Multilaterial Agreement on Investment (MAI)|
Date: Mon, 16 Feb 1998 04:03:19 -0800 (PST)
From: MichaelP <firstname.lastname@example.org>
Subject: MAI: Exceptions etc.
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
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
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.
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.
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
Some of the elements under discussion with regard to this article are the
- 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.
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 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
- 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
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.
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