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Burlington Resources, Inc v Republic of Ecuador: How Much is Too Much: When is Taxation Tantamount to Expropriation?

2014; Oxford University Press; Volume: 29; Issue: 2 Linguagem: Inglês

10.1093/icsidreview/siu006

2049-1999

Arno E. Gildemeister,

Legal and Constitutional Studies

The question as to what distinguishes expropriatory taxation from the ‘normal’ exercise of the State’s sovereign taxing power has recently drawn attention in a number of investment treaty cases.3 The analysis in Burlington Resources Inc v Republic of Ecuador addresses some of the fundamental questions that necessarily underlie any such distinction, namely (i) under what circumstances a tax can be considered to cause ‘substantial deprivation’ and (ii) whether any criteria other than the ‘sole effect’ of the measure, notably the intent of the State, the discriminatory nature of the measure or the breach of a tax stabilization guarantee can be decisive for the finding of expropriation. The present comment aims to present and analyse the Tribunal’s reasoning on these issues and put them into context. The case concerns Burlington’s investment protected under the USA–Ecuador BIT,4 notably comprising several oil production facilities and associated contractual rights. Burlington’s subsidiaries, together with consortium partner Perenco, were assigned production-sharing contracts (PSCs) in 2001 for two areas (blocks 7 and 21). The PSCs, contrary to the prior service contract model, imposed the entire cost and operational risk on the contractor and granted, in return, a share in the produced oil. The PSCs defined Burlington’s tax regime and obliged the State-owned oil company PetroEcuador to absorb any future tax increases by including a correction factor in the production sharing formula. These ‘tax absorption clauses’ had the function of a contractual tax stabilization guarantee. After a substantial rise in oil prices, Ecuador enacted ‘Law 42’ on 19 April 2006, which took away 50 percent of the so-called ‘extraordinary profits’ (or ‘windfall profits’) made by oil companies. Extraordinary profits were defined as the benefits resulting from the ‘unforeseen’ rise of oil prices in excess of the price level at the conclusion of the PSCs. On 18 October 2007, Ecuador raised the tax rate on windfall profits to 99 percent. Burlington paid under protest and requested the ‘absorption’ of the additional taxes through the correction factor. Ecuador and PetroEcuador ignored these requests. In order to enforce its tax claims, Ecuador seized and auctioned off Burlington’s shares of the oil production (‘coactiva proceedings’). PetroEcuador acquired parts of the oil at below market prices. When Burlington threatened to suspend production operations, Ecuador took possession of the production facilities and finally annulled the PSC’s by ministerial decree (‘caducidad’).