International Investment Agreement
Encyclopedia
An International Investment Agreement (IIA) is a treaty
between countries that addresses issues relevant to cross-border investments
, usually for the purpose of protection, promotion and liberalization of such investments. Most IIAs cover foreign direct investment
(FDI) and portfolio investment
, but some exclude the latter. Countries concluding IIAs commit themselves to adhere to specific standards on the treatment of foreign investments within their territory. IIAs further define procedures for the resolution of disputes should these commitments not be met. The most common types of IIAs are Bilateral Investment Treaties
(BITs) and Preferential Trade and Investment Agreements (PTIAs). International Taxation Agreements and Double Taxation Treaties (DTTs) are also considered as IIAs, as taxation commonly has an important impact on foreign investment.
Bilateral investment treaties deal primarily with the admission, treatment and protection of foreign investment. They usually cover investments by enterprises or individuals of one country in the territory of its treaty partner. Preferential Trade and Investment Agreements are treaties among countries on cooperation in economic and trade areas. Usually they cover a broader set of issues and are concluded at bilateral or regional levels. In order to classify as IIAs, PTIAs must include, among other content, specific provisions on foreign investment. International taxation agreements deal primarily with the issue of double taxation
in international financial activities (e.g., regulating taxes on income, assets or financial transactions). They are commonly concluded bilaterally, though some agreements also involve a larger number of countries.
when they invest or set up a business in other countries party to the agreement. The reduction of the investment risk flowing from an IIA is meant to encourage companies and individuals to invest in the country that concluded the IIA. Allowing foreign investors to settle disputes with the host country through international arbitration
, rather than only the host country’s domestic courts, is an important aspect in this context.
Typical provisions found in BITs and PTIAs are clauses on the standards of protection and treatment of foreign investments, usually addressing issues such as fair and equitable treatment, full protection and security, national treatment
, and most-favored nation treatment. Provisions on compensation for losses incurred by foreign investors as a result of expropriation
or due to war and strife usually also form a core part of such agreements. Most IIAs additionally regulate the cross-border transfer of funds in connection with foreign investments.
Contrary to investment protection, provisions on investment promotion are rarely formally included in IIAs, and if so such provisions usually remain non-binding. Nevertheless, the assumption is that the enhanced protection formally offered to foreign investors through an IIA will encourage and promote cross-border investments. The benefits that increased foreign investment can bring about are important for developing countries that aim at using foreign investment and IIAs as tools to enhance their economic development
.
BITs and some PTIAs also include a provision on investor-State dispute settlement. Usually this gives investors the right to submit a case to an international arbitral tribunal
when a dispute with the host country arises. Common venues through which arbitration is sought are the International Centre for Settlement of Investment Disputes
(ICSID), the United Nations Commission on International Trade Law
(UNCITRAL) and the International Chamber of Commerce
(ICC).
International taxation agreements deal primarily with the elimination of double taxation, but may in parallel address related issues such as the prevention of tax evasion.
To a large extent, the international legal aspects of the relationship between countries and foreign investors are addressed bilaterally between two countries. The conclusion of BITs has evolved from the second half of the 20th century onwards, and today these agreements constitute a key component of the contemporary international law on foreign investment. The United Nations Conference on Trade and Development
(UNCTAD) defines BITs as "agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country." While the basic content of BITs has largely remained the same over the years, focusing on investment protection as the core issue, matters reflecting public policy
concerns (e.g. health, safety, essential security or environmental protection) have in recent years more frequently been incorporated into BITs.
A typical BIT starts with a preamble
that outlines the general intention of the agreement and provisions on its scope of application. This is followed by a definition of key terms, clarifying amongst others the meanings of "investment" and "investor". BITs then address issues related to the admission and establishment of foreign investments, including standards of treatment enjoyed by foreign investors (minimum standard of treatment, fair and equitable treatment, full protection and security, national treatment and most-favored nation treatment). The free transfer of funds across national borders in connection with a foreign investment is usually also regulated in BITs. Moreover, BITs deal with the issue of expropriation or damage to an investment, determining that – and in what manner - compensation be paid to the investor in such a situation. They also specify the degree of protection and compensation that investors should expect in situations of war or civil unrest. Another core element of BITs relates to the settlement of disputes between an investor and the country in which the investment took place. Such provisions usually mention the forums to which investors can resort for establishing international arbitral tribunals (e.g. ICSID, UNCITRAL or ICC) and how this relates to proceedings in host countries' domestic courts. BITs also typically include a clause on State-State dispute settlement. Finally, BITs usually refer to the time frame of the treaty, clarifying how the agreement is extended and terminated, and specifying to what extent investments conducted prior to conclusion and ratification
of the treaty are covered.
and the transfer of factors of production
across borders. They can be economic integration
agreements, free trade agreements (FTAs), economic partnership agreement
s (EPAs) or similar types of agreements that cover, among many other things, provisions dealing with foreign investment. In PTIAs, the section dealing with foreign investment forms only a small part of the treaty, usually encompassing one or two chapters. Other issues dealt with in PTIAs are trade in goods and services, tariffs and non-tariff barriers, customs
procedures, specific provisions pertaining to selected sectors, competition, intellectual property
, temporary entry of people, and many more. PTIAs pursue the liberalization of trade and investment in the context of this broader focus. Frequently, the structure and appearance of the respective chapter on foreign investments is similar to a BIT.
There exist many examples of PTIAs. A notable one is the North American Free Trade Agreement
(NAFTA). While the NAFTA agreement deals with a very broad set of issues, most importantly cross-border trade between Canada
, Mexico
and the United States
, chapter 11 of this agreement covers detailed provisions on foreign investment similar to those found in BITs. Other examples of PTIAs concluded bilaterally can be found in the EPA between Japan
and Singapore
, the FTA between the Republic of Korea and Chile
, and the FTA between the United States and Australia
.
, Tax treaty
The main purpose of international taxation agreements is to regulate how taxes imposed on the global income of multinational enterprises are distributed among countries. In most cases, this is done through the elimination of double taxation. The core of the problem lies in the disagreements among countries on who has jurisdiction
over the taxable income of multinational corporation
s. Most commonly, such conflicts are addressed through bilateral agreements that deal solely with taxation on income and sometimes also capital. Nevertheless, a few multilateral agreements on taxation as well as bilateral agreements that address taxation together with other issues have also been concluded in the past.
In contemporary treaty practice, avoidance of double taxation is achieved by concurrently applying two separate approaches. The first approach is the elimination of definition mismatches for terms such as "residence" or "income" that could otherwise be a cause of double taxation. The second approach constitutes the relief from double taxation through one of three methods. The credit method allows foreign tax to be credited against the tax paid in the residence country. According to the exemption method, foreign income and resulting taxation is simply disregarded by the residence country. The deduction method taxes income net of foreign tax, but it is rarely applied.
countries tended to contend that foreign investors do not need to be treated differently from national firms. In 1959, the first BITs were concluded, and during the following decade, much of the content that forms the basis of a majority of the BITs currently in force were developed and refined. In 1965, the Convention for the Settlement of Investment Disputes Between States and Nationals of Other States was opened to countries for signature. The rationale was to establish ICSID as an institution that facilitates the arbitration of investor-State disputes.
The second era – from 1989 to today – is characterized by a generally more welcoming sentiment towards foreign investment, and a substantial increase in the number of BITs concluded. Amongst others, this growth in BITs was due to the opening up of many developing economies to foreign investment, which hoped that the conclusion of BITs would make them a more attractive destination for foreign companies. The mid-1990s also saw the creation of three multilateral agreements that touched upon investment issues as part of the Uruguay Round
of trade negotiations and the creation of the World Trade Organization
(WTO). These were the General Agreement on Trade in Services
(GATS), the Agreement on Trade-Related Investment Measures (TRIMS), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In addition, this era saw the growth of PTIAs, such as regional, interregional or plurilateral agreements, as exemplified in the conclusion of the NAFTA in 1992 and the establishment of the ASEAN Framework Agreement on the ASEAN Investment Area in 1998. These agreements typically also began to pursue liberalization of investment more intensively.
Statistics show the rapid expansion of IIAs during the last two decades. By 2007 year-end, the entire number of IIAs had already surpassed 5,500, and increasingly involved the conclusion of PTIAs with a focus beyond investment issues. As the types and contents of IIAs are becoming increasingly diverse and as almost all countries participate in the conclusion of new IIAs, the global IIA system has become extremely complex and hard to see through. Moreover, the number of IIA-based investor-State dispute settlement cases has also been on the rise in recent years. By the end of the year 2008, the total number of known cases reached 317.
Another new development in the global system of IIAs is the increased conclusion of such agreements among developing countries. In the past, industrialized countries usually concluded IIAs to protect their firms when they undertake overseas investments, while developing countries tended to sign IIAs in order to encourage and promote inflows of FDI from industrialized countries. The current trend towards increased conclusions of IIAs among developing countries reflects the economic changes underlying international investment relations. Developing countries and emerging economies are increasingly not only destinations, but also significant source countries of FDI flows. In line with their emerging role as outward investors, and their improved economic competitiveness, developing countries are increasingly pursuing the dual interests of encouraging FDI inflows but also seeking to protect the investments of their companies abroad.
Another key trend relates to the myriad of different agreements. As a result, the evolving international system of IIAs has been equated with the metaphor of a "spaghetti bowl". According to UNCTAD, the system is universal, as practically every country has signed at least one IIA. At the same time, it can be considered as atomized due to the large amount of individual agreements currently in existence. The system is multi-layered, with agreements being signed at all levels (bilateral, sectoral, regional etc.). It is also multi-faceted, as an increasing number of IIAs include provisions on issues traditionally considered only distantly related to investment, such as trade, intellectual property, labor rights and environmental protection. The system is also dynamic, as its key characteristics are currently rapidly evolving. For example, more recent IIAs tend to include provisions addressing issues such as public health, safety, national security
or the environment more frequently, with a view to better reflect public policy concerns. Finally, beyond IIAs, there is other international law relevant for countries' domestic investment frameworks, including customary international law, United Nations instruments and the WTO agreement (e.g., TRIMS).
In sum, recent developments have made the system increasingly complex and diverse. Moreover, even to the extent that the principal components of IIAs are similar across most of the agreements, substantial divergences can be found in the details of these provisions. All of this makes managing the interaction among IIAs increasingly challenging for countries, particularly those in the developing world, and also complicates the negotiation of new agreements.
In the past, there have been several initiatives for the establishment of a more multilateral approach to international investment rulemaking. These attempts include the Havana Charter
of 1948, the United Nations Draft Code of Conduct on Transnational Corporations in the 1980s, and the Multilateral Agreement on Investment
(MAI) of the Organisation for Economic Cooperation and Development (OECD) in the 1990s. None of these initiatives reached successful conclusion, due to disagreements among countries and, in case of the MAI, also in light of strong opposition by civil society
groups. Further attempts of advancing the process towards establishment of a multilateral agreement have since been made within the WTO, but also without success. Concerns have been raised regarding the specific objectives that such a multilateral agreement is meant to accomplish, who would benefit in what way from it, and what impact such a multilateral agreement would have on countries' broader public policies, including those related to environmental, social and other issues. Particularly developing countries may require "policy space" to develop their regulatory frameworks, such as in the area of economic or financial policies, and one major concern was that a multilateral agreement on investment would diminish such policy space. As a result, current international investment rulemaking remains short of having a unified system based on a multilateral agreement. In this respect, investment differs for example from trade and finance, as the WTO fulfills the purpose of creating a more unified global system for trade and the International Monetary Fund
(IMF) plays a similar role with respect to the international financial system.
. Accordingly, developing country governments seek to establish an adequate framework to encourage such inflows, amongst others through the conclusion of IIAs.
However, despite this potential to generate pro-development benefits, the evolving complexity of the IIA system may also create challenges. Amongst others, the complexity of today's IIA network makes it difficult for countries to maintain policy coherence. Provisions agreed upon in one IIA may be inconsistent with those included in a different IIA. For developing countries with lower capacity to participate in the global IIA system, this complexity of the IIA framework is particularly hard to manage. Additional challenges arise from the need to ensure consistency between a country's national and international investment laws, and from the objective to design investment policies that best support a county's specific development goals.
Furthermore, even if governments conclude IIAs with general development goals in mind, these agreements themselves usually do not directly deal with problems of economic development. While IIAs rarely contain specific obligations on investment promotion, some include provisions that advocate information exchange about investment opportunities, encourage the use of investment incentives, or suggest the establishment of investment promotion agencies (IPAs). Some also contain provisions that address public policy concerns related to development, such as exceptions related to health or environmental issues, or exceptions related to essential security. Some IIAs also grant countries specific regulatory flexibility, amongst others when it comes to making commitments for investment liberalization.
An additional burden arises from the growing amount of investor-State disputes, which are increasingly lodged against governments from developing countries. These disputes are very costly for the affected countries, which have to shoulder substantial expenses for the arbitration procedures, for the payment of lawyer's fees and, most importantly, for the financial compensation to be paid to the investor in case the tribunal decides against the host country. The problem is further exacerbated by inconsistencies in the case law
that is emerging from investor-State disputes. Increasingly, tribunals addressing similar cases come to differing interpretations and decisions. This increases the uncertainty among countries and investors about the outcome of a dispute.
One of the key organizations concerned with the development dimension of IIAs is the United Nations Conference on Trade and Development
(UNCTAD), which is the key focal point of the United Nations
(UN) for dealing with matters related to IIAs and their development dimension. This organization's program on IIAs supports developing countries in their efforts to participate effectively in the complex system of investment rulemaking. UNCTAD offers capacity building
services, is widely recognized for its research and policy analysis on IIAs and functions as an important forum for intergovernmental discussions and consensus building on issues related to international investment law and development.
Treaty
A treaty is an express agreement under international law entered into by actors in international law, namely sovereign states and international organizations. A treaty may also be known as an agreement, protocol, covenant, convention or exchange of letters, among other terms...
between countries that addresses issues relevant to cross-border investments
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, usually for the purpose of protection, promotion and liberalization of such investments. Most IIAs cover foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
(FDI) and portfolio investment
Portfolio investment
The purchase of stocks, bonds, and money market instruments by foreigners for the purpose of realizing a financial return, which does not result in foreign management, ownership, or legal control.Some examples of portfolio investment are:...
, but some exclude the latter. Countries concluding IIAs commit themselves to adhere to specific standards on the treatment of foreign investments within their territory. IIAs further define procedures for the resolution of disputes should these commitments not be met. The most common types of IIAs are Bilateral Investment Treaties
Bilateral Investment Treaty
A bilateral investment treaty is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment . BITs are established through trade pacts...
(BITs) and Preferential Trade and Investment Agreements (PTIAs). International Taxation Agreements and Double Taxation Treaties (DTTs) are also considered as IIAs, as taxation commonly has an important impact on foreign investment.
Bilateral investment treaties deal primarily with the admission, treatment and protection of foreign investment. They usually cover investments by enterprises or individuals of one country in the territory of its treaty partner. Preferential Trade and Investment Agreements are treaties among countries on cooperation in economic and trade areas. Usually they cover a broader set of issues and are concluded at bilateral or regional levels. In order to classify as IIAs, PTIAs must include, among other content, specific provisions on foreign investment. International taxation agreements deal primarily with the issue of double taxation
Double taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
in international financial activities (e.g., regulating taxes on income, assets or financial transactions). They are commonly concluded bilaterally, though some agreements also involve a larger number of countries.
Contents
Countries conclude IIAs primarily for the protection and, indirectly, promotion of foreign investment, and increasingly also for the purpose of liberalization of such investment. IIAs offer companies and individuals from contracting parties increased security and certainty under international lawInternational law
Public international law concerns the structure and conduct of sovereign states; analogous entities, such as the Holy See; and intergovernmental organizations. To a lesser degree, international law also may affect multinational corporations and individuals, an impact increasingly evolving beyond...
when they invest or set up a business in other countries party to the agreement. The reduction of the investment risk flowing from an IIA is meant to encourage companies and individuals to invest in the country that concluded the IIA. Allowing foreign investors to settle disputes with the host country through international arbitration
International arbitration
International arbitration is a leading method for resolving disputes arising from international commercial agreements and other international relationships...
, rather than only the host country’s domestic courts, is an important aspect in this context.
Typical provisions found in BITs and PTIAs are clauses on the standards of protection and treatment of foreign investments, usually addressing issues such as fair and equitable treatment, full protection and security, national treatment
National treatment
National treatment is a principle in international law vital to many treaty regimes. It essentially means treating foreigners and locals equally. Under national treatment, if a state grants a particular right, benefit or privilege to its own citizens, it must also grant those advantages to the...
, and most-favored nation treatment. Provisions on compensation for losses incurred by foreign investors as a result of expropriation
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
or due to war and strife usually also form a core part of such agreements. Most IIAs additionally regulate the cross-border transfer of funds in connection with foreign investments.
Contrary to investment protection, provisions on investment promotion are rarely formally included in IIAs, and if so such provisions usually remain non-binding. Nevertheless, the assumption is that the enhanced protection formally offered to foreign investors through an IIA will encourage and promote cross-border investments. The benefits that increased foreign investment can bring about are important for developing countries that aim at using foreign investment and IIAs as tools to enhance their economic development
Economic development
Economic development generally refers to the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area...
.
BITs and some PTIAs also include a provision on investor-State dispute settlement. Usually this gives investors the right to submit a case to an international arbitral tribunal
Arbitral tribunal
An arbitral tribunal is a panel of one or more adjudicators which is convened and sits to resolve a dispute by way of arbitration. The tribunal may consist of a sole arbitrator, or there may be two or more arbitrators, which might include either a chairman or an umpire...
when a dispute with the host country arises. Common venues through which arbitration is sought are the International Centre for Settlement of Investment Disputes
International Centre for Settlement of Investment Disputes
The International Centre for Settlement of Investment Disputes , an institution of the World Bank Group based in Washington, D.C., was established in 1966 pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States...
(ICSID), the United Nations Commission on International Trade Law
UNCITRAL
The United Nations Commission on International Trade Law was established by the United Nations General Assembly by its Resolution 2205 of 17 December 1966 "to promote the progressive harmonization and unification of international trade law"....
(UNCITRAL) and the International Chamber of Commerce
International Chamber of Commerce
The International Chamber of Commerce is the largest, most representative business organization in the world. Its hundreds of thousands of member companies in over 130 countries have interests spanning every sector of private enterprise....
(ICC).
International taxation agreements deal primarily with the elimination of double taxation, but may in parallel address related issues such as the prevention of tax evasion.
Bilateral investment treaties
Main article: Bilateral investment treatyBilateral Investment Treaty
A bilateral investment treaty is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment . BITs are established through trade pacts...
To a large extent, the international legal aspects of the relationship between countries and foreign investors are addressed bilaterally between two countries. The conclusion of BITs has evolved from the second half of the 20th century onwards, and today these agreements constitute a key component of the contemporary international law on foreign investment. The United Nations Conference on Trade and Development
United Nations Conference on Trade and Development
The United Nations Conference on Trade and Development was established in 1964 as a permanent intergovernmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues....
(UNCTAD) defines BITs as "agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country." While the basic content of BITs has largely remained the same over the years, focusing on investment protection as the core issue, matters reflecting public policy
Public policy
Public policy as government action is generally the principled guide to action taken by the administrative or executive branches of the state with regard to a class of issues in a manner consistent with law and institutional customs. In general, the foundation is the pertinent national and...
concerns (e.g. health, safety, essential security or environmental protection) have in recent years more frequently been incorporated into BITs.
A typical BIT starts with a preamble
Preamble
A preamble is an introductory and expressionary statement in a document that explains the document's purpose and underlying philosophy. When applied to the opening paragraphs of a statute, it may recite historical facts pertinent to the subject of the statute...
that outlines the general intention of the agreement and provisions on its scope of application. This is followed by a definition of key terms, clarifying amongst others the meanings of "investment" and "investor". BITs then address issues related to the admission and establishment of foreign investments, including standards of treatment enjoyed by foreign investors (minimum standard of treatment, fair and equitable treatment, full protection and security, national treatment and most-favored nation treatment). The free transfer of funds across national borders in connection with a foreign investment is usually also regulated in BITs. Moreover, BITs deal with the issue of expropriation or damage to an investment, determining that – and in what manner - compensation be paid to the investor in such a situation. They also specify the degree of protection and compensation that investors should expect in situations of war or civil unrest. Another core element of BITs relates to the settlement of disputes between an investor and the country in which the investment took place. Such provisions usually mention the forums to which investors can resort for establishing international arbitral tribunals (e.g. ICSID, UNCITRAL or ICC) and how this relates to proceedings in host countries' domestic courts. BITs also typically include a clause on State-State dispute settlement. Finally, BITs usually refer to the time frame of the treaty, clarifying how the agreement is extended and terminated, and specifying to what extent investments conducted prior to conclusion and ratification
Ratification
Ratification is a principal's approval of an act of its agent where the agent lacked authority to legally bind the principal. The term applies to private contract law, international treaties, and constitutionals in federations such as the United States and Canada.- Private law :In contract law, the...
of the treaty are covered.
Preferential trade and investment agreements
Preferential Trade and Investment Agreements (PTIAs) are broader economic agreements among countries that are concluded for the purpose of facilitating international tradeInternational trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
and the transfer of factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
across borders. They can be economic integration
Economic integration
Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state...
agreements, free trade agreements (FTAs), economic partnership agreement
Economic Partnership Agreement
An economic partnership agreement is an economic arrangement that eliminates barriers to the free movement of goods, services, and investment between countries. This agreement can be considered an intermediate step between free trade area and single market in the process of economic integration...
s (EPAs) or similar types of agreements that cover, among many other things, provisions dealing with foreign investment. In PTIAs, the section dealing with foreign investment forms only a small part of the treaty, usually encompassing one or two chapters. Other issues dealt with in PTIAs are trade in goods and services, tariffs and non-tariff barriers, customs
Customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...
procedures, specific provisions pertaining to selected sectors, competition, intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
, temporary entry of people, and many more. PTIAs pursue the liberalization of trade and investment in the context of this broader focus. Frequently, the structure and appearance of the respective chapter on foreign investments is similar to a BIT.
There exist many examples of PTIAs. A notable one is the North American Free Trade Agreement
North American Free Trade Agreement
The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada – United States Free Trade Agreement...
(NAFTA). While the NAFTA agreement deals with a very broad set of issues, most importantly cross-border trade between Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
, Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
and the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, chapter 11 of this agreement covers detailed provisions on foreign investment similar to those found in BITs. Other examples of PTIAs concluded bilaterally can be found in the EPA between Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
and Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, the FTA between the Republic of Korea and Chile
Chile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
, and the FTA between the United States and Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
.
International taxation agreements
Main articles: Double taxationDouble taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
, Tax treaty
Tax treaty
Many countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
The main purpose of international taxation agreements is to regulate how taxes imposed on the global income of multinational enterprises are distributed among countries. In most cases, this is done through the elimination of double taxation. The core of the problem lies in the disagreements among countries on who has jurisdiction
Jurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...
over the taxable income of multinational corporation
Multinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
s. Most commonly, such conflicts are addressed through bilateral agreements that deal solely with taxation on income and sometimes also capital. Nevertheless, a few multilateral agreements on taxation as well as bilateral agreements that address taxation together with other issues have also been concluded in the past.
In contemporary treaty practice, avoidance of double taxation is achieved by concurrently applying two separate approaches. The first approach is the elimination of definition mismatches for terms such as "residence" or "income" that could otherwise be a cause of double taxation. The second approach constitutes the relief from double taxation through one of three methods. The credit method allows foreign tax to be credited against the tax paid in the residence country. According to the exemption method, foreign income and resulting taxation is simply disregarded by the residence country. The deduction method taxes income net of foreign tax, but it is rarely applied.
Trends in international investment rulemaking
Historically, the emergence of the international investment framework can be divided into two separate eras. The first era – from 1945 to 1989 – was characterized by disagreements among countries about the degree of protection that international law should offer to foreign investors. While most developed countries argued that foreign investors should be entitled to a minimum standard of treatment in any host economy, developing and socialistSocialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
countries tended to contend that foreign investors do not need to be treated differently from national firms. In 1959, the first BITs were concluded, and during the following decade, much of the content that forms the basis of a majority of the BITs currently in force were developed and refined. In 1965, the Convention for the Settlement of Investment Disputes Between States and Nationals of Other States was opened to countries for signature. The rationale was to establish ICSID as an institution that facilitates the arbitration of investor-State disputes.
The second era – from 1989 to today – is characterized by a generally more welcoming sentiment towards foreign investment, and a substantial increase in the number of BITs concluded. Amongst others, this growth in BITs was due to the opening up of many developing economies to foreign investment, which hoped that the conclusion of BITs would make them a more attractive destination for foreign companies. The mid-1990s also saw the creation of three multilateral agreements that touched upon investment issues as part of the Uruguay Round
Uruguay Round
The Uruguay Round was the 8th round of Multilateral trade negotiations conducted within the framework of the General Agreement on Tariffs and Trade , spanning from 1986-1994 and embracing 123 countries as “contracting parties”. The Round transformed the GATT into the World Trade Organization...
of trade negotiations and the creation of the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
(WTO). These were the General Agreement on Trade in Services
General Agreement on Trade in Services
The General Agreement on Trade in Services is a treaty of the World Trade Organization that entered into force in January 1995 as a result of the Uruguay Round negotiations...
(GATS), the Agreement on Trade-Related Investment Measures (TRIMS), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In addition, this era saw the growth of PTIAs, such as regional, interregional or plurilateral agreements, as exemplified in the conclusion of the NAFTA in 1992 and the establishment of the ASEAN Framework Agreement on the ASEAN Investment Area in 1998. These agreements typically also began to pursue liberalization of investment more intensively.
Statistics show the rapid expansion of IIAs during the last two decades. By 2007 year-end, the entire number of IIAs had already surpassed 5,500, and increasingly involved the conclusion of PTIAs with a focus beyond investment issues. As the types and contents of IIAs are becoming increasingly diverse and as almost all countries participate in the conclusion of new IIAs, the global IIA system has become extremely complex and hard to see through. Moreover, the number of IIA-based investor-State dispute settlement cases has also been on the rise in recent years. By the end of the year 2008, the total number of known cases reached 317.
Another new development in the global system of IIAs is the increased conclusion of such agreements among developing countries. In the past, industrialized countries usually concluded IIAs to protect their firms when they undertake overseas investments, while developing countries tended to sign IIAs in order to encourage and promote inflows of FDI from industrialized countries. The current trend towards increased conclusions of IIAs among developing countries reflects the economic changes underlying international investment relations. Developing countries and emerging economies are increasingly not only destinations, but also significant source countries of FDI flows. In line with their emerging role as outward investors, and their improved economic competitiveness, developing countries are increasingly pursuing the dual interests of encouraging FDI inflows but also seeking to protect the investments of their companies abroad.
Another key trend relates to the myriad of different agreements. As a result, the evolving international system of IIAs has been equated with the metaphor of a "spaghetti bowl". According to UNCTAD, the system is universal, as practically every country has signed at least one IIA. At the same time, it can be considered as atomized due to the large amount of individual agreements currently in existence. The system is multi-layered, with agreements being signed at all levels (bilateral, sectoral, regional etc.). It is also multi-faceted, as an increasing number of IIAs include provisions on issues traditionally considered only distantly related to investment, such as trade, intellectual property, labor rights and environmental protection. The system is also dynamic, as its key characteristics are currently rapidly evolving. For example, more recent IIAs tend to include provisions addressing issues such as public health, safety, national security
National security
National security is the requirement to maintain the survival of the state through the use of economic, diplomacy, power projection and political power. The concept developed mostly in the United States of America after World War II...
or the environment more frequently, with a view to better reflect public policy concerns. Finally, beyond IIAs, there is other international law relevant for countries' domestic investment frameworks, including customary international law, United Nations instruments and the WTO agreement (e.g., TRIMS).
In sum, recent developments have made the system increasingly complex and diverse. Moreover, even to the extent that the principal components of IIAs are similar across most of the agreements, substantial divergences can be found in the details of these provisions. All of this makes managing the interaction among IIAs increasingly challenging for countries, particularly those in the developing world, and also complicates the negotiation of new agreements.
In the past, there have been several initiatives for the establishment of a more multilateral approach to international investment rulemaking. These attempts include the Havana Charter
Havana Charter
Havana Charter was the charter of the defunct International Trade Organization . It was signed by 53 countries on March 24, 1948. It allowed for international cooperation and rules against anti-competitive business practices. The charter ultimately failed because the Congress of the United States...
of 1948, the United Nations Draft Code of Conduct on Transnational Corporations in the 1980s, and the Multilateral Agreement on Investment
Multilateral Agreement on Investment
The Multilateral Agreement on Investment was a draft agreement negotiated between members of the Organisation for Economic Co-operation and Development in 1995–1998. Its ostensible purpose was to develop multilateral rules that would ensure international investment was governed in a more...
(MAI) of the Organisation for Economic Cooperation and Development (OECD) in the 1990s. None of these initiatives reached successful conclusion, due to disagreements among countries and, in case of the MAI, also in light of strong opposition by civil society
Civil society
Civil society is composed of the totality of many voluntary social relationships, civic and social organizations, and institutions that form the basis of a functioning society, as distinct from the force-backed structures of a state , the commercial institutions of the market, and private criminal...
groups. Further attempts of advancing the process towards establishment of a multilateral agreement have since been made within the WTO, but also without success. Concerns have been raised regarding the specific objectives that such a multilateral agreement is meant to accomplish, who would benefit in what way from it, and what impact such a multilateral agreement would have on countries' broader public policies, including those related to environmental, social and other issues. Particularly developing countries may require "policy space" to develop their regulatory frameworks, such as in the area of economic or financial policies, and one major concern was that a multilateral agreement on investment would diminish such policy space. As a result, current international investment rulemaking remains short of having a unified system based on a multilateral agreement. In this respect, investment differs for example from trade and finance, as the WTO fulfills the purpose of creating a more unified global system for trade and the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) plays a similar role with respect to the international financial system.
The development dimension
By providing additional security and certainty under international law to investors operating in foreign countries, IIAs can encourage companies to invest overseas. While there is a scientific debate on the extent to which IIAs increase the amount of FDI flows to signatory host countries, policymakers do tend to anticipate that IIAs encourage cross-border investment and thereby also support economic development. Amongst others, FDI can facilitate the inflows of capital and technology into host countries, help generate employment and have other positive spillover effectsSpillover effect
Spillover effects are externalities of economic activity or processes that affect those who are not directly involved. Odours from a rendering plant are negative spillover effects upon its neighbours; the beauty of a homeowner's flower garden is a positive spillover effect upon neighbours.In the...
. Accordingly, developing country governments seek to establish an adequate framework to encourage such inflows, amongst others through the conclusion of IIAs.
However, despite this potential to generate pro-development benefits, the evolving complexity of the IIA system may also create challenges. Amongst others, the complexity of today's IIA network makes it difficult for countries to maintain policy coherence. Provisions agreed upon in one IIA may be inconsistent with those included in a different IIA. For developing countries with lower capacity to participate in the global IIA system, this complexity of the IIA framework is particularly hard to manage. Additional challenges arise from the need to ensure consistency between a country's national and international investment laws, and from the objective to design investment policies that best support a county's specific development goals.
Furthermore, even if governments conclude IIAs with general development goals in mind, these agreements themselves usually do not directly deal with problems of economic development. While IIAs rarely contain specific obligations on investment promotion, some include provisions that advocate information exchange about investment opportunities, encourage the use of investment incentives, or suggest the establishment of investment promotion agencies (IPAs). Some also contain provisions that address public policy concerns related to development, such as exceptions related to health or environmental issues, or exceptions related to essential security. Some IIAs also grant countries specific regulatory flexibility, amongst others when it comes to making commitments for investment liberalization.
An additional burden arises from the growing amount of investor-State disputes, which are increasingly lodged against governments from developing countries. These disputes are very costly for the affected countries, which have to shoulder substantial expenses for the arbitration procedures, for the payment of lawyer's fees and, most importantly, for the financial compensation to be paid to the investor in case the tribunal decides against the host country. The problem is further exacerbated by inconsistencies in the case law
Case law
In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...
that is emerging from investor-State disputes. Increasingly, tribunals addressing similar cases come to differing interpretations and decisions. This increases the uncertainty among countries and investors about the outcome of a dispute.
One of the key organizations concerned with the development dimension of IIAs is the United Nations Conference on Trade and Development
United Nations Conference on Trade and Development
The United Nations Conference on Trade and Development was established in 1964 as a permanent intergovernmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues....
(UNCTAD), which is the key focal point of the United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
(UN) for dealing with matters related to IIAs and their development dimension. This organization's program on IIAs supports developing countries in their efforts to participate effectively in the complex system of investment rulemaking. UNCTAD offers capacity building
Capacity building
Capacity building also referred to as capacity development is a conceptual approach to development that focuses on understanding the obstacles that inhibit people, governments, international organizations and non-governmental organizations from realizing their developmental goals while enhancing...
services, is widely recognized for its research and policy analysis on IIAs and functions as an important forum for intergovernmental discussions and consensus building on issues related to international investment law and development.
See also
- Free trade agreement
- Double taxationDouble taxationDouble taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
- Foreign direct investmentForeign direct investmentForeign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
- International Centre for Settlement of Investment DisputesInternational Centre for Settlement of Investment DisputesThe International Centre for Settlement of Investment Disputes , an institution of the World Bank Group based in Washington, D.C., was established in 1966 pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States...
(ICSID) - Preferential trading areaPreferential trading areaA Preferential trade area is a trading bloc which gives preferential access to certain products from the participating countries. This is done by reducing tariffs, but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration...
- Tax treatyTax treatyMany countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
- Commercial treatyCommercial treatyA Commercial treaty is a formal agreement between states for the purpose of establishing mutual rights and regulating conditions of trade.For example, the Methuen Treaty was a commercial treaty between Portugal and England....
- Investor State Dispute SettlementInvestor state dispute settlementInvestor State Dispute Settlement provisions in international trade treaties grant investors covered by provisions with a right to initiate dispute settlement proceedings against foreign governments in their own right under international law....
(ISDS)
External links
- United Nations Conference on Trade and Development (UNCTAD) work programme on IIAs, offering various databases and publications on the subject
- UNCTAD publications, including the UNCTAD Series on Issues in International Investment Agreements, the UNCTAD Series on International Investment Policies for Development and the UNCTAD IIA Monitor
- International Centre for Settlement of Investment Disputes (ICSID)
- SICE - Foreign Trade Information System of the Organization of American States (OAS), offering a database of trade and investement agreements
- Investment Treaty News informs and analyses on the role of international investment law in economic development.
- Investment Arbitration Reporter, a news publication on international investment law
- Digest of International Investment Jurisprudence, a collection of statements made by tribunals concerned with international investment agreements.
- Bilaterals.org provides news and analysis on bilateral trade and investment agreements.
Further reading
- UNCTAD, International Investment Rulemaking: Stocktaking, Challenges and the Way Forward, New York and Geneva, 2008.
- Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Oxford University Press, 2008.
- Peter T. Muchlinski, Multinational Enterprises & The Law, Oxford University Press, 2007.
- M. SornarajahMuthucumaraswamy SornarajahMuthucumaraswamy Sornarajah, is a legal academic. He is the C. J. Koh Professor of Law at the National University of Singapore,...
, The International Law on Foreign Direct Investment, Cambridge University Press, 2004. - Journal of International Arbitration, Kluwer Law International.
- Recent developments in international investment law August Reinisch, Ed. A.Pedone, Paris, 2009, EAN 9782233005533