Novel treaty-based approaches to resolving International Investment and Tax Disputes in the Asia-Pacific region.

• Author: Burch, Micah

Abstract

Trade and investment treaties have proliferated throughout the Asia-Pacific region. Their dispute resolution mechanisms are important in entrenching market access commitments, especially when providing for direct claims by firms against Stares. However, the 'Global Financial Crisis' has also heightened calls to balance liberalisation with harmonised regulatory safeguards. The way investment treaties sometimes deal with certain claims over taxes imposed by host States, limiting the scope for investors to proceed with direct arbitration claims, suggests one innovative mechanism for resolving claims about other types of investment disputes. A second possibility is to redesign investment treaties covering such claims like some contemporary double tax treaties, which have also burgeoned through the Asia-Pacific region based on the Organisation for Economic Co-operation and Development ('OECD') Model Tax Convenlion. Just as a taxpayer can he given rights under tax treaties to force treaty partner tax authorities to initiate an inter-state arbitration, an investor could be entitled to trigger an inter-state arbitration of other sensitive issues under an investment treaty. Both dispute resolution mechanisms address state sovereignty and public interest access, yet preserve a role for private interests. They represent only some of various possibilities for improving the treaty-based investor--state arbitration system, instead of abandoning it for Australia's future treaties as proposed by the Gillard Government's April 2011 'Trade Policy Statement'.

Introduction

Particularly through the Asia-Pacific Economic Cooperation ('APEC') forum, much effort has been expended over the last two decades to build up regulatory harmonisation and cooperation in order to liberalise and facilitate cross-border trade and investment in the Asia-Pacific region. The creation of AMC in 1989 helped to galvanise an expansion and formalisation of related initiatives within the Association of Southeast Asian Nations ('ASEAN'). That process within ASEAN has accelerated since 2000, when negotiations stalled for a new round of multilateral liberalisation measures under the World Trade Organization ('WTO'), and as its member states, along wall other Asian nations, became increasingly Concerned' about the economic rise of China. (1)

South-East Asian nations have begun actively concluding bilateral free trade agreements ('FTAs'), such as the Japan-Singapore FTA (signed in 2001) and die Australia--Singapore FTA (2003), as well as regional 'ASKAN+1' FTAs first with China (framework agreement signed in 2002) and now including FTAs between ASNAN and Korea, Japan, India and Australia--New Zealand. (2) Although no FTAs have been concluded yet among China, Korea and Japan, 'transgovernmentalism' among these closely linked economic powerhouses has expanded dramatically--particularly since the Asian Financial Crisis of 1997--and studies are now well underway for 'ASEAN+3' or 'ASEAN+6' FTAs A paraillel development is the Trans-Pacific Partnership Agreement ('TPPA') agreed in 2005 among New Zealand, Singapore, Brunei and Chile, negotiations are now underway to add chapters on 'Investment' and 'Services', and to bring in Australia., the United Stares ('US') Malaysia, Vietnam and possibly Japan--creating the first Asia-Pacific regional FTA to include the US These and other Asia-Pacific States have also greatly expanded the numbers and scope of application of intra-regional bilateral investment treaties ('BITS'), hitherto mainly concluded with capital exporting countries from the West. (4)

Various concerns have been raised about this expansion of bilateral and regional trade agreements ('BRTAs').The TPPA, in particular, has been criticised as entrenching assumptions about free markets and 'light-handed regulation' that have proven risky and inequitable in the context of the 'Global Financial Crisis' (GFC') of 2008 and its aftermath. (5) More moderate commentators point to the experience of the European Union ('EU') as provding some insights into how to balance market liberalisation with regulatory safeguards to prevent an unsustainable 'race to the bottom', while acknowledging that significant differences remain among economic, sociopolitical and legal systems Asia. (6)

A third perspective, epitomised by the 'Gillard Government Trade Policy Statement' released in April 2011 ('TPS'), (7) instead sees BRTAs as potentially inward-looking and protectionist, dangerously distracting policy-makers' attention from initiatives such as the WTO's Doha Development Round. Australia's 'TPS urges instead a reemphasis on multilateralist approaches, and even unilateral liberalisation, to promote economic prosperity. (8) Under this approach, unilateral liberalisation can be supported by capacity-building measures to support voluntary commitments made by regional neighbours, rather like the model of 'open regionalism' promoted by APEC. (9)

These debates have mainly been driven by senior politicians, officials and economists, and, more recently, by political scientists arid specialists in regional integration studies. However, legal experts have an important role to play. (10) Adopting unilateral market access measures--including 'behind-the-border' measures such as enhanced transparency in regulatory decision-making and enforcement--calls especially for comparative law research into both the 'law in books' (formal rules) and the law in action' (implementation and impact of rules in practice), to determine optimal means of implementing reforms. Comparative law studies are also important when market liberalisation commitments entrenched through BRTAs are combined with novel features such as 'mutual recognition' principles and, consequently, perhaps joint standard-setting between national regulators. (11) International law is crucial to interpret and enforce commitments undertaken through treaties. More broadly, legal discourse--both in designing cross-border frameworks for liberalisation and/or regulatory safeguards, and implementing procedures for resolving disputes that arise when those frameworks are not adhered to--can help entrench positive 'habits of cooperation' that draw also on economic and political factors. (12)

In the multilateral WTO system covering mainly trade in goods and services (including investments in services sectors where the host State has bound itself to allow foreign investment via a 'commercial presence'), disputes that commitments have not been honoued are resolved through an inter-state process under the Dispute Settlement Understanding. (13) This approach is also generally found in BRTAs, as well as BITs, although with in permanent appellate body checking for substantive error of law by the tribunal initially appointed under the relevant treaty. By contrast, the EU; has developed a system allowing affected firms and citizens (and indeed the Furopean Cnntnission, the main executive body) to bring claims directly before the European Court of Justice, alleging violation of rights to Free movement of goods, services, capital and people. This mechanism has been viewed as an important mechanism to entrench commitments and promote deeper economic integratio. The lack of a close equivalent Within the Asia-Pacific region is paralleled by arguably ambiguous evidence as to whether BRTAs have contributed much to 'behind-the-borders' improvements in market access. (14)

Investment treaty arbitration: Asia versus Australia?

Potentially significant, therefore, is the emerging importance or investor-state arbitration ('ISA') provisions in investment treaties concluded by Asia-Pacific States as well as .ASEAN as a whole. (15) Growing numbers and proportions of BITs entrench substantive protections for foreign investments, such as protections against 'expropriation' or violations of due process or other 'fair and equitable treatment' (FET) standards, by allowing, foreign investors to claim directly against host States in international arbitral proceedings. Investment chapters in BRTAs, restating similar protections, but also recording market liberalisation commitments, also generally add this dispute resolution ('DR') mcechanism. Roth types of treaties also still include an inter-state DR mechanism, similar to that found in the WTO and for trade disputes under FTAs, but a foreign investor will typically not invoke that because it further 'politicises' the dispute. The affected firm must persuade its home State to espouse the claim and commence inter-stale proceedings, which the State may be reluctant to do, because it has other diplomatic objectives or interests in its current dealings with the host State.

ISA Claims and arbitral awards have increased dramatically over the last decade, in particular, leading some to proclaim the emergence of a 'global administrative Law. (16) Others contend that this overstates the derivation, coherence and impact of the principles developed .and applied by arbitrators deciding investment treaty claims. (17) There is also some statistical evidence that ISA protections do not significantly affect 'good governance' generally within the States that offer such commitments, (18) but data is limited and determining causation is difficult. Another potential problem in determining the effect of ISA provisions is that the proportion of Asian host States in actual proceedings appears quite low compared to the extent of treaty protections nowadays, as well as inbound foreign direct investment ('FDI'). (19) Nonetheless, the numbers and visibility of claims involving Asian parties are growing, thus contributing to the likelihood of investment treaty commitments generating lasting 'behind-the-border' improvements in the regulatory environment for investors.

This regional development, however, has recently been threatened by Australia's TPS, which blew cold on ISA provisions in future treaties--such as the TPPA. A literal...