Arbitration and the Fisc: NAFTA's "Tax Veto"

"Taxes," said Franklin Roosevelt, "are the dues that we pay for the privileges of membership in an organized society."1Harsher tongues describe tax as a form of property seizure. Somewhere between these competing characterizations of revenue raising-club dues and forced takings-lies a clue to why the North American Free Trade Agreement ("NAFTA") reserves special treatment for investment disputes implicating fiscal matters. NAFTA gives foreign investors a right to settle investment disputes by arbitration, a process more politically and procedurally neutral than either host state courts or foreign gunboats.4 Without the option to arbitrate, the specter of unfair expropriation might chill cross-border economic cooperation and capital flow. The dispute resolution process does not apply to all investment controversies, however. If an expropriation claim implicates "taxation measures," the competent fiscal authorities of host and investor countries may block arbitration! Thus this "tax veto" supplies an initial screening process to determine when taxation constitutes a form of what has been called "creeping expropriation."6 This power to block arbitration serves as a springboard to consider the politically sensitive interaction of revenue raising and national sovereignty. II. INVESTMENT ARBITRATION UNDER NAFTA A. OVERVIEW No supranational court possesses mandatory jurisdiction to decide the appropriate indemnity for nationalized assets. Litigation in the expropriating country, along with possible assertions of diplomatic protection, remains the default mechanism for adjudicating investment disputes One consequence is that without explicit agreement to arbitrate (sometimes neglected or refused), the real or imagined bias of local judges can create a commercial anxiety that often inhibits wealth-creating international transactions! In response, NAFTA gives foreign investors an automatic right to elect arbitration of claims for improper nationalization, pursuant to rules drafted by either the United Nations or the World Bank. NAFTA thus endorses the long tradition of arbitral dispute resolution underpinning much modern international business law." B. COMPENSATION STANDARDS The compensation criteria adopted by NAFTA Chapter 11 echo the "prompt, adequate and effective" standards traditionally applied by the United States." As a preliminary matter, Chapter 11 permits expropriation only if justified by a public purpose and applied on a non-discriminatory basis.' In addition, compensation must be "equivalent to the fair market value" of the investment at the date of expropriation, must be "paid without delay and be fully realizable," and must bear interest at a commercially reasonable rate until date of actual payment." If paid other than in a hard currency," compensation must be in an amount which, at market rates of exchange, would convert into a sum no less than the hard currency equivalent of market value on the payment date. III. ARBITRATION A. OVERVIEW While Section A of Chapter 11 sets forth the substantive norms underlying cross-border investment under NAFTA, Section B goes on to provide arbitration as a remedy for a host state's breach of its duties. Claims may be made either directly by an investor or on behalf of an enterprise owned (directly or indirectly) by the investor.ls NAFTA permits an aggrieved investor to choose either (i) arbitration supervised by the World Bank's International Centre for the Settlement of Investment Disputes ("ICSID") or (ii) arbitration conducted under rules adopted by the United Nations Commission on International Trade Law ("UNCITRAL").16 Unless otherwise agreed, the place of arbitration must be in the territory of a country that is a party to both NAFTA and the New York Arbitration Convention.17 Established under the 1965 Washington Convention ("Convention"), ICSID normally has jurisdiction over investment disputes between a state that is a party to the Convention and an investor from another Convention state. …