Super Profits Tax: Massive International Law Claims Likely
Written by ACM
Sunday, 06 June 2010
Another concern about the Resource Super Profits Tax proposal is that it may breach international law and lead to a large number of very substantial claims to a Washington based international agency. These could be made under any of several treaties the Federal government has entered into under the external affairs power in the Constitution. In the video below, Professor David Flint explains how these claims could arise.
Foreign investors are entitled to assume they will not be subjected to laws which expropriate their assets without compensation. International law protects such investment.
[ Washington, but not for tourism ]
...treaty making power...
The Federal Constitution grants a power with respect to external affairs to the Federal Parliament. Under this, the Federal government has entered into a number of treaties to protect foreign investment.
Hitherto there was no obvious need for Australia to do this to encourage foreign investment. Foreign investors would only be concerned about unstable countries being parties to these treaties, not a country with the record Australia has, or perhaps we should say had until recently.
Australia has long been seen as one of the most stable countries in the world, one where foreign investors could expect to be treated fairly and consistently.
No more. Now we hear the code words "sovereign risk" and "country risk" mentioned in relation to investment here.
If the tax is in fact enacted, foreign investors could claim that the tax is retrospective, and substantially affects existing projects. They would say that they came to Australia expecting to pay Federal taxes, company tax and the GST, and that they had entered into negotiations with the States or were aware of the rate of royalties charged by the owners of the minerals, usually the State governments.
Under one or more of up to 22 international treaties in which the Commonwealth has pledged to protect foreign investment. The foreign investors could claim that Australia was in breach of its commitments to protect this investment.
These breaches could lead to Australia being required to take part in a large number of international arbitration proceedings before an agency of the World Bank. One might be a test case for the others.
In the proceedings the foreign investors would ask for a remedy which is prompt, adequate and effective. This could involve orders for restitution, or for compensation.
This could result in a future Federal government -- that is the taxpayers, and particularly the next generation - having to pay enormous amounts of compensation to foreign companies. At the same time new investment would most likely fall.
The action of the government in so peremptorily announcing such a massive tax and in indicating that the core is non-negotiable, has for the first time raised the factor of sovereign risk in relation to investment in Australia.
Sovereign risk is usually in issue in relation to unstable countries. As the ANZ states, ssovereign risk implies the possibility that conditions will develop in a country which inhibit repayment of funds due from that country, such as exchange controls, strikes or declarations of war
An international lender should (but does not always) compensate for perceived sovereign risk by adjusting the interest rate charged. In other words, lenders to investors in Australia can be expected to increase the interest rates charged.
An associated consideration is country risk, which the ANZ says is the risk associated with dealing with another country, including the legal, political, currency and settlement risks.
For the first time in the history of Australia , foreign investors and lenders considering new projects both in the country and offshore are considering the issues of sovereign and country risks.