This article addresses a currently very controversial issue—the question of environmental regulation of foreign investment and the limits on such national regulation by international law, in particular by recently completed and negotiated multilateral investment Treaties (MITs). It contributes to the emerging discussion on how and where to draw the line between legitimate non-compensable national regulation aimed at protecting the environment, or ‘human, animal or plant life or health’1 on one hand, and regulation which is ‘tantamount’ to expropriation requiring compensation, on the other. It is a question that is largely responsible for the 1998 collapse of the negotiations for a Multilateral Agreement on Investment (MAI) within the OECD.2 This experience is currently the main obstacle for negotiating multilateral investment agreements—and it has already become a problem for the proper implementation of the already existing ones—in particular the novel and far-reaching investor-state arbitration under Chapter XI of NAFTA and Art. 26 of the Energy Charter Treaty.3

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This chapter provides an overview of the regulation of taxation in modern investment treaties and the underlying policies and tensions reflected in the variations of treaty regulation of tax disputes. Section 1 sets the scene for the discussion, placing tax-related investment disputes in the political and economic context. It argues that under the current regulatory state, in which the function of the state has retreated from that of controlling the ‘commanding heights’ of the economy to regulation, the tendency for the state to use tax instruments to ‘squeeze’ foreign investors or for protectionist purposes is very attractive. Section 2 provides an overview of the history of taxation. Section 3 discusses the general scope of coverage of tax under investment treaties, examining how tax is defined in some of the treaties and the shortcomings of those definitions, the type of taxes covered under the treaties and the underlying issues and tensions surrounding such coverage. Section 4 discusses the applicability of core substantive investment protection provisions to tax and the underlying issues and tensions surrounding them. Section 5 examines the treaty formulations on expropriatory taxation and transparency and the policy reasons for the new trend in those areas. Section 6 goes on to consider arbitral jurisprudence on expropriatory taxation. Section 7 discusses joint tax consultation as a means of limiting expropriatory tax measures. Finally, Section 8 deals with taxation and transparency.

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