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MAI DRAFT TEXT OF 1997: VIII TAXATION

CONFIDENTIAL DAFFE/MAI(97)1/REV2

VIII. TAXATION(1)

1. Nothing in this Agreement shall apply to taxation measures except as expressly provided in paragraphs 2 to ...(2) below.

2. Article ... (Expropriation) shall apply to taxation measures. Interpretative Note: "When considering the issue of whether a taxation measure effects an expropriation, the following elements should be borne in mind:

a) The imposition of taxes does not generally constitute expropriation. The introduction of a new taxation measure, taxation by more than one jurisdiction in respect to an investment, or a claim of excessive burden imposed by a taxation measure are not in themselves indicative of an expropriation.

b) A taxation measure will not be considered to constitute expropriation where it is generally within the bounds of internationally recognised tax policies and practices. When considering whether a taxation measure satisfies this principle, an analysis should include whether and to what extent taxation measures of a similar type and level are used around the world.

c) While expropriation may be constituted even by measures applying generally (eg, to all taxpayers), such a general application is in practice less likely to suggest an expropriation than more specific measures aimed at particular nationalities or individual taxpayers. A taxation measure would not be expropriatory if it was in force and was transparent when the investment was undertaken.

d) Taxation measures may constitute an outright expropriation, or while not directly expropriatory they may have the equivalent effect of an expropriation (so-called "creeping expropriation"). Where a taxation measure by itself does not constitute expropriation it would be extremely unlikely to be an element of a creeping expropriation."

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CONFIDENTIAL DAFFE/MAI(97)1/REV2

"1. [paragraph 1.1 of] Article XX (National Treatment) shall apply to taxation measures, except that no claim that a taxation measure involves a discrimination1 shall be submitted to dispute settlement by an investor of a Contracting Party pursuant to Article ... (Investor-State Dispute Settlement):

(a) Unless the investor concerned has first referred to the Competent Tax Authorities of both Contracting Parties involved in the dispute the issue of whether the tax measure involves a discrimination, nor shall the claim be submitted to dispute settlement within the 24 month period immediately following such referral; and

(b) If, within 24 months of the dale of referral, the Competent Tax Authorities of both Contracting Parties concerned determine that the tax measure does not involve a discrimination.

2.However, nothing in the above-mentioned Article shall:

(a) prevent the adoption or enforcement by the Contracting Party of any measure which:

(i) differentiates treatment between taxpayers who are not in the same circumstances, in particular with respect to residence, or

(ii) is aimed at ensuring the equitable or effective imposition, payment or collection of taxes, or

(iii) is aimed at preventing the avoidance or evasion of taxes, provided that the measure does not arbitrarily discriminate between investors or investments of Contracting Parties or arbitrarily restrict benefits accorded under the provisions of this Agreement;

(b) have the effect of extending fiscal advantages granted by the Party on the basis of any international agreement or arrangement by which it is or may be bound, or its membership of any Regional Economic Integration Organisation."

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CONFIDENTIAL DAFFE/MAI(97)1/REV2

3. Article ... (Transparency) shall apply to taxation measures, except that nothing in this Agreement shall require a Contracting Party to furnish or allow access to information covered by tax secrecy or any other provision or administrative practice protecting confidentiality in domestic laws or international agreements, and including information:

a) contained in or exchanged pursuant to any agreement or arrangement relating to taxation between governments and investors;

b) pursuant to any agreement with a foreign government concerning the application or interpretation of an international agreement relating to taxation in the case of an investor, including exchange of information between governments;

c) concerning the identity of an investor or other information which would disclose any trade, business, industrial, commercial or professional secret or trade process;

d) pertaining to the negotiation of tax treaties or of any other international agreement relating partly or wholly to taxation or the participation by a government in the work of international organisations; or

e) the disclosure of which would affect the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, taxation, or any information the disclosure of which would aid or assist in the avoidance or evasion of taxes;

[or]

[f) the disclosure of which would be contrary to the general administrative practice of the Contracting Party.]

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CONFIDENTIAL DAFFE/MAI(97) 1/REV2

4.(3)

[a) The provisions of Article [C] (State to State Dispute Settlement) and Article [D] (Investor to State Dispute Settlement), except for paragraph lb of Article [D], shall apply to disputes under this Article with regard to taxation measures [to the extent that they fall outside the scope of mutual agreement procedures provided for in double taxation agreements.] However, the issue of whether the measure complained of falls within the definition of taxation measures at paragraph [ ] below shall be decided first.

b) Article [D] (Investor to State Dispute Settlement) shall apply to disputes under this Article with regard to taxation measures subject to subparagraph a) above and to the following provisions:

i) at the request of the Contracting Party to the dispute, any issue referred to in sub-paragraph (a) above, or any claim that a taxation measure constitutes an expropriation shall be referred to the Competent Tax Authorities of the Contracting Party of the Investor and the Contracting Party to the dispute, and the proceedings regarding those issues under Article [D] shall be suspended; and

ii) notwithstanding paragraph I (b) of Article [C], if the Competent Tax Authorities determine that the measure does fall within the definition of taxation measures at paragraph [ ] below this Article shall apply, and if the Competent Tax Authorities detemnine that the measure does not involve an expropriation, the proceedings regarding that issue under Article [D] shall be terminated. If the Competent Tax Authorities concerned do not so detemmine within [9] months, it may be submitted for resolution [by agreement of] [at the request of either of] the Contracting Parties concerned by arbitration pursuant to Article [C], and any award of a Tribunal pursuant to Article [C] shall be binding upon the Tribunal constituted under Article [D].

c) Any Tribunal under Article C or D shall, at the request of either Party to the dispute, convene a technical review board of taxation experts, as provided in Articles [C.5] and [D.13], to consider a taxation matter and shall take its views into accounts.(4)]

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CONFIDENTIAL DAFFE/MAI(97)1/REV2

5. For the purposes of this Article:

a) A Competent Tax Authority means the minister or ministry responsible for taxes or their authorised representatives.

b) "Taxation measures" include

i) any provision relating to taxes of the law of the Contracting Party or of a political subdivision thereof or a local authority therein, or any administrative practices of the Contracting Party relating to taxes; and

ii) any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the

Contracting Party is bound.

Alternative A

[For greater certainty "taxes" for the purposes of this Article shall be taken to include [social security measures/contributions] [and customs duties].

Alternative B


Taxes shall be taken for this purpose to include direct taxes, indirect taxes and [social security measures/contributions] [ and customs duties].

Interpretative Note: For greater certainty, Article XX (most favoured nation treatment) shall not be invoked to avoid the provisions of paragraph ... (dispute settlement) of this Article.(5)

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1. When the Negotiating Group discussed this draft text in April 1997, the Chairman concluded that there was broad support for the provision on expropriation, but further reflection was needed with respect to the text proposed by EG2 on transparency and dispute settlement. A large majority of delegations favoured no carve-in provision for national treatment on taxes, but seven delegations supported inclusion of such a text and one or two others were undecided. Other issues meriting further work include the treatment of taxes in investment incentives, performance requirements and accession.

2. In addition to the paragraphs on expropriation and transparency which follow, some EG2 Delegations (Belgium, Germany, Italy, Switzerland and the European Commission) proposed a carve-in for national treatment. As an example on how national treatment could be carved in, the following wording was put forward:

3. There is agreement on the need for a provision along the lines of paragraph 4, but the text needs refinement. Several delegations maintained scrutiny reservations on the text of paragraph 4. Clearly additions or alterations to this tet would need to be made if taxation measures are carved into MAI disciplines other than Expropriation and Transparency. Australia reserves its position on MAI dispute settlement procedures.

4. Australia puts forward the following alternaive language for this paragraph:

"Any Tribunal under Article C or D shall, at the request of either Party to the dispute, convene a technical review board of taxation experts, as provided in Articles [C.5] and [D.13], to consider a taxation matter and shall base its findings on the views expressed by such board."

5. Several delegations maintain a scrutiny reservation on the text of this Note.

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