Jiangfeng Li (Kirkland & Ellis), Taxation and Expropriation in International Investment Arbitration, 47 U. Pa. J. Int’l L. 158 (2025)

In recent decades, there has been a significant increase in the number
of international investment arbitration cases involving disputes over
taxation. As taxation measures are a core part of the State’s inherent police
power, there are extensive debates regarding the criteria for when an
investment treaty obligation is violated and how to balance States’ police
power to tax with protection of foreign investors’ interests. As most
investment treaties do not exempt taxation-related expropriation claims,
taxation cases often include a claim that the host State has indirectly
expropriated the investment interest through the taxation-related
measures. This Article conducts an extensive analysis and examination of
investor-state dispute settlement (“ISDS”) cases involving indirect
expropriation claims targeting host States’ taxation measures and shows
that taxation-related claims generally fall within three regulatory spaces.
The examination of these cases also shows that ISDS tribunals have adopted
quite divergent approaches when assessing taxation-related expropriation
claims, namely, the “qualified police power” approach, the “sole effects”
approach, and the “fact-based, case-by-case, cumulative” approach. In
order to resolve the discrepancy and uncertainty existing in current
arbitral jurisprudence, this Article proposes a “Two-Prong” methodology
to conduct expropriation analysis using the restructured “Balanced
Effects & Police Power” approach, with the first prong using the
redefined “effects” test to assess whether there is a level of interference amounting to substantial deprivation of investors’ investment interests
and the second prong utilizing the “qualified police power” doctrine to
assess whether the interference amounts to compensable expropriation.