1. The terms "public purpose" and "public interest' derive from different legal traditions but have very similar meanings. The term chosen "for a purpose which is in the public interest' is considered consistent with both legal traditions; it was previously agreed in the Energy Charter Treaty (ECT).
2. The Drafting Group understands that the violation of criminal laws could result in the loss of an investment (or part thereof) which would not be deemed expropriation, provided those laws and their application are non-discriminatory and otherwise consistent with the standards of this agreement.
3. In cases where the investment consists in total or in part of shares, the rights of the shareholders, if an expropriation takes place, have to be defined. This should derive from the definition of investments in the MAI, if not, a special provision may be needed in Article 2.
4. Expropriation in cases where the investment consists in total or in part of intellectual property rights was seen as critical. It was decided not to suggest specific language on this issue and that it would need to be further revisited in a global context.
5. "Creeping expropriation" in general is covered by the words of Article 2: "measures or measures having equivalent effect". "Creeping expropriation" through tax measures were rnentioned but no specific wording was suggested (see Conmentary on "Taxation").
6. One delegation proposed additional text on blocking, freezing, sequestration or any similar measures having expropriatory effect. After discussion, it was agreed that these concerns were already addressed: temporary actions, when ended, would result in restitution of the property, and, any unlawful aspects of the temporary measure could give rise to damages for breach of other articles, such as Article 1. Should the measures take on a permanent or expropriatory character, they would, (i) if lawful, be subject to Article 2, or (ii) if unlawful, give rise to a right to restitution under customary international law.
7. The Drafting Group considered the problem of exchange rate risk only in the case of delay in the payment of compensation for expropriation to the exclusion of other exchange rate risks to which the investor may be exposed.
8. It identified four options for calculating compensation in order to protect the investor against losses from currency fluctuations before date of payment. In each case, the text would replace the text currently shown in article 2.5.
The compensation to be paid shall be calculated by summing:
at the market rate of exchange prevailing on that date, plus
(b) interest, at a commercial rate established on a market basis for the currency of valuation, from the date of expropriation until the date of actual payment.
That sum shall be expressed in the currency of payment at the market rate of exchange prevailing on the date of payment for the currency of valuation.
Option B - Government Choice: Multiple currency option
The compensation to be paid shall be calculated by summing:
at the market rate of exchange prevailing on that date, plus
(b) interest, at a commercial rate established on a market basis for the currency of valuation, from the date of expropriation until the date of actual payment.
T'hat sum shall be expressed in the currency of payment at the market rate of exchange prevailing on the date of payment for the currency of valuation.
Option C - Government Choice - Freely Convertible Currency specially defined 1
The compensation to be paid shall be calculated by summing:
(b) interest, at a commercial rate established on a market basis for the currency of valuation, from the date of expropriation until the date of actual payment.
That sum shall be expressed in the currency of payment at the market rate of exchange prevailing on the date of payment for the currency of valuation.
T'he following would be inserted in the definitions article: "A Freely Convertible Currency is a currency which is, in fact, widely used to make payments for international transactions and is widely traded in the principal exchange markets".
Option D - No Explicit Coverage of Exchange Loss Provision
Compensation shall include interest at a commercially reasonable rate established on a market basis for the currency of payment from the date of expropriation until the date of actual payment.
9. A majority of delegations favoured Option D. Some delegations considered that the international law standard of compensation, set out in Article 2, which requires payment of full market value in fully realisable fom and without delay, has implicit within it the requirement of offsetting declines in the currency of valuation between the valuation date and the payment, where there was a delay. Others considered this approach to be too vague or to leave the issue open for later dispute. They therefore favoured an explicit provision on the method to be used in calculating expropriation compensation including the choice of reference currency.
10. A number of delegations favoured giving the investor a choice of currency. Some favoured limiting the choice to the currencies of the home or host government. Others favoured broadening that choice somewhat. There was a consensus among them that the choice could not be unlimited. Option A illustrates their approach.
11. A number of other delegations considered that the choice of currency should be with the host government. Several of those delegations supported Option C. One delegation preferred Option B and requested its inclusion in this report.
12. One delegation noted that it could only accept an option which did not allow its currency to be used for calculation if the same limitation were imposed on all MAI parties. It suggested the inclusion of the words "other than its own" after the words "a freely usable currency" in Option B. The same delegation mentioned that another option would be to calculate exchange rate changes on the basis of a basket of currencies.
13. It will need to be borne in mind, when considering the accession of non-OECD Members, that the convertibility of the national currency will be important with respect to the transfer obligations of the agreement, including transfers of compensation for expropriation.
14. One delegation asked whether the drafting of Article 2 was adequate to avoid excessive scope, raising as an example the case of an investor which had received a permit or authorisation for an investment but then ceased to meet the necessary conditions for it. The Drafting Group was of the opinion that this should pose no problem under Article 2 as drafted: cancellation or withdrawal of the permit or authorisation in these circumstances by the Government would not constitute a direct or indirect expropriation or nationalisation of the investment. Comment 2 to Article 2, on loss of an investment through proper application of criminal laws, was not exhaustive.
15. One delegation, supported by another delegation, believes it is important to provide guidance to arbitrators on how to determine the "fair market value". This paragraph could read as follows:
1. All delegations agreed that the free transfer of returns was a critical element of the protection of the investors. Therefore a clear preference was voiced for listing the main categories of returns in Article 4.1(b) and in particular: "profits, interest, dividends, capital gains, royalties, fees and return in kind". However it was finally agreed not to lengthen the text of Article 4.1(b) provided that these categories are explicitly listed in the definition of returns in the article on definitions of the MAI.
2. The free transfer obligation applies to earnings and other remuneration net after deduction of any withholding for tax or social security purposes. Dispute resolution would be available to investors but not their personnel.
3. The Drafting Group heard a presentation on transfers by an expert from the International Monetary Fund regarding the rights and obligations of countries under the Fund Agreement. It recommended that the Negotiating Group deal with this matter, for example, under general provisions concerning the relationship of the MAI to other international agreements.
4. The Negotiating Group will nevertheless need to address the question of general exceptions and temporary derogations for reasons such as balance of payments, public order and preservation of monetary union, including their possible relation to this article. However, it was mentioned that any such provision should not apply to payment of compensation under Article 2.
5 . Articles 4.2 and 4.3 ensure -- without imposing it -- the freedom to make transfers in a freely [convertible] currency at a market rate. The reference to the exchange rate in Article 4.3 pertains only to cases where the conversion of funds occurs on the date of transfer.
6. Most delegations considered that the draft Article 4.4 would provide greater investor protection in extreme circumstances. Others thought the provision should not rule out a different solution mutually agreed by the Parties.
7. Conversely, a few delegations considered that it would not be useful or necessary to include such a text because: a) the extreme circumstances envisaged were very unlikely to arise in OECD countries; b) it is unlikely that a country without a functioning foreign exchange market would want to join or be able to meet the criteria for joining the MAI; and c) if a provision were included for these cases, the SDR rate may not be the most appropriate or most advantageous rate for the investor.
8. It was broadly agreed that this specific matter was independent of the general issues linked to the accession of non-Members to the MAI, although the conditions of non-Member accession to the MAI could possibly include a requirement that all MAI countries should meet the requirements of Article VIII of the IMF Agreement and should maintain functioning foreign exchange markets.
9. In order to emphasise the freedom of transfer, one delegation proposed the following text for the first sentence of Article 4.5: "The freedom of transfer of returns in kind under Article 4.1(b) does not derogate from the rights of a Contracting Party under the Agreement established by the World Trade Organisation to restrict or prohibit the export or the sale for export of what constitutes the return in kind".
10. Article 4.6 is indirectly but closely linked with the issue of free transfer. It allows satisfaction of two important objectives. It is comparable to the language in the Energy Charter Treaty (ECT). Some delegations would include additional specific objectives, such as bankruptcy, insolvency or the protection of the rights of creditors; issuing, trading or dealing in securities; and records of transfers. Other delegations questioned the need and desirability of Article 4.6.
11. At the invitation of the Negotiating Group, EG5 reviewed earlier square-bracketed text for paragraph 4.6 of the MAI Article on Transfers. This present text has been developed by EG5 for the MAI Article on Transfers as a whole. Most delegations considered that such provisions are particularly important for financial services. A few delegations felt that no such provisions are necessary.
12. One delegation suggested adding the following text on forced transfers: "A Contracting Party shall not require the transfer of, or penalise the failure to transfer, the income, earnings, profits or other amounts derived from, or attributable to, an investment in the territory of another Contracting Party by one of its investors." This proposal did not attract a consensus.
1 . It was discussed whether to include reference to private insurance companies in the recognition given in Article 5. A special provision to this effect was considered unnecessary since a Contracting Party may designate its "designated agency" regardless of its private or public status.
2. The respective rights of the investor and the Contracting Party or its designated agency subrogated in the rights of this investor and dealt with in the text on Dispute Settlement.
1. There was broad support for inclusion in the MAI of a provision stipulating that the MAI would apply to pre-MAI investments. The debate was not conclusive as to whether to restrict the coverage to investments that were "consistent with the legislation" of the host state.
2. Some delegations wish to specify that the Agreement would not apply to claims arising out of past events or which had already been settled. This is reflected in Option A in the draft text. Another delegation questioned the need for the second sentence in view of Article 28 of the Vienna Convention on the Law of Treaties and proposed the text in Option B, which avoids implying retroactive effect.
It is understood that for a number of delegations further work is needed on dispute settlement. In particular, different options remain in the field of multilateral consultations and scope of dispute settlement. The present text has been prepared by the Chairman of the Expert Group on Dispute Settlement on the basis of the discussions in the group. It needs to be discussed by the Negotiating Group.
Article C.1.a
1. This paragraph provides that arbitration is available for a dispute over whether a Party has acted in contravention of the Agreement. It is understood that 'action' includes failure to act when the Agreement requires it. A key question, which this formulation does not prejudice, and leaves open for the arbitral tribunal to decide in light of all the relevant circumstances and the jurisprudence is, when is a dispute over a legislative measure of a Party ripe for arbitration, if its terms, which provide for action violative of the Agreement, have not yet been applied to a concrete case in that fashion.
2. In light of the opinion of the ICJ in the ELSI case, consideration was given to including in the MAI an express provision that there was no requirement of exhaustion of local remedies before resort might be had to MAI dispute settlement for injury to an investor. There was full agreement that the intent was not to require exhaustion of local remedies before MAI dispute settlement could be invoked. However, it was decided to record that in Commentary, rather than include in the articles of the MAI a provision which might cast doubt on the dispute settlement provisions of other investment agreements which had the same intent and which were silent on the matter.
3. One delegation has serious concerns in relation to this provision.
Article C 1.b
Article C paragraph 1.b, based on ICSID Article 27, is intended to assure that the initiation of any form of investor-state arbitration provided by the MAI would restrain parallel state-state proceedings under the MAI to the same extent as, but no more than, would initiation of ICSID arbitration for a MAI Contracting Party which is also an ICSID party. This is a very limited preclusion, effecting the right to bring the very same claim. The ICSID observer confirmed that ICSID Article 27 should not preclude a state-to-state arbitration of an issue of treaty interpretation or application which was also involved in the investor-state dispute, as long as this did not amount to the espousal of the claim of the investor. It was recognised that an award in such a state-state proceeding would not affect an award rendered in the investor-state proceeding.
Article C 6
The "applicable rules" referred to in Article C 4 are those concerning the interpretation and application of treaties. Accordingly, this provision would not provide a basis for a Panel to rule on a dispute about a Contracting Party's compliance with other international legal obligations.
Article C 9
1. There was full agreement on the desirability of strong procedural safeguards for resort to countermeasures. This would prevent problems which unilateral recourse to countermeasures can produce. However, there was disagreement on the role of the Parties Group in this process.
2. On the permissible scope of countermeasures, there was agreement that expropriation of investments and denial of treatment in accordance with international law were not available countermeasures. There was broad willingness to consider some hierarchy of responses -- to discourage countermeasures against established investment. However, views were fairly evenly divided between delegations favoring a broad approach which would generally allow any responsive measure permitted under customary international law, including measures in the field of trade, and those favoring limiting responses to suspension of benefits under the MAI itself.
3. The broader customary law approach might not, in reality, be as far from the MAI only approach as it might appear to be. For example, certain responses permitted under customary law would run counter to obligations of MAI parties under the GATT, GATS or other WTO agreements. By neither expressly authorizing suspension of benefits under other agreements nor precluding challenge of such retaliatory suspension under the WTO DSU, a MAI party would run the full risk that any retaliation in areas protected under those agreements, without obtaining a waiver under them, would be found to be a violation of those other obligations, notwithstanding alleged rights of retaliation under the customary law of state responsibility. This risk would flow in part from the possibility that a WTO panel would not consider any state responsibility argument but would deal with a dispute strictly within the terms of the WTO agreements themselves; it would also flow in part from the legal uncertainties which some delegations believe exist concerning the right to respond to violation of one treaty by action in contravention of another unrelated one. Provided that the MAI, unlike the OECD's shipbuilding agreement, neither expressly authorized retaliatory suspension of benefits under WTO agreements nor waived the MAI Parties rights to complain under the WTO system for a retaliation found lawful under the MAI, the practical scope of the broad option is likely to be severely constrained.
Article D.1.a
1. Pursuant to Article D.1.a, an alleged breach of the MAI must be causally linked to loss or damage to the investor or investment for the investor to have standing to bring a claim against the host state, but the damage, while imminent, would not need to have been incurred before the dispute is ripe for arbitration. Further a lost opportunity to profit from a planned investment would be a type of loss sufficient to give an investor standing to bring an establishment dispute under this article, without prejudice to the question of whether a specific amount of lost profits might later prove too remote or speculative to be recoverable as damages. The claim would be initiated on the basis of allegations of loss or damage, but their existence and actual amount would remain to be demonstrated, along with the remainder of the investor's case, during the proceedings on the merits of the dispute.
2. This Article, which includes effects on the investor, applies to all the investor's rights including those relating to establishment.
Article D.1.b
1. Some countries could accept the procedural solution on condition that there are no reservations permitted; were reservations permitted they would wish to return to the full respect clause. Six delegations wish to reserve their position. Positions are divided on the types of agreement to be covered.
2. Provided that the law specified under Article D.14.b were applicable under both options, and the respect clause were excepted from state-state dispute settlement, the full respect clause and the procedural solution would appear to be similar in their legal effect.
Article D.2.a
The reference in this article to submission of a dispute to "any competent courts" leaves open the possibility that a Contracting Party might choose not to make the MAI directly enforceable in its courts.
Article D.2.c
Under Article D.2.c, the investor may freely choose among the arbitral options. Country reservations limiting the choice of UNCITRAL and ICC to cases in which the ICSID and additional facility options were not available would be acceptable.
Article D.3
Two delegations have problems of a constitutional nature with unconditional prior consent. Another one has serious concerns with it.
Article D.6
This paragraph would be intended to assure that, in cases of mixed or unclear division of competence between the EC and a member state, both would be in the proceedings and responsibility would be covered, without burdening the investor with this issue. Whether or not this should be generalised beyond the EC to any other future REIO contracting party, i.e., a REIO with legal capacity and competence on MAI matters, is being considered as well.
Article D.8
Article D.8 is a variant of the clauses which appear in many investment agreements, allowing the established company to have standing to bring the claim to arbitration against the host state. Country specific reservations to this clause or an annex listing countries to which it does not apply would be acceptable.
Article D.9
1. This paragraph would represent a compromise between those delegations which want consolidation to be only with the case by case agreement of the investors concerned and those which wish consolidation to be mandatory, with the investor only able to withdraw from it with prejudice to its right to resort to other dispute settlement. Subparagraph e would allow withdrawal to be without prejudice other than under Article D.2.c.
2. One delegation has serious concerns in relation to this provision.
Article D.14
Unlike in cases under Article 14 (a) in which domestic law may be applicable as law, domestic
law may be considered as a relevant fact in cases under Article 14 (b).
Article D.18
This paragraph provides for the enforceability of awards in accordance with the New York Convention in the courts of parties to it. While it does not require that MAI Contracting Parties become party to the New York Convention, it does requires them to provide for the enforcement of MAI pecuniary awards.
Paragraph 1
1. It has been proposed that the general exceptions provisions not be applicable to all of the obligations under the agreement. The ECT (Article 24(1)) is an example of a multilateral agreement that does not allow for general exceptions to be taken with regard to specific obligations concerning compensation for losses or expropriation. Bilateral treaty practice differs on this matter. Some delegations thought that a reference to paragraph 2(c) would be necessary to clarify that actions pursuant to a UN Charter obligation would in any case prevail over the MAI (see paragraph 9, below). One delegation submitted a proposal which would have the same effect by changing the order of the paragraphs.
2. The question is whether certain obligations of the agreement are considered so central to investor protection, for example compensation in case of expropriation, that a provision should limit the right of a Contracting Party to invoke this Article for actions that would be inconsistent with its obligation to pay compensation in the case of an expropriation.
3. The majority view was that the MAI should provide an absolute guarantee that an investor will be compensated for an expropriated investment. This was questioned by the United States delegation which doubted that in time of war whether a country would be able to pay compensation, in all cases, to an investor of a party with which it is in conflict. In the case that general exceptions would be permitted to override MAI obligations, delegations might further consider whether this should be limited to only essential security interests.
4. One delegation raised the issue of the need to ensure that this provision would not apply retroactively. Delegations pointed to customary international law rules limiting retroactive application of treaties. They agreed this was a valid point, but that it applied more generally to the entire agreement and should be addressed elsewhere.
Paragraph 2
1. One delegation, supported by other delegations, requested square brackets be put around the phrase "which it considers" in the chapeau, as well as brackets around the phrase "or other emergency in international relations" at the end of (i). In the opinion of these delegations, these proposals would help safeguard against potential abuse by constraining the self-judging nature of the provision and by limiting its scope. One delegation believes that, based on an ICJ decision, such a change would eliminate the self-judging nature of the provision.
2. There were different views on whether to delete the phrase "including those" in the chapeau, which would make the list a closed one. Recent agreements like the NAFTA, the ECT, the GATS, and the Shipbuilding agreement do not define essential security interests but provide elements clarifying the purpose of the provision. One delegation thought that in a closed list it would also be necessary to amend element (ii) (by inserting the phrase "inter alia" after the word "non-proliferation") to cover international non-proliferation agreements, other than those relating to nuclear weapons for example agreements concerning chemical weapons. Another delegation, supported by other delegations, proposed the inclusion of an additional element (iii).
3. This provision is found in recent agreements (NAFTA, ECT, GATS, Shipbuilding). One delegation, supported by other delegations, requested that square brackets be put around the phrase "it considers" (to be replaced by "would be") to help safeguard against potential abuse by constraining the self-judging nature of the provision. One delegation believes that, based on an ICJ decision, such a change would eliminate the self-judging nature of the provision.
4. Several delegations noted that this issue also arose in the context of the discussion on transparency in the National Treatment chapter. One delegation pointed out that in its opinion this paragraph would also apply to concerns relating to public order.
5 . Agreements such as the NAFTA, GATS, and the Shipbuilding agreement include a general exception provision relating to obligations for the maintenance of international peace and security. These provisions refer specifically to obligations under the UN Charter. Some delegations thought it unnecessary to refer to this obligation because the supremacy of the UN Charter over international treaties is not disputed, but they agreed not to insist on its deletion if others wanted to make this explicit. Others were of the opinion that this reference was too restrictive because it might not cover actions taken pursuant to regional security arrangements. To address this point, one delegation proposed including, after the words "UN Charter", the phrase "or equivalent arrangements authorised by a competent international organisation". Another delegation saw this as an issue of clarification rather than one of restrictiveness and suggested including, after the word "under", the phrase "or consistent with".
Paragraph 3
1. Some countries believe that a reference to public order is necessary to allow countries to take exceptional measures based on this principle. One delegation indicated in a written submission that a public order clause was meant to ensure certain objectives, including the non-discriminatory application of its laws and the prevention of disturbances to the public order that could be posed by certain foreign investments. It thought that given the different circumstances of foreign and domestic investors as concerns the protection of public order, it would not be possible, in all cases, to accord equivalent treatment to these different types of investors. Delegations recognised the interest of a state in ensuring the application of its criminal laws, anti-terrorist measures, and money laundering regulations, for example. But not all delegations were convinced that it is necessary to discriminate between foreign and domestic investors in order to protect public order. One delegation remarked that if the MAI went beyond national treatment obligations to include the concept of market access, then the broader interpretation of public order would be necessary.
2. Several delegations were of the opinion that provision might need to be made for cases where information requirements or other formalities might be required of foreign investors because they are not in the same situation as domestic investors. This question also arose in the context of the discussion of the transfer provisions in the investment protection chapter where the host state would want to preserve its right to require certain reports without being in contradiction of the absolute right of free transfer otherwise provided by the agreement. Article 1111 of the NAFTA was cited as a possible model to take account of these situations. The question arose whether in fact this was not a matter of "equivalent treatment" which could be included in the context of national treatment.
3. In situations where the state needs to ensure that all investors conform to its laws and regulations which are not in contradiction with the provisions of the agreement, a provision of more general application might also be needed, as in Article 5 of the Capital Movements Code. The Group could consider a provision similar to that in the Code which would apply to the whole of the agreement. If this were the preferred solution, it might obviate the need for a special provision in the transfer article or elsewhere in the agreement where there might be similar concerns.
4. Several proposals were made with the intent to narrow the scope of a public order exception. One delegation proposed limiting the public order concept to exceptions to the national treatment principle and to make the MAI dispute settlement mechanism applicable. Another delegation remarked, however, that if the MAI went beyond national treatment obligations to include the concept of market access, then the broader interpretation of public order would still be necessary. A third delegation suggested a reference to the ECJ principles of proportionality and the exclusion of economic purposes as additional limitative qualifications to public order.
5. Delegations in favour of including a public order exception agreed that its use should be strictly controlled. These delegations felt that the actions relating to public order would not be self-judging and would be subject to the limitation in paragraph 4 and to the procedures in paragraph 6. One delegation, supported by another delegation, stated that these limitations and procedures should apply in the same way to other general exceptions and that all general exceptions should be treated in the same way in relation to the applicability of the dispute settlement mechanism.
Paragraph 4
Paragraph 4 would apply to all exceptions in this article. It is another way of formulating the obligation that parties must be in good faith when invoking this article and cannot avail themselves of it as a pretext for not complying with their obligations under the agreement. A good faith obligation already exists in international law and one delegation has concerns that by restating it in the agreement, we may create a different standard. Some delegations thought it might be useful to follow the ECT (Article 24) and GATS (Article XIV) provisos that public order or other general exceptions must not constitute a disguised restriction or that they are invoked without proper justification. This paragraph could be considered to have the effect of allowing a party which had reason to believe that another party had made improper use of this article to challenge such use as contrary to the objectives of the article. A decision on paragraph 4, in the opinion of several delegations, would have to wait until such time that consideration of paragraphs 2 and 3 had been completed.
Paragraph 5
The content of this paragraph would need to await a discussion of the role of a "Parties Group". The requirement to notify measures is intended to facilitate transparency and to promote consistency in the manner that MAI Parties might apply the general exceptions provisions. Some delegations thought that the 1991 clarification by the CIME that "measures taken for economic, cultural or other reasons should be identified as such and should not be shielded by an excessively broad interpretation of public order and essential security interests..", might also assist the Parties in applying these provisions.
Paragraph 6
1. Most delegations were in favour of providing for a mechanism for consultation/dispute settlement. It would be understood that entering into consultations would not prejudice the right of either Party to invoke the other procedures of the agreement to which it might be entitled. The question remains whether paragraph 4 provides an objective standard which, if violated, can give rise to an actionable cause.
2. Paragraph 6 could be adapted depending on how parties wish to proceed. There are several options which can be considered:
b) actions relating to any of the provisions of this article could be subject to consultations (as provided for in this article or by reference to the consultations procedures of the agreement), to the exclusion of recourse to the dispute settlement provisions of the agreement;
c) actions relating to the public order provisions of paragraph 3, could be subject to consultations (as provided for in this article or by reference to the consultations procedures of the agreement), and to the dispute settlement provisions of the agreement.
3. In the view of one delegation, any dispute settlement mechanism provided in the MAI would be rendered superfluous by the self-judging nature of the general exception provisions. This delegation also questioned whether it would be necessary to provide a specific consultation mechanism in this article separate from the general consultation mechanism of the MAI.
4. Whatever the procedure agreed for general exceptions, it will have to be considered in the context of the MAI provisions on the role of the Parties Group and the dispute settlement procedures.
1. Most EG5 delegations wanted to consider this issue further, including in particular whether the transactions referred to in paragraph 1 should be explicitly limited to: 1) open market transactions in government securities; and 2) foreign exchange intervention transactions. Some delegations considered that there should be a broad carve-out for activities conducted in pursuit of monetary or exchange rate policies by a central bank or monetary authority.
2. The Group also considered a text which would preserve the freedom of.the monetary authority to decide not to carry out transactions with foreign non-residents but which would prevent the monetary authority from discriminating against resident (established) foreign investors when choosing the counterpart of a transaction. This text would be added at the end of paragraph 1. It would read as follows:
Some delegations considered that such an addition would not be appropriate. Other delegations wished to reflect further on this matter.
3. One delegation asked whether restrictions on the sale of financial instruments to non-residents falls under the above provisions or under the temporary safeguard clause (see below). In response, it was said that under the above provisions the monetary authority would be free to determine whether or not to sell instruments to non-residents, while restrictions imposed by the authorities on the sale by residents other than the monetary authority to non-residents should fall under the safeguard clause.
1. Some Delegations questioned the need to allow for a derogation from National Treatment.
2. In paragraph 1 a), the words "and external financial difficulties" can be found in the GATS. It is understood that inclusion of these words narrows the scope of the safeguard clause. A few delegations wished to review further the meaning of the phrase "and external financial difficulties."
3. One delegation reserved its position on the role of the Fund with respect to paragraph 1(b).
4. Some delegations wished to review further the relationship between this safeguard clause and the Fund Articles of Agreement because an extension of the Fund's jurisdiction is under consideration.
5. Regarding paragraph 3 a), the Fund representative proposed that there should be flexibility in the timing of reviews, for example, for countries implementing a Fund-supported programme, in order to coincide the review under the MAI safeguard article with a scheduled review by the Fund's Executive Board of the policies under the programme.
6. In paragraph 5 c), one delegation suggested that decisions by the Parties Group to approve or disapprove a measure shall be made by consensus minus one.
7. Concerning paragraph 7, one delegation proposed an alternative text which reads:
Many Delegations preferred to delete paragraph 7 entirely so as not to qualify the scope of the safeguard article.
8. With respect to panel consultations with the Fund in the context of Dispute Settlement, the Fund representative proposed inclusion of the following text:
It was agreed that this proposal needs to be discussed.
1. The proposed Article applies to measures taken with respect to financial services. Given the coverage of the MAI, the Article will apply to measures affecting investors and their investments in the financial services area and not all aspects of international trade in financial services. The Expert Group No.5 considered that there was no need to make this point explicit in the proposed Article.
2. The proposed text recognises the right of a Party to take prudential measures which do not conform with National Treatment, MFN and the other provisions of the Agreement, provided that the measures are not used as a means of avoiding Party's commitments and obligations. One delegation suggested that a requirement that prudential measures be not more restrictive than necessary to meet the prudential objective might be included in the proposed Article.
3. One delegation asked whether restrictions on transfers taken in connection with orders or judgements related to civil, administrative and criminal proceedings, etc. would be covered by paragraph 1 of the proposed article, subject to the anti-abuse provision of paragraph 2. This question may be related to paragraph 4.6 in the "Transfers" Article.
4. In paragraph 1 of the proposed Article, the Expert Group opted for the term "enterprise". This term was understood to be broader than "institution" which is generally only an entity expressly authorised to do business and regulated or supervised under the law of the party in whose territory it is located.
5. Except for one delegation, EG5 took the view that the exercise of a Party's right to take prudential measures which do not conform with the provisions of the Agreement should in principle be subject to the dispute settlement mechanism of the MAI. Most delegations were of the view that financial services expertise should be required for any arbitration panel for disputes on issues relevant to financial services.
6. EG5 felt it would be desirable that the Agreement define certain terms including the term "measure".
1. Most EG5 delegations recommended adoption of the draft text on authorisation procedures.
2. It was suggested that provisions on authorisation procedures may have a broader application than financial services.
3. A few delegations felt that no such provisions are necessary as they considered that the
provisions would not add to the basic obligations of the agreement.
1. The Expert Group No. 5 recommended that, in addition to the general Transparency provisions of the MAI, such specific text for financial services be adopted.
2. The Group also considered a provision proposed by one delegation calling for advance notification, to the extent practicable, to all interested persons of any measure of general application that the Contracting Party proposes to adopt which may affect the operation of the agreement, in order to allow an opportunity for such persons to comment on the measure. The text reads as follows:
While delegations agree to the value of prior consultation, a majority of delegations expressed concerns that the above proposed provision may be unduly burdensome, and would not be practical.
1. The Expert Group No. 5 recommended adoption of the draft text on information transfer and data processing2.
2. The Group considered that this text may have a broader application than financial services and invited the Negotiating Group to consider this possibility.
3. It is the Group's common understanding that such provisions do not prejudice in any way the right of Contracting Parties to take prudential measures as provided by the prudential carve-out article.
4. One delegation provided comments on the reasons why the term "privacy" in paragraph 2 b) should be adopted, instead of the term "personal privacy" used in the GATS. Some delegations wanted to review this aspect of the text further.
1. The Expert Group No. 5 recommended adoption of the proposed text.
2. It is the Expert Group's common understanding that these provisions do not prevent self-
regulatory bodies and associations, including deposit insurance institutions, from applying the
requirements of the relevant rules and regulations for access to membership as long these requirements are consistent with the provisions of this Agreement.
3 . Most delegations supported the following interpretative note proposed by one delegation:
4. A few delegations wanted to review further the proposed interpretative note because they considered that it would impose a lesser standard than in the WTO. One delegation suggested adding to the interpretative note: "provided that such access provides equal opportunities".
1 . The Expert Group No.5 noted that these issues were related to the role of monetary authorities and agreed to consider further the proposed text.
2. Most delegations supported the following interpretative note proposed by one delegation:
3. A few delegations wanted to review further the proposed interpretative note because they considered that it would impose a lesser standard than in the WTO. One delegation suggested adding to the interpretative note: "provided that such access provides equal opportunities".
DETERMINATION OF CERTAIN FINANCIAL SERVICES ISSUES IN INVESTOR TO STATE PROCEEDINGS
1. Delegations considered whether the MAI should provide for a special procedure, in investor to state proceedings, to determine whether certain financial services measures (specifically, prudential measures, temporary safeguards and actions taken by a monetary authority) are consistent with the MAI.
2. Some delegations believe that the decision of a Contracting Party to invoke prudential measures, and perhaps some other kinds of measures, should not be subject to the dispute settlement provisions of the MAI.
3. Some delegations believe that an investor to state panel should be free to decide all financial services issues. These delegations are concerned that a special provision dealing with certain financial services matters could lead to a call for special provisions in other areas.
4. The majority of delegations believe that MAI Parties should have a voice in the question of whether a prudential measure, and perhaps a temporary safeguard or action by a monetary authority, is consistent with the MAI. These delegations hold the view that there must be a balance between the interest of an investor in pursuing its remedies under the MAI and the need for stability in financial markets.
COMPOSITION OF DISPUTE SETTLEMENT PANELS IN FINANCIAL SERVICES DISPUTES
1. Delegations agree that panellists in state to state and investor to state proceedings should have the necessary expertise relevant to prudential issues and other financial services issues when the dispute involves such an issue.
2. A majority of delegations believe that the MAI should contain a provision that requires or
encourages Parties to appoint financial services experts as panellists in such disputes.
3. However, some delegations believe that the current dispute settlement provisions on
appointments to panels, which would enable a disputing Party to appoint a financial expert to a panel if it so desired, are adequate. These delegations are concerned that a special provision on appointment of financial services experts might lead to calls for such provisions with respect to other areas of expertise.
4. While the Group has not reached agreement on the principle of a specific provision on appointment of financial services experts, and have not had an opportunity to discuss text in detail, two proposals for a provision have been put forward for consideration.
5 . Under the first proposal, the MAI would contain a provision modelled after a provision in the GATS Annex on Financial Services.
1. The recommended definition of financial services is the same as that used in the GATS.
2. One EGS delegation asked whether transfer of credit risks (for instance, credit swaps) and the provision of stored value cards were considered as financial services. EG5 understood the proposed list of financial services as an open-ended one. Therefore, it was considered that, unless otherwise specified, the services in question should be regarded as financial services.
NEW FINANCIAL SERVICES
1. Several EGS delegations considered that owing to the rapid pace of innovation in the financial services sector, it is important to ensure that an investor in the host country can introduce a new service to that market and that, as there are not adequate points of comparison, relying on the National Treatment principle alone could effectively exclude a foreign-owned establishment from introducing new financial services. Therefore these delegations favoured the preparation of specific text.
2. Three delegations supported the introduction in the MAI of specific provisions concerning new financial services. The Group considered two options for text:
"A Contracting Party shall permit financial services enterprises of any other Contracting Party established in its territory to offer any new financial services."
Option 2
"A Contracting Party shall permit a financial services enterprise established in its territory that is an investment of an investor of any other Contracting Party to offer in its territory any financial service that is not offered in the territory of the Contracting Party but which is offered in the territory of another Contracting Party. A Contracting Party may determine the institutional and juridical form through which the service may be provided and may require authorisation for the provision of the service. Where such authorisation is required, a decision shall be made within a reasonable time and the authorisation may only be refused for prudential reasons".
3 Most delegations questioned the need for specific provision and preferred to rely on the National Treatment provision of the MAI, possibly accompanied by an interpretative note.
"ACQUIRED RIGHTS"
1. EGS considered suggestions made by one delegation that there may need to be provisions concerning the "acquired rights" of foreign financial services enterprises established in a Contracting Party.
2. Some delegations considered that it was unclear what the concept of "acquired rights" referred to. One delegation provided comments on this matter (circulated after the March meeting). Delegations wished to give further consideration to these comments. Some delegations considered that this matter is linked to "standstill" and should be addressed in the general framework of the Agreement.
3. Other delegations considered that the inclusion of provisions on "acquired rights" could create distortions in the treatment of investors depending on the date of their respective establishment. Those delegations considered that a Contracting Party should have the ability to apply new regulations to all financial institutions operating on its territory so long as these regulations are consistent with the provisions of the Agreement.
RIGHT OF INITIAL ESTABLISHMENT, EQUALITY OF COMPETITIVE OPPORTUNITY AND APPLICATION OF NATIONAL TREATMENT IN SUB-NATIONAL UNITS OF GOVERNMENT
1 . One EGS delegation made proposals for text in these areas. A few other delegations expressed support for the proposal on right of initial establishment and equality of competitive opportunity.
2. Most delegations did not support adoption of text in these areas. They considered that these issues go beyond financial services issues and have been addressed or are under consideration within the broader framework of the Agreement. A few delegations considered that specific market access disciplines for financial services should be developed in the MAI.
RESTRICTIONS BASED ON DOTATION CAPITAL OF BRANCHES OF FINANCIAL SERVICES ENTERPRISES
1. One EG5 delegation proposed the following text:
Detailed comments explaining the rationale for this proposal are contained in paragraph 31 of the Aide-Memoire of the meeting held in January 1997.
2. While two other delegations supported this proposal, several delegations considered that the measures referred to in the above text were justifiable on prudential grounds and should be permitted under the MAI. Some delegations considered that the issue should preferably be dealt with on a bilateral basis (between national supervisory authorities).
3. Delegations agreed that any such measures should not discriminate between branches of non-resident financial institutions and domestic financial institutions.
"INDIRECT INVESTMENT"
1. One EG5 delegation expressed concern that the extension of the protection of the MAI to indirect investment may not be appropriate for the financial services sector for prudential reasons, particularly in instances where there is a lack of appropriate co-operation arrangements with the supervisory authorities of non-MAI countries.
2. A number of delegations wanted to consider the matter further. Other delegations considered that the MAI provided safeguards to adequately address these concerns, including the prudential carve-out, the proposed denial-of-benefits clause, and possible specific provisions for financial services in the dispute settlement process (see below).
1. EG2 agreed to carve in taxes for expropriation and agreed on the text set out in paragraph 2 of the Draft Article on Taxation.
2. The Group reconfirmed that taxes as such are not expropriatory. It developed a clarifying text providing elements to be considered when determining whether a specific measure should be considered expropriatory. The Group agreed that the text should be included in the MAI as an Interpretative Note having full legal force.
3. Most delegations supported inclusion of the following additional statement in the Interpretative Note: "MAI Parties understand that no taxation measures of the Parties effective at the time of signature of the Agreement could be considered as expropriatory or having the equivalent effect of expropriation." Some delegations were not in a position to associate themselves with such a statement.
4. The Group agreed that the Tax Authorities of only two countries should be involved in the procedure described in paragraph 2 and both should be MAI Parties. One of the Parties would certainly be the host country to the investment, but the other might need to be defined taking into account the extent to which indirect investments will be covered by the MAI.
1 . EG2 agreed to carve in transparency.
2. The Group also agreed that the general Article on transparency in the consolidated text
(paragraphs 2.1, 2.2 and 2.3) should apply to taxes. However the Group considers the inclusion of the term "policies or practices" in paragraph 2.3 of the general Article on Transparency to be necessary for tax purposes, and additional text needs to be included in the Taxation Article to protect the confidentiality of certain types of information specific to tax matters, including information shared between the Authorities of different countries on a confidential basis. The Group developed an agreed text for this purpose (paragraph 3 of the Draft Article on Taxation).
1. The vast majority of EG2 delegations was opposed to any carve-in for taxes with respect to National Treatment. These delegations emphasised the need to see tax measures affecting National Treatment in the context of international treaty obligations and tax policy as a whole, and the need of governments to preserve the freedom to introduce new measures especially in the light of economic and technological developments. These delegations also emphasised the extent to which tax treaties, including the protection provided by non-discrimination obligations, provide comprehensive protection to investors. Moreover these delegations emphasised that double taxation agreements cover most OECD countries and that the mutual agreement procedures under tax treaties have a long and successful history of resolving tax disputes within a reasonable time period. Subjecting taxes to the national treatment obligation would undermine both tax agreements (through forum shopping) and the MAI. This problem could be aggravated by the accession to the MAI of Non-OECD Members, particularly certain countries with which OECD Members would not to be willing to conclude tax treaties. Problems of legal interpretation were also mentioned as creating uncertainty and exposing Tax Authorities to unjustified dispute settlement claims. T'hese delegations shared the concern that any carve-in for taxes with respect to National Treatment would not allow the effective operation of its anti-avoidance measures and tax treaty network. Based on these arguments and taking into consideration points raised in paragraph 8, the consensus of the Group was to present a single text to the Negotiating Group with a footnote.
2. Five EG2 delegations favoured a "carve-in" for taxes with respect to National Treatment subject to safeguards specific to taxation. One delegation, with the support of another delegation, provided a text specifying what this carve-in provision might entail. The five delegations considered that the MAI, as a high standards investment agreement, should not carve-out taxation measures from National Treatment. These delegations agree that the tax treaty network, though extensive, does not cover all likely signatories to the MAI (nor even all OECD countries). In their view some treaties do not contain a sufficiently comprehensive non-discrimination provision. They also felt that incorporating the National Treatment obligation in the body of the text would strengthen the accession criteria from a tax policy viewpoint. These delegations also argued that subjecting tax disputes arising in connection with National Treatment to binding disputes settlement procedures under the MAI would encourage tax authorities to resolve disputes that would not otherwise be resolved (within a reasonable period of time) in accordance with the mutual agreement procedures established under double taxation agreements. These delegations felt that the tax policy concerns that had been identified in paragraph 7 were adequately addressed by the proposed text. The Group did not discuss this text in detail, however, as the vast majority did not feel that such a carve-in was appropriate.
1. EG2 agreed that neither direct taxes proper nor social security contributions/taxes should be carved into the MFN provision of the MAI.
2. EG2 also agreed that as indirect taxes do not usually discriminate against foreign investors and are, in any case, adequately covered both by non-discrimination provisions in bilateral tax treaties and similar provisions in other multilateral agreements, such taxes should not be carved-in into the MFN provision either.
Many questions were raised in EG2 as to the potential impact of the discipline on Performance Requirements on standard features of the tax systems of Member countries. Based on the difficulties that the current Performance Requirements text would pose for Member countries' tax systems, the Group, at this stage, does not recommend covering taxes.
EG2 agreed that taxation measures should not be subject to the Article on transfers.
1. In response to the request from EG3, EG2 had an extensive discussion on the desirability and feasibility of including tax incentives in the national treatment and MFN articles. This discussion took place in the light of the emerging consensus in EG3 that investment incentives should be subject to both national treatment and MFN obligations, without necessarily including explicit text to this effect.
2. On the issue of limiting or restricting the scope of tax incentives, the Group noted the distorting effect of positive discrimination in favor of foreign investors, but also the ongoing work of this issue in other fora. Discussions showed that defining tax incentives generally, and undesirable ones particularly, would be extremely difficult. Also, the vast majority of delegates felt that the approach to carving out taxation measures from national treatment and MFN obligations should include taxation incentives as such incentives are clearly taxation measures. There should therefore be no carve-in of taxation measures to incentives provisions. The vast majority of the Group did not see any reason for subjecting tax incentives to any disciplines different from those applying to taxation measures in general.
3. However, some delegations believed that including tax incentives would add to the value of the proposed disciplines of the incentives Article, and would avoid a shift from non-tax incentives (covered by the investment incentives Article) into tax incentives (not covered). These delegations therefore proposed a carve-in of tax incentives for purposes of the investment incentives Article. One delegation felt that it would, in principle, be possible to define specific tax incentives, a view supported by another delegation. The vast majority of delegations rejected this view, and examples were given to illustrate the difficulty.
4. Equally, it might be observed that work has only recently begun in the WTO on a subsidies code under the GATS and in the CFA special sessions on harmful tax competition. So there must be concern that work in the MAI on further disciplines on incentives risks running into conflict with work elsewhere if attempts are made to plan out a programme of future work at this stage; it may be possible to develop a programme later, but it would appear sensible to consider this only after a full appraisal has been carried out into exactly how any MAI disciplines are intended to fit with those being developed elsewhere (and the relative time-scales involved).
| PREVIOUS | TOP | CONTENTS | NEXT PAGE |