#11165 - Currency Controls And Transfer Pricing - International Law II

Currency Controls and Transfer Pricing

1. International Tax Basics

   1. Tax systems and rates vary by state-no int’l harmonization

   2. Tax on worldwide income (US) or income accruing from domestic sources?

   3. Bilateral tax treaties:

      1. US has 68 double taxation treaties

      2. Treaties are meant to avoid individuals and companies from being taxed by both countries for the same income

2. EXAMPLE: US-Ireland Tax Treaty

   1. Art. 7

      1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

   2. Art. 7

      1. 1. Where:

         1. a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or

         2. b) the same persons participate directly or indirectly in the management, control, or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,

         3. and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations that differ from those that would be made between independent enterprises, then, any profits that, but for those conditions, would have accrued to one of the enterprises, but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

3. EXAMPLE: U.S.–Argentina BITS: TREATY BETWEEN THE UNITED STATES OF AMERICA AND THE ARGENTINE REPUBLIC CONCERNING THE RECIPROCAL ENCOURAGEMENT AND PROTECTION OF INVESTMENT (Signed November 14, 1991; Entered into Force October 20, 1994, 103rd Congress 1st Session 103-2)

   1. ARTICLE II

      1. 1. Each Party shall permit and treat investment, and activities associated therewith, on a basis no less favorable than that accorded in like situations to investment or associated activities of its own nationals or companies, or of nationals or companies of any third country, whichever is the more favorable, subject to the right of each Party to make or maintain exceptions falling within one of the sectors or matters listed in the Protocol to this Treaty. Each Party agrees to notify the other Party before or on the date of entry into force of this Treaty of all such laws and regulations of which it is aware concerning the sectors or matters listed in the Protocol. Moreover, each Party agrees to notify the other of any future exception with respect to the sectors or matters listed in the Protocol, and to limit such exceptions to a minimum. Any future exception by either Party shall not apply to investment existing in that sector or matter at the time the exception becomes effective. The treatment accorded pursuant to any exceptions shall, unless specified otherwise in the Protocol, be not less favorable than that accorded in like situations to investments and associated activities of nationals or companies of any third country.

      2. 2.

         1. a) Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law.

            1. “[T]he stability of the legal and business framework in the State party is an essential element in the standard of what is fair and equitable treatment.” LG&E Energy Corp. (TWEN).

            2. Fair and equitable treatment means treatment in an “evenhanded and just manner, conducive to fostering the promotion of foreign investment.” LG&E Energy Corp. (TWEN).

            3. “[T]he fair and equitable treatment analysis [also] involves consideration of the investor’s expectations when making its investment in reliance on the protections to be granted by the host State.” LG&E Energy Corp. (TWEN).

               1. Investor’s fair expectations have the following characteristics: (1) they are based on the conditions offered by the host State at the time of the investment; (2) they may not be established unilaterally by one of the parties; (3) they must exist and be enforceable by law; (4) in the event of infringement by the host State, a duty to compensate the investor for damages arises except for those caused in the event of state of necessity; (5) however, the investor’s fair expectations cannot fail to consider parameters such as business risk or industry's regular patterns. LG&E Energy Corp. (TWEN).

            4. “[T]he fair and equitable standard consists of the host State’s consistent and transparent behavior, free of ambiguity that involves the obligation to grant and maintain a stable and predictable legal framework necessary to fulfill the justified expectations of the foreign investor.” LG&E Energy Corp. (TWEN).

         2. b) Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments. For the purposes of dispute resolution under Articles VII and VIII, a measure may be arbitrary or discriminatory notwithstanding the opportunity to review such measure in the courts or administrative tribunals of a Party.

         3. …

      3. 3. Subject to the laws relating to the entry and sojourn of aliens, nationals of either Party shall be permitted to enter and to remain in the territory of the other Party for the purpose of establishing, developing, administering or advising on the operation of an investment to which they, or a company of the first Party that employs them, have committed or are in the process of committing a substantial amount of capital or other resources.

      4. 4. Companies which are legally constituted under the applicable laws or regulations of one Party, and which are investments, shall be permitted to engage top managerial personnel of their choice, regardless of nationality.

      5. …

      6. 8. The treatment accorded by the United States of America to investments and associated activities of nationals and companies of the Argentine Republic under the provisions of this Article shall in any State, Territory or possession of the United States of America be no less favorable than the treatment accorded therein to investments and associated activities of nationals of the United States of America resident in, and companies legally constituted under the laws and regulations of, other States, Territories or possessions of the United States of America.

      7. …

   2. ARTICLE V

      1. 1. Each Party shall permit all transfers related to an investment to be made freely and without delay into and out of its territory. Such transfers include: (a) returns; (b) compensation pursuant to Article IV; (c) payments arising out of an investment dispute; (d) payments made under a contract, including amortization of principal and accrued interest payments made pursuant to a loan agreement directly related to an investment; (e) proceeds from the sale or liquidation of all or any part of an investment; and (f) additional contributions to capital for the maintenance or development of an investment.

      2. 2. Except as provided in Article IV paragraph 1, transfers shall be made in a freely usable currency at the prevailing market rate of exchange on the date of transfer with respect to spot transactions in the currency to be transferred. The free transfer shall take place in accordance with the procedures established by each Party; such procedures shall not impair the rights set forth in this Treaty.

      3. 3. Notwithstanding the provisions of paragraphs 1 and 2, either Party may maintain laws and regulations (a) requiring reports of currency transfer; and (b) imposing income taxes by such means as a withholding tax applicable to dividends or other transfers. Furthermore, either Party may protect the rights of creditors, or ensure the satisfaction of judgments in adjudicatory proceedings, through the equitable, nondiscriminatory and good faith application of its law.

   3. ARTICLE XI

      1. This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.

         1. NPM clauses allow governments to take actions otherwise prohibited by the relevant treaty when, for example, the actions are necessary for the protection of essential security, or for the maintenance of public order.

         2. The first four awards handed down by ICSID arbitration panels, out of the many cases brought against Argentina as a result of Argentina’s reactions to the economic crisis, have taken different approaches to the NPM clause of the US-Argentina BIT.

            1. On the same facts, three tribunals, in the CMS v. Argentina, Enron v. Argentina and Sempra v. Argentina arbitrations,...