International investment agreement

An international investment agreement (IIA) is a type of treaty between countries that addresses issues relevant to cross-border investments, usually for the purpose of protection, promotion and liberalization of such investments. Most IIAs cover foreign direct investment (FDI) and portfolio investment, but some exclude the latter. Countries concluding IIAs commit themselves to adhere to specific standards on the treatment of foreign investments within their territory. IIAs further define procedures for the resolution of disputes should these commitments not be met. The most common types of IIAs are bilateral investment treaties (BITs) and preferential trade and investment agreements (PTIAs). International taxation agreements and double taxation treaties (DTTs) are also considered IIAs, as taxation commonly has an important impact on foreign investment.

Bilateral investment treaties deal primarily with the admission, treatment and protection of foreign investment. They usually cover investments by enterprises or individuals of one country in the territory of its treaty partner. Preferential trade and investment agreements are treaties among countries on cooperation in economic and trade areas. Usually they cover a broader set of issues and are concluded at bilateral or regional levels. In order to classify as IIAs, PTIAs must include, among other content, specific provisions on foreign investment. International taxation agreements deal primarily with the issue of double taxation in international financial activities (e.g., regulating taxes on income, assets or financial transactions). They are commonly concluded bilaterally, though some agreements also involve a larger number of countries.

Contents

Countries conclude IIAs primarily for the protection and, indirectly, promotion of foreign investment, and increasingly also for the purpose of liberalization of such investment. IIAs offer companies and individuals from contracting parties increased security and certainty under international law when they invest or set up a business in other countries party to the agreement. The reduction of the investment risk flowing from an IIA is meant to encourage companies and individuals to invest in the country that concluded the IIA. Allowing foreign investors to settle disputes with the host country through international arbitration, rather than only the host country’s domestic courts, is an important aspect in this context.

Typical provisions found in BITs and PTIAs are clauses on the standards of protection and treatment of foreign investments, usually addressing issues such as fair and equitable treatment, full protection and security, national treatment, and most-favored nation treatment. Provisions on compensation for losses incurred by foreign investors as a result of expropriation or due to war and strife usually also form a core part of such agreements. Most IIAs additionally regulate the cross-border transfer of funds in connection with foreign investments.

Contrary to investment protection, provisions on investment promotion are rarely formally included in IIAs, and if so such provisions usually remain non-binding. Nevertheless, the assumption is that the enhanced protection formally offered to foreign investors through an IIA will encourage and promote cross-border investments. The benefits that increased foreign investment can bring about are important for developing countries that aim at using foreign investment and IIAs as tools to enhance their economic development.

BITs and some PTIAs also include a provision on investor-State dispute settlement. Usually this gives investors the right to submit a case to an international arbitral tribunal when a dispute with the host country arises. Common venues through which arbitration is sought are the International Centre for Settlement of Investment Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL) and the International Chamber of Commerce (ICC).

International taxation agreements deal primarily with the elimination of double taxation, but may in parallel address related issues such as the prevention of tax evasion.

Types

Bilateral investment treaties

To a large extent, the international legal aspects of the relationship between countries and foreign investors are addressed bilaterally between two countries. The conclusion of BITs has evolved from the second half of the 20th century onwards, and today these agreements constitute a key component of the contemporary international law on foreign investment. The United Nations Conference on Trade and Development (UNCTAD) defines BITs as "agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country." While the basic content of BITs has largely remained the same over the years, focusing on investment protection as the core issue, matters reflecting public policy concerns (e.g. health, safety, essential security or environmental protection) have in recent years more frequently been incorporated into BITs.

A typical BIT starts with a preamble that outlines the general intention of the agreement and provisions on its scope of application. This is followed by a definition of key terms, clarifying amongst others the meanings of "investment" and "investor". BITs then address issues related to the admission and establishment of foreign investments, including standards of treatment enjoyed by foreign investors (minimum standard of treatment, fair and equitable treatment, full protection and security, national treatment and most-favored nation treatment). The free transfer of funds across national borders in connection with a foreign investment is usually also regulated in BITs. Moreover, BITs deal with the issue of expropriation or damage to an investment, determining how much and how compensation would be paid to the investor in such a situation. They also specify the degree of protection and compensation that investors should expect in situations of war or civil unrest. Another core element of BITs relates to the settlement of disputes between an investor and the country in which the investment took place. These provisions, often called investor-state dispute settlement, usually mention the forums to which investors can resort for establishing international arbitral tribunals (e.g. ICSID, UNCITRAL or ICC) and how this relates to proceedings in host countries' domestic courts. BITs also typically include a clause on State-State dispute settlement. Finally, BITs usually refer to the time frame of the treaty, clarifying how the agreement is extended and terminated, and specifying to what extent investments conducted prior to conclusion and ratification of the treaty are covered.

Preferential trade and investment agreements

Preferential Trade and Investment Agreements (PTIAs) are broader economic agreements among countries that are concluded for the purpose of facilitating international trade and the transfer of factors of production across borders. They can be economic integration agreements, free trade agreements (FTAs), economic partnership agreements (EPAs) or similar types of agreements that cover, among many other things, provisions dealing with foreign investment. In PTIAs, the section dealing with foreign investment forms only a small part of the treaty, usually encompassing one or two chapters. Other issues dealt with in PTIAs are trade in goods and services, tariffs and non-tariff barriers, customs procedures, specific provisions pertaining to selected sectors, competition, intellectual property, temporary entry of people, and many more. PTIAs pursue the liberalization of trade and investment in the context of this broader focus. Frequently, the structure and appearance of the respective chapter on foreign investments is similar to a BIT.

There exist many examples of PTIAs. A notable one is the North American Free Trade Agreement (NAFTA). While the NAFTA agreement deals with a very broad set of issues, most importantly cross-border trade between Canada, Mexico and the United States, chapter 11 of this agreement covers detailed provisions on foreign investment similar to those found in BITs. Other examples of PTIAs concluded bilaterally can be found in the EPA between Japan and Singapore, the FTA between the Republic of Korea and Chile, and the FTA between the United States and Australia.

International taxation agreements

The main purpose of international taxation agreements is to regulate how taxes imposed on the global income of multinational enterprises are distributed among countries. In most cases, this is done through the elimination of double taxation. The core of the problem lies in the disagreements among countries on who has jurisdiction over the taxable income of multinational corporations. Most commonly, such conflicts are addressed through bilateral agreements that deal solely with taxation on income and sometimes also capital. Nevertheless, a few multilateral agreements on taxation as well as bilateral agreements that address taxation together with other issues have also been concluded in the past.

In contemporary treaty practice, avoidance of double taxation is achieved by concurrently applying two separate approaches. The first approach is the elimination of definition mismatches for terms such as "residence" or "income" that could otherwise be a cause of double taxation. The second approach constitutes the relief from double taxation through one of three methods. The credit method allows foreign tax to be credited against the tax paid in the residence country. According to the exemption method, foreign income and resulting taxation is simply disregarded by the residence country. The deduction method taxes income net of foreign tax, but it is rarely applied.

Trends in international investment rulemaking

Historically, the emergence of the international investment framework can be divided into two separate eras. The first era – from 1945 to 1989 – was characterized by disagreements among countries about the degree of protection that international law should offer to foreign investors. While most developed countries argued that foreign investors should be entitled to a minimum standard of treatment in any host economy, developing and socialist countries tended to contend that foreign investors do not need to be treated differently from national firms. In 1959, the first BITs were concluded, and during the following decade, much of the content that forms the basis of a majority of the BITs currently in force were developed and refined. In 1965, the Convention for the Settlement of Investment Disputes Between States and Nationals of Other States was opened to countries for signature. The rationale was to establish ICSID as an institution that facilitates the arbitration of investor-State disputes.

The second era – from 1989 to today – is characterized by a generally more welcoming sentiment towards foreign investment, and a substantial increase in the number of BITs concluded. Amongst others, this growth in BITs was due to the opening up of many developing economies to foreign investment, which hoped that the conclusion of BITs would make them a more attractive destination for foreign companies. The mid-1990s also saw the creation of three multilateral agreements that touched upon investment issues as part of the Uruguay Round of trade negotiations and the creation of the World Trade Organization (WTO). These were the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Investment Measures