CONFIDENTIAL DAFFE/MAI(97) 1/REV2

VIII. TAXATION

EXPROPRIATION

l. EG2 agreed to carve in taxes for expropriation and agreed on the text set out in paragraph 2 of

the Draft Article on Taxation.

2. The Group reconfirmed that taxes as such are not expropriatory. It developed a clarifying text

providing elements to be considered when determining whether a specific measure should be considered

expropriatory. The Group agreed that the text should be included in the MAI as an Interpretative Note

having full legal force.

3. Most delegations supported inclusion of the following additional statement in the Interpretative

Note: "MAI Parties understand that no taxation measures of the Parties effective at the time of signature

of the Agreement could be considered as expropriatory or having the equivalent effect of expropriation."

Some delegations were not in a position to associate themselves with such a statement.

4. The Group agreed that the Tax Authorities of only two countries should be involved in the

procedure described in paragraph 2 and both should be MAI Parties. One of the Parties would certainly be

the host country to the investment, but the other might need to be defined taking into account the extent to

which indirect investments will be covered by the MAI.

TRANSPARENCY

1. EG2 agreed to carve in transparency.

2. The Group also agreed that the general Article on transparency in the consolidated text

(paragraphs 2.1, 2.2 and 2.3) should apply to taxes. However the Group considers the inclusion of the term

"policies or practices" in paragraph 2.3 of the general Article on Transparency to be necessary for tax

purposes, and additional text needs to be included in the Taxation Article to protect the confidentiality of

certain types of information specific to tax matters, including information shared between the Authorities

of different countries on a confidential basis. The Group developed an agreed text for this purpose

(paragraph 3 of the Draft Article on Taxation).

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NATIONAL TREATMENT

1. The vast majority of EG2 delegations was opposed to any carve-in for taxes with respect to

National Treatment. These delegations emphasized the need to see tax measures affecting National

Treatment in the context of international treaty obligations and tax policy as a whole, and the need of

governments to preserve the freedom to introduce new measures especially in the light of economic and

technological developments. These delegations also emphasised the extent to which tax treaties, including

the protection provided by non-discrimination obligations. provide comprehensive protection to investors.

Moreover these delegations emphasised that double taxation agreements cover most OECD countries and

that the mutual agreement procedures under tax treaties have a long and successful history of resolving tax

disputes within a reasonable time period. Subjecting taxes to the national treatment obligation would

undermine both tax agreements (through forum shopping) and the MAI. This problem could be aggravated

by the accession to the MAI of Non-OECD Members, particularly certain countries with which OECD

Members would not to be willing to conclude tax treaties. Problems of legal interpretation were also

mentioned as creating uncertainty and exposing Tax Authorities to unjustified dispute settlement claims.

These delegations shared the concern that any carve-in for taxes with respect to National Treatment would

not allow the effective operation of its anti-avoidance measures and tax treaty network. Based on these

arguments and taking into consideration points wised in paragraph 8, the consensus of the Group was to

present a single text to the Negotiating Group with a footnote.

a. Five EG2 delegations (Germany, Italy, Belgium, Switzerland and the European Commission)

favoured a "carve-in" for taxes with respect to National Treatment subject to safeguards specific to

taxation. The Swiss with the support of the German delegation provided a text specifying what this

carve-in provision might entail. The five delegations considered that the MAI, as a high standards

investment agreement, should not carve-out taxation measures from National Treatment. These delegations

agree that the tax treaty network, though extensive, does not cover all likely signatories to the MAI (nor

even all OECD countries). In their view some treaties do not contain a sufficiently comprehensive

non-discrimination provision. They also felt that incorporating the National Treatment obligation in the

body of the text would strengthen the accession criteria from a tax policy viewpoint. These delegations

also argued that subjecting tax disputes arising in connection with National Treatment to binding disputes

settlement procedures under the MAI would encourage tax authorities to resolve disputes that would not

otherwise be resolved (within a reasonable period of time) in accordance with the mutual agreement

procedures established under double taxation agreements. These delegations felt that the tax policy

concerns that had been identified in paragraph 7 were adequately addressed by the Swiss text. The Group

did not discuss this text in detail, however, as the vast majority did not feel that such a carve-in was

appropriate.

MOST FAVOURED NATION TREATMENT

1. EG2 agreed that neither direct taxes proper nor social security contributions/taxes should be

carved into the MFN provision of the MAI.

3. EG2 also agreed that as indirect taxes do not usually discriminate against foreign investors and

are. in any case. adequately covered both by non-discrimination provisions in bilateral tax treaties and

similar provisions in other multilateral agreements, such taxes should not be carved-in into the MEN

provision either.

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PERFORMANCE REQUIREMENTS

Many questions were raised in EG2 as to the potential impact of the discipline on Performance

Requirements on standard features of the tax systems of Member countries. Based on the difficulties that

the current Performance Requirements text would pose for Member countries' tax systems, the Group, at

this stage, does not recommend covering taxes.

TRANSFERS

EG2 agreed that taxation measures should not be subject to the Article on transfers.

INVESTMENT INCENTIVES

1. In response to the request from EG3, EG2 had an extensive discussion on the desirability and

feasibility of including tax incentives in the national treatment and MFN articles. This discussion took

place in the light of the emerging consensus in EG3 that investment incentives should be subject to both

national treatment and MFN obligations, without necessarily including explicit text to this effect.

2. On the issue of limiting or restricting the scope of tax incentives, the Group noted the distorting

effect of positive discrimination in favor of foreign investors, but also the ongoing work of this issue in

other fore. Discussions showed that defining tax incentives generally, and undesirable ones particularly,

would be extremely difficult. Also, the vast majority of delegates felt that the approach to carving out

taxation measures from national treatment and MFN obligations should include taxation incentives as such

incentives are clearly taxation measures. There should therefore be no carve-in of taxation measures to

incentives provisions. The vast majority of the Group did not see any reason for subjecting tax incentives

to any disciplines different from those applying to taxation measures in general.

3. However, some delegations believed that including tax incentives would add to the value of the

proposed disciplines of the incentives Article, and would avoid a shift from non-tax incentives (covered by

the investment incentives Article) into tax incentives (not covered). These delegations therefore proposed a

carve-in of tax incentives for purposes of the investment incentives Article. One delegation felt that it

would, in principle, be possible to define specific tax incentives, a view supported by another delegation.

The vast majority of delegations rejected this view, and examples were given to illustrate the difficulty.

4. Equally, it might be observed that work has only recently begun in the WTO on a subsidies code

under the GATS and in the CFA special sessions on harmful tax competition. So there must be concern

that work in the MAI on further disciplines on incentives risks running into conflict with work elsewhere

if attempts are made to plan out a programme of future work at this stage; it may be possible to develop a

programme later, but it would appear sensible to consider this only after a full appraisal has been carried

out into exactly how any MAI disciplines are intended to fit with those being developed elsewhere (and

the relative time-scales involved).

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DISPUTE SETTLEMENT

l. EG2 considered that dispute settlement would not only arise for taxation to the extent that

taxation matters were carved back into the MAI, but also for the purpose of determining what constitutes a

taxation measure for the purpose of the carve-out.

2. To the extent that tax matters are covered under the MAI disciplines other than transparency and

expropriation, the Group agreed that primacy should be given to mutual agreement procedures under tax

treaties. Tax authorities should have the necessary flexibility to settle tax related disputes and tax expertise

should be required at all stages of MAI dispute settlement including consultations and arbitration

procedures although this might not need to be explicit in the case of state-to-state disputes.

3. The European Commission pointed out that unrestricted access to the Investor to State dispute

settlement procedures was a core feature of the MAI. While recognising that the appropriate input of tax

experts and competent tax authorities into the procedures was a justified concern, it considered that some

features of the Draft Taxation Article contain major changes to the general rules on Investor to State

dispute settlement. This particularly concerns the possibility to suspend an Investor to State procedure and

turn it into a State to State procedure under certain conditions. It would also arise if the proposal, currently

set-out in a footnote, were adopted to bind a panel to the findings of a review board of tax experts.

4. Some delegations noted that a procedural modification to Investor-State dispute settlement in the

case of expropriation claims involving taxation measures is a standard feature of their country's

investment treaties.

5. Taxation measures are generally not subject to dispute settlement. The fact that the proposed

paragraph in the Taxation Article on dispute settlement is a significant departure from this practice

underlines the insertion of the footnote by Australia.

RELATIONSHIP BETWEEN THE MAI AND OTHER INTERNATIONAL AGREEMENTS

1. EG2 did not see any benefit from carving taxation measures into the "non-derogation" clause

[DAFFE/MAI/EG3(96)7].

2. The Group noted that, however remote, the possibility existed that an investor of a MAI

Contracting Party might seek to obtain access to international arbitration rather than the arbitration

procedures provided in the Taxation Article by relying on its bilateral investment agreements in

combination with the MFN provision in the MAI. To avoid this possibility, the Group agreed to an

interpretative note to the Draft Article on Taxation.

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ACCESSION

1. EG2 expressed concern about accession to the MAI of "tax havens", whether as Contracting

Parties or as dependent territories of Contracting Parties. It was generally felt that tax havens, which are

usually characterized by low (or zero) tax rates and/or extremely narrow tax bases as well as bank secrecy

laws restricting exchange of tax information, provide opportunities for tax evasion and therefore pose a

serious threat to countries' tax revenues.

2. The Group believed that the above concern would not require specific accession criteria if

taxation were subject to neither national treatment nor MFN obligations under the MAI.

3. The Group considered nevertheless that tax policy considerations should be taken into account in

accession to the MAI. It therefore considered that tax authorities should be involved in the process by

which accession candidates are judged.

DEFINITIONS

1. A large majority of EG2 delegations were in favour of defining taxes in order to provide

certainty for investors by clarifying the dividing line between those measures that are carved out or back

into the MAI.

2. The main outstanding issue is whether or not the definition of "taxes" should include social

security measures or contributions, which are not normally considered taxes in some countries. This matter

remains to be resolved.

3. The reference to customs duties is a placeholder pending clarification of the relationship between

the MAI and international trade in goods and services.

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