Today (26 May 2022), UK Chancellor of the Exchequer
Rishi Sunak has announced a 25% windfall
tax on oil and gas companies in the UK,
“extraordinary profits” made in the sector due
to surging global commodity prices driven in
part by the war in Ukraine. Earlier this week,
news emerged that a similar measure may
be introduced to also encompass UK power
The windfall tax may constitute a breach of investment treaties
by, inter alia, violating the legitimate expectations of foreign
investors in the United Kingdom in the petroleum sector.
Moreover, international law requires that tax may not be
discriminatory and may not be confiscatory. As details of the
scheme emerge over the coming days, investors should look
carefully at lessons from previous instances where similar laws
were passed. For example, when previously a country reacted
to a similar extraordinary energy price windfall by enacting a
windfall tax of 50% on the revenue derived from the increase
in oil prices in the mid-2000s, investment treaty tribunals
generally did not consider it to fall afoul of the applicable
bilateral investment treaties, although they did hold that
subsequent higher tax of 99% did amount to a breach of fair
and equitable treatment (see Murphy Exploration & Production
Company International v. Republic of Ecuador, PCA Case No.
2012-16; Perenco Ecuador Limited v Republic of Ecuador,
ICSID Case No. ARB/08/6; and Burlington Resources Inc. v.
Republic of Ecuador, ICSID Case No. ARB/08/5). In the latter
case, one arbitrator dissented, indicating that there are factors
that, in specific circumstances, may lead to a different outcome
in future cases.
The oil and gas producers who stand to be affected by the
tax include numerous companies from the United Kingdom,
China, France, the Netherlands, Norway, Spain, and the
United States. It is notable that following the exit of the
United Kingdom from the European Union, these companies
will be able to rely on BITs entered into between the United
Kingdom and members of the European Union, as they are no
longer considered intra-EU BITs.
Squire Patton Boggs has a leading BIT arbitration practice.
If you have any question regarding the subject matter of this
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