that in all future BITs and comprehensive economic agreements which are free trade pacts along with a bilateral investment treaty, we will insist that our tax laws cannot be challenged before arbitration tribunals … we are sticking to that,” officials said.

However, many of India’s investment and trading partners, including the European Union are not willing to buy the clause. In the model treaty designed by the finance ministry, a clause 2.4 has been added which says, “This Treaty shall not apply to: (i) any measure by a local government; (ii) any law or measure regarding taxation, including measures taken to enforce taxation obligations.” The model treaty goes on to clarify that “where the State in which investment is made decides that conduct alleged to be a breach of its obligations under this Treaty is a subject matter of taxation, such decision of that State, whether before or after the commencement of arbitral proceedings, shall not be open to any arbitration tribunal to review such decision.”