International tax treaties influence how major cross-border FDI gets structured but don’t ignore BIT’s.
As Cairn’s experience in India has shown, Bilateral Investment Treaties can offer important protection against the exercise of sovereign power. See Cairn’s announcement here of the December 2020 Permanent Court of Arbitration award of US$1.2bn compensation against India for confiscation of Cairn India shares following enforcement of India’s 2012 retrospective tax law.
As noted in Cairn’s recent announcement, India is appealing the arbitration ruling whilst Cairn is threatening to enforce the ruling against Air India assets. Things are getting spicy.
The concept behind a BIT is relatively simple.
A BIT is designed to protect an investor in a foreign jurisdiction from arbitrary and discriminatory treatment by a host nation, especially as regards infringement of property rights.
This is achieved by an international treaty which provides protections to the investor from the investing state into the investee state. For example, if property is confiscated, the BIT will normally provide a compensatory mechanism. Here is a link to the 1994 UK/India BIT (which is very short). You can find the most relevant provisions at articles 5 and 6.
BIT’s tend not to be entered into between Western democratic nations since property rights tend to be respected anyway. BIT’s were originally intended to encourage investment from ‘developed’ nations into ‘developing’ nations such as India or China. Now of course India and China are big investors into the UK so the boot could often end up on the other foot.
Since BIT’s are symmetrical (the clue is in the title), investors from countries that have a BIT with the UK theoretically have an advantage over investors from countries that do not. Ironically, when it was feared Mr Corbyn might win power and nationalise vast swathes of British industry, investors from countries such as Brazil, China and India (with BITs) would likely have been entitled to greater compensation than USA or Canadian investors who might only have received compensation provided by the relevant nationalisation legislation (unless they had routed their UK FDI via a BIT treaty state effectively).
Investors will often forum shop to find a jurisdiction with both attractive tax conditions and BIT protection. For example, both Singapore and Hong Kong have both a low corporate tax rate and BIT protection with the UK. Whilst the spectre of wholescale nationalisation by a socialist UK Government may now look unlikely, a foreign investor may as well get BIT protection if it can. How confident are you that you can predict the future?
This is not just a UK related consideration. There are a multiplicity of BIT’s between countries. I have seen an investment structured into a Eurasian nation I won’t name where a domestic investor teaming with an international investor planned to ‘round trip’ the investment abroad to get the protection of a BIT alongside its JV partner. Clearly, there was a trust issue in its home nation. These types of structures are open to challenge so need to be carefully assessed.
G7 Tax Proposals will impact future investment planning
President Trump introduced legislation to discourage inversion transactions which were popularised by US companies merging with Irish companies and moving the tax base. Now of course with have the G7 planning a minimum 15% tax rate for multinational companies, multinationals may be further discouraged from locating their headquarters in countries like Ireland, the Netherlands and Luxembourg. However, a 15% minimum corporate tax rate still leaves scope for international tax planning. Also, it will be interesting to see how tax based on in-country revenues will be adopted.
National Security Laws
Finally, as countries start becoming more protectionist and seek to secure nationally important domestic manufacturing such as vaccines, energy and food production, international investors need to consider the impact of legislation like the UK’s new National Security & Investment Act 2021. That legislation is primarily forward looking (unlike India’s tax law which was retrospective) and affects new investment into sectors of the UK economy which are designated as important to national security. However, an increase in existing investment can be caught if control is consolidated. You can find more information on the new UK FDI Act and the UK’s post Brexit strategic priorities in my posts here and here.
Conclusions
Corporations planning significant FDI should take a holistic approach to their investment case looking not only at tax efficiency but also downside protection and FDI laws and regulations. BIT’s and international trade agreements are worth studying carefully before finalising an FDI structure. A repository of the 110 UK BIT’s (not all of which are in force) can be found here.
