Non-discriminatory treatment for national and international investors

 

Rationale | Key considerations | Assessment | Resources | Next

 

1.6 Has the government taken steps to establish non-discrimination as a general principle underpinning laws and regulations governing investment? In the exercise of its right to regulate and to deliver public services, does the government have mechanisms in place to ensure transparency of remaining discriminatory restrictions on international investment and to periodically review their costs against their intended public purpose? Has the government reviewed restrictions affecting the free transfer of capital and profits and their effect on attracting international investment?


Rationale

Non-discriminatory treatment concerns the notion of "national treatment", which provides that a government treat enterprises controlled by the nationals or residents of another country no less favourably than domestic enterprises in like situations. National treatment requires equivalent, not identical, treatment. Equivalent treatment is when a different regime applies to non-residents as compared to residents to place them on an equal footing (e.g. for prudential purposes). Non-discriminatory treatment also means that an investor or investment from one country is treated by the host country no less favourably than an investor or investment from any third country (referred to as Most Favoured Nation or MFN in international agreements) in like situations. Reciprocally, non-discriminatory treatment does not call for providing advantages to foreign investors.

 

The application of these principles towards investment varies considerably across countries, partly because a state’s right to regulate sometimes involves discriminating against foreign investors. Policies that favour some firms over others (i.e. any policies that derogate from national treatment or MFN) involve a cost, however. They may result in less competition (see also the chapter on Competition Policy), distort resource allocation, impede linkages between MNEs and local suppliers and slow the diffusion of technological innovations. These effects discourage all investors and give a negative perception about a country’s receptiveness towards investment. This is why exceptions to non-discrimination, especially in sectors that play a central role in the development of an economy (e.g. financial and telecommunication sectors), need to be periodically re-evaluated to determine whether the original motivation and national benefits behind an exception remain valid and outweigh the costs borne by consumers, suppliers and investors.

 

The ability to transfer investment-related capital, including repatriating earnings and liquidated capital, is important for any firm to be able to make, operate, and maintain investments in another country. At the same time, governments sometimes need to limit these economic freedoms in order to address serious balance of payment difficulties. Since measures that restrict the free transfer of capital may adversely affect inflows of international investment, deter domestic companies from accessing international capital markets to fund investment and encourage inefficient and non-transparent practices such as transfer pricing, restrictions on the transfer of funds also need to be reviewed periodically. Governments have authority to take any measure required to prevent evasion of their laws and regulations.

 

Related PFI questions:

The discriminatory effects of policies are also discussed in 
Question 3.4Question 4.1, Question 5.5 and Question 6.2.

 

Key considerations

  • Establishing equivalent treatment
    Do national laws and regulations discriminate among investors and investments? What are the number and scope of exceptions from national treatment, the quality of implementation and enforcement, and the interactions with the concepts of MFN and fair and equitable treatment?
     
  • Transparency and periodic review of discriminatory restrictions on international investment
    Does discrimination in investment policy - either inadvertent or intended – represent the best option for meeting particular policy objectives? There is a trade-off between offering national treatment as a means of increasing investment and qualifying national treatment as a means of promoting local enterprise development. While peer practices can offer insights on how to evaluate the trade-offs, the actual balance will depend on country specific conditions, levels of development and the goals of each host country. The basic consideration is to evaluate whether the present level and form of exceptions to national treatment contribute to promoting these goals and economic development more generally; whether alternative policy instruments could achieve the same goals more effectively; and how exceptions to national treatment discourage investment.
     
  • Free transfer of funds
    Do restrictions on the transfers of investment-related capital exist? And if so, how do they operate? If restrictions exist, what is their likely impact on international investment? International investment is influenced by many factors, of which capital restrictions form only one part, but there may be some evidence of underperformance in attracting investment compared to similar countries without such restrictions.

 

Policy practices to scrutinise

Key issues in assessing equivalent treatment for national and international investors are whether national laws and regulations treat foreign investors operating in the host country comparably to domestic or other foreign investors and whether discriminatory practices between domestic and foreign and among foreign investors are transparent. It also requires identifying any restrictions impeding the free transfer of capital and profit and assessing whether they deter investment.

 

The following policy practices and criteria ought to be considered:

  • The legal framework establishing non-discrimination as a general principle governing investment
    Areas that need to be considered include: whether a country’s constitution, laws governing commercial activity, including the investment law if one exists, other relevant laws and regulatory practices enshrine the principle of non-discrimination; their scope and application (e.g. sub-national authorities apply national treatment); if discrimination can be exercised through discretionary powers, and if so are there safeguards in place to avoid abuse of discretionary power; at what phase national treatment is embodied in international investment agreements that the country is a party to (i.e. pre- or post-establishment); whether these agreements grant most-favoured-nation treatment to investors and investments; how strictly treatment is compared to national investors (e.g. “same as”, “as favourable as” or “no less favourable”); and whether national treatment is dependent on a reciprocal commitment to the standard or deferred to a later date (as is done, e.g. in the Energy Charter Treaty).
     
  • No country unequivocally applies national treatment
    Laws and regulations and international agreements rightly allow a country to make qualifications. While it is not the role of the PFI user to pass judgement on the exceptions, it is important that, where exceptions exist and when the scope of national treatment is limited, these are transparent and clearly defined in law. This requires identifying:
    • General exceptions (e.g. to maintain public health, the protection of national security); subject specific exceptions (e.g. intellectual property, taxation provisions in bilateral tax treaties); and country-specific exceptions (e.g. specific industries, such as financial services and transportation). It is also important to understand whether exceptions are based on an explicit and clearly defined rationale (e.g. public order, economic development, such as infant industries); and if exceptions are notified to international organisations or in the context of investment or trade agreements (e.g. OECD National Treatment Instrument, or Article 6 TRIMS agreement); and the key features of their design (e.g. indefinite duration or for a defined time period). Alternatively in some international agreements, national treatment extends only to those areas and industries identified in a ‘positive’ list (e.g. TRIMs and GATS agreements).
       
    • The nature of the exceptions. For instance: across-the-board screening procedures for FDI entry, more burdensome licensing requirements for foreign investors than for domestic investors, sectoral foreign equity ownership ceilings, denial of access for foreign control-established enterprises to local finance and incentives (e.g. tax concessions), legal establishment (e.g. subsidiaries or branches), denial of access to specific markets (e.g. public procurement, privatisations), performance requirements (e.g. local content rules) and other discriminatory practices (e.g. nationality based restrictions on boards, limits on key personnel).
       
    • How the country compares with other countries in the region or at a similar level of economic development in terms of its discriminatory measures. The factors to consider are whether the country benchmarks the scope of national treatment in their laws and in practice with other similar economies; periodically reviews the list of exceptions based on an analysis of their costs and benefits, or a narrower regulatory impact analysis (see Question 10.3); and if reviews canvass the views and observations of national and international investors and other relevant stakeholders.
       
  • The free and full repatriation of capital and profits from investments. What are a country’s practices and restrictions on the transfer of investment-related capital, their key features and their impacts on investment decisions? This requires identifying:
    • The scope of provisions allowing for the free transfer of funds
      For instance, rules apply both to inward and outward investment, or whether different rules are in force depending on the direction of the investment flow; whether rules apply to both existing and new investments; the types of investment-related capital and their coverage (e.g. profits, dividends, interest and royalty receipts, original capital, capital appreciation, proceeds from liquidation, payments received as compensation for property expropriation, settlement of disputes etc., and earnings of personnel engaged from abroad in connection with an investment); and the conditions that are attached to the transfer of investment-related capital (e.g. convertibility requirements)
       
    • The principle exceptions and qualifications attached to the transfer of funds
      Which provisions effectively excuse a country from fulfilling obligations on the free transfer of capital that it has committed itself to? Under which conditions may new restrictions be imposed (e.g. a balance of payments crisis)? What is the form of these qualifications on the free transfer of capital (e.g. for a fixed duration in length, formal notification procedures, imposed on a discriminatory basis)? To which types of transfer do they apply?
       
    • The impact of restrictions on investment decisions
      Factors to consider are: whether the country’s policies on the transfer of funds result in unreasonably high costs (e.g. because of excessive exchange transaction charges); unreasonable delays (e.g. because of numerous and complex verification procedures); and the scope for arbitrary and discretionary decisions regarding the transfer of investment-related capital (e.g. on the choice of exchange rate values).

 

Further resources

  • OECD member countries have committed themselves to maintaining and expanding the freedom for international capital movements and current invisible operations under the legally-binding OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations. The Codes are applicable to all OECD member states, which collectively represent the majority of foreign investors. A User’s Guide contributes to a better understanding of the principles, procedures and coverage of the OECD Codes.
     
  • The OECD Declaration on International Investment and Multinational Enterprises includes an instrument on National Treatment. It consists of a declaration of principle and a procedural OECD Council Decision, which obliges adhering countries to notify their exceptions to National Treatment, and established follow-up procedures to deal with such exceptions. The website offers information on the National Treatment Instrument, how it works, a list of exceptions to National Treatment by each adhering country and a list of other measures having a bearing on the investment climate.
     
  • The OECD FDI restrictiveness index captures statutory deviations from "national treatment" by calculating a summary measure of restrictiveness for OECD countries and an increasing number of non-member countries. The methodology covers four broad categories of restrictions: limitations on foreign ownership, screening or notification procedures, and management and operational restrictions.
     
  • An OECD paper on “Fair and Equitable Treatment Standard in International Investment Law” surveys information on jurisprudence, literature and state practice related to the fair and equitable treatment standard. It examines the origins of the standard and its use in international agreements and state practice, its relationship with the minimum standard of international customary law and the elements of its normative content as identified by arbitral tribunals.
     
  • An OECD paper on “Most-Favoured-Nation Treatment in International Investment Law” surveys jurisprudence and related literature on MFN treaty clauses in investment agreements. It defines the MFN clause, traces its origins and provides some examples of such provisions in the two major types of model investment agreements in existence (the “North American model” and the “European model”). It then summarises relevant aspects of the extensive work carried out by the International Law Commission between 1968 and 1978 on MFN clauses and describes recent arbitral awards on the scope of application of MFN treatment clauses resulting from disputes under investment treaties.
     
  • A WTO website deals with the General Agreement in Trade in Services (GATS).  The GATS agreement covers all internationally-traded services and defines four ways of trading. The third way - mode 3 - is when a foreign company sets up a subsidiary or branch to provide services in another country. The website provides technical and non-technical information about the GATS agreement, including the application of the MFN and National Treatment Principles.
     
  • The IMF compiles, in close consultation with national authorities, the Annual Report on Exchange Arrangements and Exchange Restrictions. It tracks for each country in a tabular format exchange measures in place, the structure and setting of the exchange rate, arrangements for payments and receipts, procedures for resident and non-resident accounts, mechanisms for import and export payments and receipts, controls on capital transactions and provisions specific to the financial sector.

 

previous | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | next

 

Back