The government has proposed to limit the investment protection and other benefits accorded to foreign-owned companies under bilateral treaties only to the firms that comply with every domestic legislation and government decisions at all levels. This would make it difficult for these firms to seek treaty benefits and international arbitration to settle disputes with the Indian government.
The government’s move also implies that in the case of tax disputes, the foreign firms can’t seek relief and compensation under these bilateral treaties, without first paying up the taxes demanded by the revenue department.
Under the bilateral treaties, the foreign-owned investor gets “national treatment”, prompt and fair compensation in case of nationalisation of their assets and the window of international arbitration in case of disputes that can’t be resolved bilaterally.
The model text for bilateral investment treaties, that India wants to adopt for future treaties is designed to be the basis for renegotiating over 80 existing ones, also explicitly bars any enterprise from a treaty partner country from seeking relief on tax disputes under the treaty.
The model text also proposes to limit the treaty protection to companies that have made “substantial contribution to the development of the host state through its operations along with transfer of technological knowhow, where applicable”. Potential treaty partners, experts said, may be reluctant to accept such a clause considering technology transfer being commercial decision between companies.
The idea behind such tightening of treaty use is to thwart instances of companies that are embroiled in tax disputes with the government from seeking recourse to international arbitration and demand compensation if assets are attached as part of tax proceedings. Already, the government has been dragged to arbitration abroad by a clutch of foreign companies including Vodafone, Cairn Energy, Sistema Joint Stock Financial Corporation and Deutsche Telekom.
The government’s move, according to official sources, is also triggered by the recent investor actions against it under such treaties including one that resulted in an adverse arbitration award in the case of White Industries Australia Limited which forced the government to suspend all treaty talks. According to Rahul Garg, who leads the direct taxes practice at PwC, bilateral investment protection treaties should be so designed that they encourage investors to have confidence in them rather than them being difficult to make use of.
The new provisions would come into force only when a new or renegotiated treaty is signed. Experts said that it remains to be seen if India would be able to sell such treaty provisions to other nations. It is also doubtful if any other nation has any such treaties in force, they said.
“We should be farsighted in our approach to bilateral treaties and adopt global best practices rather than having clauses that would lead to further uncertainties in business environment,” said Neeru Ahuja, Partner, Deloitte Haskins & Sells.
India is keen to have bilateral investment treaties with countries like Canada, Brazil, Iraq, Nepal, Norway, South Africa and the UAE but the talks were suspended after a host of companies dragged the country to international arbitration following the cancellation of 2G telecom licenses.
The model text expects a law abiding company to follow not only the Constitution, laws and rules but also guidelines, procedures, administrative measures, executive actions at all levels of government and orders of judicial and administrative institutions having the force of law.
The intention of the proposed model text of BIT is clearly to keep tax disputes outside its scope, said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.
At present, India has 82 bilateral investment treaties with its trading partners of which, 72 are operational.