For Cairns dispute, international arbitration is not the way forward  

Source: Indian Express

Relevance: Various dimensions of the Cairn issue

Synopsis: The recent move by Cairn to seize India’s sovereign assets has many grey areas of law that need due consideration.

Background:

Britain’s Cairn Energy Plc has secured an order from a French court authorizing the freezing of 20 Indian government properties in Paris valued at over 20 million euros.

Evolution of Bilateral Investment Treaties:

• After the World Wars countries tended to look at foreign investments as a form of neo-colonialism.
• For many years, policies in developing countries turned inward-looking.
• As a result, developed countries sought to guard their investments against expropriation.
• Bilateral investment treaties became the primary tool to forge relationships between developed and developing countries.
• Some argue that the US signed BITs mainly to adopt standards for prompt, adequate and effective compensation in case of expropriation.
• With the advent of globalisation, BITs became the means for foreign investment in developing countries.

Issues with International arbitration:

• Firstly, the question is about the jurisdiction of the International Arbitration Tribunal as the most appropriate forum to preside over a matter pertaining to tax planning.
  • Taxing offshore indirect transfers, a structuring device to gain tax advantage from the indirect sale of assets is not unique to India (336 tax treaties contain such an article).
• Secondly, retrospective tax is challenged on grounds of denial of fair and equitable treatment.
  •  In 2012, the Indian government then retrospectively amended the tax code, giving itself the power to go after mergers and acquisitions(M&A) deals all the way back to 1962 if the underlying asset was in India.
  • But the principle, retrospective amendments are not unusual.
  • For example, in the UK such an amendment was introduced in 2008 to check the use of avoidance arrangements via the Isle of Man.
• Thirdly, the option of arbitration upon an unsuccessful Mutual Agreement Procedure (MAP) resolution is not available in India.
  • Even when the OECD published its multilateral instrument for tax treaty amendment, India reserved the application of binding arbitration.
• Fourthly, many developing countries view arbitration of tax matters as a breach of their sovereign right to tax.
  • Taxation of cross-border incomes is resolved either through domestic dispute mechanisms or by competent authorities appointed to agree on an outcome not binding on the taxpayer.
• Lastly, all investments have tax implications and the acceptance of distinction could create problems even where tax is explicitly carved out from the bilateral investment treaties.
  • Over the years, there has been a rising trend in tax disputes involving BITs.
  • The Cairn case is one such instance where arbitration was invoked especially since MAP was not an option.
  • The UK-India tax treaty allowed for taxation of capital gains as per Indian law. India challenged the admissibility of the case before the arbitration tribunal. However, the case rests on a distinction between tax and tax-related investment.

Hence, given the complexity, the only reasonable solution would be a negotiated settlement. Even if there’s a resolution in the Cairns case, questions of law would remain.

Terms to know: 

• Income Tax Act 
• Retrospective taxation