By Elizabeth Whitsitt
29 August 2008
In one of two ICSID awards handed down in August involving the US firm Duke Energy, a Tribunal has found the Republic of Peru liable to Duke Energy International Peru Investments No. 1 Ltd. (DEI Bermuda) for damages totaling US$ 18,440,746 plus interest after the SUNAT, Peru’s National Tax Administration Superintendency, found DEI Bermuda liable for tax underpayments, interest and penalties equaling some US$ 48.3 million for the years 1996-1999.
Tax Assessment had two main components
The first component was based on SUNAT’s view, under its interpretation of the Peruvian Tax Code, that certain corporate transactions resulting in DEI Bermuda’s indirect foreign ownership of a Peruvian energy corporation were sham transactions “…concluded solely to take improper advantage of tax benefits under Peru’s Merger Revaluation Law (the “Merger Revaluation Assessment”).”
The second component of the Tax Assessment was based on SUNAT’s opinion that assets belonging to a Peruvian energy corporation indirectly owned by the Claimant were assessed for tax purposes using incorrect depreciation rates (the “Depreciation Assessment”).
In its Request for Arbitration, DEI Bermuda made a number of claims against the Respondent as a result of the Tax Assessment. For the Depreciation Assessment, the principal claims at issue were tax stabilization and the doctrine of actos propios (good faith/estoppel). For the Merger Revaluation Assessment, the principal guarantees at issue were tax stabilization, the doctrine of actos propios and the guarantee against discrimination.
In finding Peru liable to DEI Bermuda for damages arising out of the Tax Assessment, the Tribunal concluded, by majority, that Peru was not liable for the Depreciation Assessment under any of the theories advanced by Claimant.
With respect to the Merger Revaluation Assessment, however, the Tribunal found Peru liable for breach of the guarantee of tax stabilization under a legal stability agreement entered into between DEI Bermuda and Peru (the “DEI Bermuda LSA”). The Tribunal also considered the Merger Revaluation Assessment to be a violation of Peru’s obligation to act in good faith, a guarantee implied in the DEI Bermuda LSA by Peruvian law.
This case is notable for the Tribunal’s discussion of the scope of tax stabilization guarantees available to foreign investors like the Claimant. In particular the Tribunal determined that: (i) laws or regulations that form part of the Peruvian tax regime at the time the LSA is executed will not be amended or modified to the detriment of the investor, (ii) a stable interpretation or application that is in place at the time an LSA is executed will not be changed to the detriment of the investor, and (iii) even in the absence of (a) and (b), stabilized laws will not be interpreted or applied in a patently unreasonable or arbitrary manner. The Tribunal further clarified that tax stabilization does not mean that tax laws must only be interpreted or applied based on the meaning that most favours the foreign investor.
While specific to this particular case, the above clarifications respecting the scope of tax stabilization guarantees for foreign investors in Peru may prove useful to parties involved in other arbitral disputes involving similar claims regarding tax stabilization.
Duke Energy International Peru Investments No. 1 Ltd. v. Republic of Peru is available in English from InvestmentClaims, www.investmentlaw.info/