“Taxes,” said Franklin Roosevelt, “are the dues that we pay for the privileges of membership in an organized society.” Harsher tongues describe tax as a form of property seizure. Somewhere between these competing characterizations of revenue raising—club dues and forced takings—lies a clue to why the North American Free Trade Agreement (“NAFTA”) reserves special treatment for investment disputes implicating fiscal matters.
NAFTA gives foreign investors a right to settle investment disputes by arbitration, a process more politically and procedurally neutral than either host state courts or foreign gunboats. Without the option to arbitrate, the specter of unfair expropriation might chill cross-border economic cooperation and capital flow.
The dispute resolution process does not apply to all investment controversies, however. If an expropriation claim implicates “taxation measures,” the competent fiscal authorities of host and investor countries may block arbitration. Thus this “tax veto” supplies an initial screening process to determine when taxation constitutes a form of what has been called “creeping expropriation”. This power to block arbitration serves as a springboard to consider the politically sensitive interaction of revenue raising and national sovereignty.