THE TREATMENT OF TAXATION AS EXPROPRIATORY IN INTERNATIONAL INVESTOR-STATE ARBITRATION A state’s power to tax individuals and entities within its jurisdiction also empowers the state with the tools to take and/or destroy investments within its reach. 1 By ALI LAZEM* and ILIAS BANTEKAS* ABSTRACT Domestic tax measures are treated by investment tribunals as a fundamental attribute of sovereignty and constitute lex specialis in relation to the general rule on expropriation under customary international law. Although both direct and indirect expropriation is possible through the imposition of tax measures, in practice such a finding is rare and is further restricted by joint tax vetoes and tax exclusion clauses in BITs and bilateral tax treaties. This inclination in favour of host states is further confirmed by the requirement that the conduct requirements for expropriation be satisfied, although the role of conduct requirements is to differentiate between lawful and unlawful expropriation. The lex specialis character of tax measures suggests, particularly as a result of cases such as Burlington, that investment tribunals are unlikely to lower the threshold of state liability for expropriation arising from tax measures and are in fact likely to view the substantial deprivation standard very strictly and in a manner that requires a total deprivation of property. Introduction The regulation of tax in international investment law is hardly straightforward even if, as this article demonstrates, the imposition of arbitrary and discriminatory taxes may amount to both direct and indirect expropriation, as well as a violation of an applicable standard of investor treatment. For one thing, the levying of taxes is an indispensable function of sovereignty, lest states are unable to attain the requisite resources to uphold their sovereignty or survival. This has given rise to a presumption in favour of the validity of tax-related measures under international investment law. 2 Moreover, the sovereign power to tax is subject to several (consensual) limitations under international law, particularly trade liberalisation agreements, whether in the form of regional free trade agreements (such as NAFTA) 3 or global arrangements such as those set up by the WTO. Whereas the restrictions on tariffs (taxes on foreign goods upon entry) and internal taxes 4 in the context of trade liberalisation treaties are 1 * LXL LLP (London). ** Professor of International Law, Brunel University School of Law. Nearly 200 years ago, in the United States case of McCulloch v. Maryland (1819) 17 U.S. 327, the judge presiding over the case, Chief Justice Marshall, correctly asserted that “… the power to tax involves the power to destroy…”. 2 See El Paso Energy International Company v Argentine Republic , ICSID Case No. ARB/03/15, Award of 31 October 2011, para 290. 3 See, for example, Art 77 of the EC-Chile FTA which applies the national treatment principle in respect of internal taxes to imported goods. Given that importers of goods engage in trade and not investment, a violation of this provision does not give rise to international investment arbitration (IIA). 4 Trade liberalisation encompasses tariff barriers and non-tariff barriers. As far as the former is concerned, the term tariff is broad and includes practices such as duties, surcharges and export subsidies. Non-tariff barriers