The Shaky Proposition of the State’s Legitimate Tax Expectations: A Response to Yenkong Ngangjoh-Hodu

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I do not share a number of Yenkong Ngangjoh-Hodu’s views about the legitimate expectations doctrine, but this response focuses on the final paragraph of his post, in which he argues that a State could somehow raise a legitimate expectations argument against a foreign investor that engages in “tax avoidance.” For the sake of clarity, I understand Yenkong to mean not tax evasion, which would violate the law of the host State and thus subject the investor to domestic criminal and civil penalties, but what has been defined as “the minimization of tax liability by lawful methods.” This is also known as “tax planning.” (Photo: Avoiding the window tax in England, credit)

I see several problems with Yenkong’s suggestion. First, as he correctly explains, the legitimate expectations doctrine is an interpretation of the fair and equitable treatment (FET) provisions contained in many investment treaties. Those provisions invariably impose a one-way obligation that governs the State’s treatment of the investor, not the reverse. This is a separate issue from whether (a) a State can invoke an investor’s actions to show that it treated the investor fairly in the circumstances (it can), or (b) a State can raise counterclaims (it can in some cases), or even (c) some treaties do or may in the future impose specific substantive obligations on investors (they likely will). However, even considering those possibilities, it is not clear on what legal ground a State would “develop” “an argument . . . that its legitimate expectations [were] frustrated.”

Second, Yenkong asserts that tax avoidance or tax planning is “incongruous with the spirit of any bilateral investment agreement.” While he makes no attempt to support this claim, it is not obviously true. BITs typically state their goals in their preambles, and I have yet to see one that refers to increasing tax revenue. Instead, they refer to promoting greater economic cooperation, stimulating the flow of private capital, fostering economic growth and development, and maximizing effective use of economic resources. It thus appears entirely possible for an investment to uphold the “spirit” of a BIT by creating new and beneficial cross-border economic activity while still minimizing its tax liability within the confines of the law.

Third, he states that, “instead of an unqualified ‘legitimate expectations’, tribunals ought to clearly take into account investor’s conduct.” There are a few problems here. He appears to have shifted from an argument that a State should be able to claim that its expectations were violated to an argument that an investor’s tax conduct might appropriately be raised as a defense to the investor’s allegation that its legitimate expectations were violated. Is he hinting at the possibility of a counter-claim (in which case, on what legal theory, since as noted above FET is a one-way obligation), or is he suggesting a defense? If the latter, as he acknowledges earlier in his post, the investor’s conduct is already considered as part of the determination of whether its alleged expectations were legitimate and whether the State’s actions thwarted them. However, it is not at all apparent in what factual situation tax avoidance/planning would be relevant to an investor’s claim that its legitimate expectations were violated. Such scenarios would certainly be rare.

Finally, assuming for the sake of argument that there were a legal foundation on which a State could raise a legitimate expectations claim, on what basis would a State allege to have developed a legitimate expectation to collect a certain level of tax beyond that legally required? It seems to me there would have to be some kind of agreement on this between the investor and the State to found a claim.

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