A new era of international tax disputes and arbitration?


Financier Worldwide Magazine

December 2017 Issue

The growing focus on multinationals and their tax affairs by governments across the world is likely to result in increased tax disputes at a domestic level and, in many cases, arbitration at an international level. This introduces a new era in which we are likely to see parallel legal proceedings which may well be necessary in order for taxpayers to adequately protect their rights and pursue all remedies available to them.

A new dimension: tax disputes flowing from investments

In developing countries in particular, aggressive tax revenue collection is a growing risk for multinational investors. Previously, developing countries were committed to a policy of attracting foreign investment on favourable and flexible terms, creating a positive investment climate for multinationals and encouraging substantial capital inflows. However, more recently, the sentiment has shifted and developing countries have become ever more suspicious, in many instances without good reason, and more focused on claiming substantial and even inflated taxes from those investors. One explanation could be a perceived multi-billion dollar annual ‘tax gap’ – the difference between existing tax revenue and potential revenue – which has fuelled those tax authorities to become ever more aggressive.

On a practical level, this trend has created a new dimension. On the one hand, friction between the initial investment agreements which attracted those corporates to invest in the first place and which contain fiscal stabilisation clauses or other provisions safeguarding the tax base. And on the other, the domestic legislative regime which might provide for a different fiscal regime. This leaves multinationals in a situation where they have to pursue remedies under their investment agreements with the relevant government as well as those remedies that might be available under domestic law including appeals and reviews to the local specialist tax courts. The challenges of this new environment demand a careful analysis of the remedies available to foreign investors under international agreements as well as under domestic legislation, and the interplay between them.

Fiscal stabilisation

International investment agreements are an essential tool for foreign investors looking to protect their investments. However, the benefits of such agreements do not flow asymmetrically – countries compete against one another to attract foreign investment, resulting in increased tax competition. The stability offered by tax treaties or other investment agreements to protect investments encourages investor confidence and harnesses the potential for inbound investment. Multinationals, in particular, are less likely to invest conservatively if their investments are respected and protected and subject to a pre-agreed fiscal stabilisation regime.

Fiscal stabilisation clauses are among the key vehicles through which foreign investors seek to protect their investment. These clauses are a legitimate risk-mitigating contractual tool to protect investors from arbitrary amendments or modifications to the legal regime which could unfairly compromise the commercial viability and returns of an investment. Fiscal stabilisation clauses can take various forms. Among the most common are clauses which effectively ‘freeze’ the domestic law as it stood on the date of the contract (or some other date), thereby enabling the investor to take account of the domestic law in agreeing the terms of the investment. Another version of such clauses enables the parties to renegotiate the contract should any amendments to the domestic law detrimentally impact upon the investment. Yet another form of stabilisation clause only permits amendments to the contract (including domestic law that shifts the incentive structures under the contract) to be made upon the agreement of the parties.

While fiscal stabilisation clauses remain the method of choice for foreign investors seeking to preserve their investment, more general contractual provisions – such as the duty of good faith, the duty to provide fair and equitable treatment, the prohibition on expropriation or the duty to provide ‘most favoured nation’ treatment – may also be relied upon in tandem with such clauses.

Threats to fiscal stabilisation

Fiscal stabilisation clauses can potentially be undermined when governments or domestic tax authorities seek to disturb the equilibrium by enacting new legislation, making unilateral changes to existing legislation, or where they adopt new interpretations of existing legislation. Usually, where there is breach of the investment agreement, the remedy provided is for such dispute, where it cannot be resolved by negotiation in the first instance, to be resolved by arbitration. In most instances, this will take the dispute outside the local jurisdiction to an independent arbitration forum. Even if a final arbitral award is granted in favour of the investor, issues might arise with regard to enforcement against the government concerned.

However, that might not be the end of the matter or resolve all issues to finality. For this reason, remedies under domestic law should not be overlooked. In many instances, the relevant investment agreement may not be sufficiently broad to cover all tax disputes or it might require domestic remedies to be exhausted first. In these scenarios, foreign investors may well need to pursue available remedies under domestic law.

While this is likely to be a strategically complex issue, international arbitration and domestic litigation are not necessarily mutually exclusive. In fact, both proceedings could be pursued in parallel, so long as each is constructed in a way that does not impinge upon the jurisdiction of the other. A number of issues arise for consideration. These include how to adequately protect rights so that it could not be contended that arbitration jurisdiction has been waived, how to adequately pursue local remedies so that it could not be contended that tax assessments have become final and therefore capable of being executed, how to protect against execution action while remedies are being pursued and how to prevent loss of local remedies through time barring provisions.

What to do? Tips and traps

The starting point is usually the terms and language of the investment agreement. The investment agreement may positively require the investor to exhaust local remedies. In these circumstances, pursuing domestic proceedings is not only desirable, but also necessary, to make any claims under the agreement itself. In other instances, the investment agreement may be completely silent as to the pursuit or exhaustion of local remedies. In such cases, it may still be advisable to pursue domestic remedies, lest any claims be made that the arbitration proceeding is premature. Moreover, states are likely to claim that disputes involving purely tax-based issues are not arbitral in any event, making the pursuit of domestic remedies all the more significant. There are many hybrid positions between these extremes – for instance, the agreement may require the pursuit (but not the exhaustion) of local remedies, or may permit the state to require the exhaustion of domestic remedies if it so chooses.

In addition, investors should carefully consider whether the treaty or agreement includes a specific provision for the election of remedies, or a ‘fork in the road’ clause. This is different from requirements for exhaustion of local remedies, for the choice of one remedy eliminates another. In these situations, the pursuit of domestic remedies forecloses the possibility of pursuing international arbitration and vice-versa. Sustaining parallel proceedings in such situations is likely to be more difficult.

In parallel, investors should be aware of any objection, appeal or review remedies and proceedings under local law and specifically any time limitations or time barring provisions. These could be fatal in cases where a local remedy is not pursued within the applicable time frame.

Parallel proceedings: strategic considerations

Where the terms of the investment agreement presumptively enable the pursuit of parallel international arbitration and domestic proceedings, a number of strategic considerations must be considered when instituting parallel proceedings.

The most significant risk that an investor must mitigate against is the possibility that pursuing domestic remedies constitutes a waiver of the jurisdiction of the arbitral tribunal. A number of factors will help determine what constitutes a waiver in such circumstances. This could include matters such as whether the issue could be raised before the arbitral tribunal, the extent of overlap between the domestic remedies and the arbitral remedy, and the character of the local decision-making body.

In these circumstances, the risks of waiver are likely to be heightened if the domestic proceedings invoke the stabilisation clause as a ground for challenging the decision of the government or tax authority. Therefore, if independent grounds to challenge the decision are available in domestic law, it may be advisable to rely on those grounds in the domestic proceeding, while referencing the stabilisation clause (and other relevant provisions in the investment agreement) in the arbitration.

It would also be prudent to avoid overlaps in the remedies sought in domestic proceedings and in the arbitration. For example, whereas the investor may seek to set aside the tax decision in domestic law as being wrong in law, it may make a case for monetary compensation in the arbitration. Another simple but effective strategy would be to include language expressly reserving the investor’s rights in all substantive pleadings in the domestic proceedings, so as to maintain the separation between the international and domestic proceedings.

Ultimately, there remains a residual risk that domestic courts will issue an anti-arbitration injunction restraining the continuation of arbitral proceedings. On the flipside, there is a risk that the arbitral tribunal will apply the doctrine of lis pendens and await the outcome of the domestic proceedings. Nevertheless, crafting these proceedings strategically to minimise the extent of overlap is likely to mitigate against these risks, and offer some comfort to foreign investors.


Attempts at increasing tax revenue collection in the face of investment agreements have introduced a new era in tax disputes between foreign investors and host states. Investors should consider the possibility of pursuing carefully calibrated parallel proceedings, with a close eye on the terms of the investment agreement in question and a good understanding of available remedies under domestic law.


Liesl Fichardt is a partner and Chintan Chandrachud is an associate at Quinn Emanuel Urquhart & Sullivan LLP. Ms Fichardt can be contacted on +44 (0)20 7653 2000 or by email: Mr Chandrachud can be contacted on +44 (0)20 7653 2000 or by email:

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