Multilaterial Agreement on Investment (MAI)

Exceptions, Derogations and National Reservations

By Marinus Sikkel,
Ministry of Economic Affairs, Netherlands
Symposium on the MAI. 20 October 1997 - Cairo, Egypt

The MAI has a very wide scope and has very strong obligations regarding the investments falling within that scope. This raises the question whether it is desirable and feasible to enforce under all circumstances and for all Contracting Parties those obligations.

There may well be circumstances that call for a temporary or permanent possibility to derogate from the MAI principles. It may well be warranted to take into account that the levels of development of the Contracting Parties can be widely different.

Realising that, in order to achieve a high level Agreement it is necessary to provide for some flexibility, the negotiators have foreseen six types of provisions which will enable the signatories to derogate from the principles of the agreement:

1)Certain limitations in the definition.

2)General exceptions under which States would have the possibility to take the measures necessary to ensure compliance with certain general objectives.

3)The definition of investment is very broad and therefore covers most elements of the balance of payments. Accordingly, a temporary derogation clause in case of serious problems with the balance of payments could be inserted.

4)Prudential measures which give the Contracting Parties the possibility to ensure the integrity and stability of their financial system.

5)Taxation is generally not covered by the MAI. A so-called carve-out/ carve-in approach is followed.

6)National reservations. States will have to disclose all non-conforming measures which they maintain at the time the MAI is signed or at the time they join. Clearly, the final negotiating phase will focus on such a list and seek to establish commitments which are as open as possible.

DEFINITION

Although a working hypothesis for the definition is established, further work is necessary on the issues of indirect investment, intellectual property, concessions, public debt and real estate. E.g. many delegations are not in favour of covering investments made through affiliates established in a non-MAI country. In the field of IPR's conflicts with existing international Treaties on this subject must be avoided.

GENERAL EXCEPTIONS

Such exceptions could be granted for reasons of national security and maintenance of international peace. The question of a cultural exception intended to protect linguistic and cultural diversity is also under discussion. Some countries believe that a reference to public order is necessary to allow countries to take exceptional measures based on this principle.

Some of the elements under discussion with regard to this article are the following:

• It has been proposed that the general exceptions provisions not be applicable to all of the obligations under the agreement. 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.
• Should the provisions regarding protection of essential security interests be self-judging?
• 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. Should the list of such elements be open or closed?
• An anti-abuse-clause could be added to this article. However a good faith obligation already exists in international law and there are 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 notconstitute a disguised restriction or that they are invoked without proper justification.

BALANCE OF PAYMENTS CLAUSE

OECD Member countries are strongly attached to the freedom of investment and capital movements more generally as well as to the right of investors to freely make payments and transfers in connection with current and capital transactions. They have traditionally discouraged resource to exchange restrictions and capital controls as a means of solving balance-of-payments problems, stressing that they should not be a substitute for appropriate adjustment policies. Nevertheless, it is noted that are considerable differences of scope between the classical BIT's and the MAI. Especially since the MAI will also cover portfolio investments it may be considered that there could exist exceptional circumstances in which a country should have the flexibility to introduce restrictions for a temporary period if this can allow the country to buy time until appropriate policy measures take hold. This may be especially important in he context of adjustment policies adopted with IMF support.

PRUDENTIAL MEASURES

l. Notwithstanding any other provisions of the Agreement, a Contracting Party shall not be prevented from taking prudential measures with respect to financial services, including measures for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by an enterprise providing financial services, or to ensure the integrity and stability of its financial system.

2.Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Contracting Party's commitments or obligations under the Agreement.

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 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.

Several questions are under consideration, such as the question whether the exercise of a Party's right to take prudential measures which do not conform with the provisions of the Agreement should be subject to the dispute settlement mechanism of the MAI, or whether financial services expertise should be required for any arbitration panel for disputes on issues relevant to financial services.

TAXATION

Taxation is a vital point in foreign investment decisions. Foreign investors attach primary importance to fair fiscal treatment. Logically, therefore, the non-discrimination rule in the MAI should extend to fiscal treatment. But in reality, things are not that simple. Fiscal experts have identified a number of problems that would arise if the MAI were in its entirety to apply to taxation. Their primary concern is that strong obligations on national treatment, non-discrimination and most-favoured nation treatment, as envisaged in the MAI, could conflict with obligations contained in the many bilateral agreements on the avoidance of double taxation. Although these agreements are also based on the non-discrimination principle, this does not necessarily mean that a foreign investor is always taxed identically to a local firm.

After considerable debate the conclusion tends to go in the following direction:

• the Contracting Parties recognise the importance of the principles of non-discriminatory treatment in taxation. They refer in that respect to the extensive network of agreements for the avoidance of double taxation and their efforts to expand that network;
• as a general rule the MAI will not apply to fiscal measures, except for expropriation and transparency;
• respect for these principles will play a role in the accession process.

STANDSTILL AND THE LISTING OF COUNTRY SPECIFIC RESERVATIONS

The MAI aims to ensure a high minimum standard of treatment for investors and their investments, including National Treatment and MFN treatment. These standards apply to all the Contracting Parties alike.

However it is recognised that there are major differences in the level of economic development between the OECD member States. It is also recognised that some of them have a long tradition of openness to foreign investors while others are relatively newcomers in this respect.

To take these differences into account it will be possible to lodge country specific reservations which will allow individual countries to maintain certain non-comforming measures they already have at the time of coming into force of the MAI. Standstill would result from the prohibition of new or more restrictive exceptions to this minimum standard of treatment. Standstill would not apply, however, to any general exceptions (e.g. national security) or to any temporary derogations (e.g. balance of payments) that might be allowed under the MAI.

For those matters where Contracting Parties are ready to commit to standstill:

a)each Contracting Party should list all existing non-conforming measures that it wishes to maintain in an Annex of the Agreement;

b)the reservations should describe, in the most precise terms possible, the nature and scope of the non-conforming measures. This would ensure that the scope of the reservations is not broader than these measures and, thus, that the reservations are not of a precautionary nature;

c)no additional non-conforming measures could be introduced; and

d)an amendment to a non-conforming measure would be permitted provided it did not decrease the conformity of the measure.

Of course, if the MAI obligations were expanded, (a) - (d) would come into play again with respect to the new or enlarged obligations.

Further discussion is needed on the question of country specific reservations in certain sensitive sectors and new economic activities that may emerge in the future. Some delegations suggested flexibility could be achieved by separate annexes to the Agreement for the listing of country specific reservations in these areas. For sectors, sub-sectors or activities mentioned in this annex it would be allowed to introduce new or more restrictive non-conforming measures.

You will not be surprised to learn that a very important element of the negotiations at present is the examination of the lists of reservations tabled by the negotiating parties. Achieving a balance of commitments has always been one of the core targets of the negotiations. That such a balance does not imply identical obligations for all Parties, regardless of their level of development and experience with foreign investments will greatly contribute to the possibilities for all countries to participate in the MAI.