Treasurer Chalmers is making ISDS lawyers relevant again

The recent announcement by Treasurer Jim Chalmers that the May budget will include a retrospective capital gains tax on foreign investors will prompt many of those corporations to consider their remedies under Australia’s foreign investment treaties.

The purpose of the proposed changes is to reverse the effect of two Federal Court cases last year, in which the Court found that North American miner Newmont and YTL Power of Malaysia were not obliged to pay tax on the sale of certain Australian assets.  The Treasurer’s stated intention is to make the change retrospective to 2006.

Nothing in Australia’s domestic law prevents the Parliament from enacting a law with retrospective application.  But Australia is party to several bilateral and multilateral treaties that contain provisions designed to protect foreign investors in Australia.  Most of these include clauses providing for ISDS – investor-state dispute settlement – which allows aggrieved investors to pursue the Commonwealth for damages when there has been a breach of a promise contained in the treaty.  And the most relevant of those promises is the promise of “fair and equitable treatment”.

International tribunals dealing with ISDS claims have generally accepted that States are entitled to make laws and regulations that impact foreign investors adversely.  Whether a particular regulatory measure breaches the promise of fair and equitable treatment will generally be assessed by the investor’s legitimate expectations at the time at which the investment was made.  Many tribunals have found that investors are entitled to expect a stable and predictable regulatory environment, and this concept of legitimate expectations makes retrospective legislation extremely problematic.  A prospective investor ought to know what the host country’s tax regime is when it makes its investment, and can have no complaint about it; nor, barring exceptional cases, can it have any complaint if that regime later changes.  But it is often arguable that retrospective laws are inconsistent with investors’ legitimate expectations, because they change the rules after the event.  In the 2022 decision in Renergy v Spain, the tribunal observed that regulatory changes with retroactive effect were “more likely to violate legitimate expectations” than other changes. 

Awards by ISDS tribunals aren’t binding as precedents on other tribunals, although they may be regarded as influential.  Even so, the 2020 decision in Cairn Energy Plc v India is relevant and salutary.   In that case, India passed a law imposing capital gains tax liabilities on foreign investors, which the government characterised as a “clarification”, and the claimant described as “retroactive”.  This was an exceptionally complex case, in which the tribunal explained that its task when considered retroactive legislation was to balance “India's public policy objectives, on the one hand, and the Claimants' interest in benefitting from the values of legal certainty and predictability, on the other.”   Having performed that exercise, the tribunal found that “the measures imposed on the Claimants” did have retrospective effect, and  “are of sufficient severity to constitute a violation of FET”.  India was ordered to pay the claimants more than US$1.2 billion. 

So, while a retrospective tax measure will not necessarily violate the fair and equitable treatment standard, there’s a reasonable prospect that any foreign investors who would be affected by the proposed measure, and have the good fortune to be protected by a treaty, will be paying close attention to the terms of that treaty between now and budget time.