Author: Jaroslav Kudrna*
Published: July 2020
Costs and Damages
Damages claimed in investor state cases are increasing in the “new age of the megacase.” At the same time, recent practice is characterized by the inflation of damages by investors and a major gap between damages claimed and damages awarded. One can only speculate about the reasons for this trend. Investors might hope to catch the attention of the respondent and of the tribunal from the beginning with a big claim. Or a big initial claim might create stronger pressure on the state given that claimants often pass the information about the amount claimed to the media. It can possibly make the state more likely to settle. And if the claim goes on, in the popular idea of the tribunal to “split the baby,” awarding even a small portion of an inflated claim can still bring a lot of money to the investor.
Recently, an increasingly used strategy to increase damages is to claim for a tax gross-up. Investors are of course entitled to full reparation. Failure to consider the impact of taxation on the award could arguably result in under or over-compensation. Therefore, is tax gross-up a legitimate claim to make an investor whole or is it just another method to inflate damages?
The article will start by discussing the taxation of awards by host states (II). This section will present various solutions through which tribunals are avoiding the issue of double taxation; for example, by awarding the compensation net of any taxes to be paid to the host state, or by awarding the damages to the parent companies outside the host state’s territory. The next section will discuss the taxation of awards by investors’ home states (III). Within this section will be discussed the claimants’ burden of proof in regard to the tax gross-up claim as well as the lack of causation between a host state’s breach and a home state’s taxation of an award. Finally, the speculative and uncertain nature of damages for the taxation of awards by home states will be touched upon.
*Legal Adviser at the International Arbitration and Investment Protection Unit at the Ministry of Finance of the Czech Republic. Kudrna obtained a Ph.D. in public international law at Charles University in Prague, an LL.M. at New York University, a Master of European Economic Law at the University of Strasbourg, and a Master of Laws at Sciences Po Paris. The views expressed are those of the author alone and do not necessarily represent the views of the Ministry of Finance or the Government of the Czech Republic.