Tax Stabilization Clause in Oil and Gas Industry

摘要

An investor in oil and gas industry take the risk of concluding a long-term contract with a state counterparty that has the power at any time to change the tax law applicable to its contract. In this situation a state party cannot reassure an investor counterparty sufficiently to take such a risk. Tax risk is something that can be managed and thereby minimized - for the good of both the state hosting the resource and the extractive company. A number of tools exist to manage this risk; this paper looks at the tax stabilization clause as it is a particularly popular option for investors. This paper takes a qualitative approach through an investigation into literary works and explores how and why the tax stabilization clause has become a popular option for tax risk management. These clauses have been heavily criticized by various stakeholders and yet they remain as relevant today as when they were first shaped in the 20th century. This paper also looks at the controversy surrounding the validity of such clauses by examining various doctrinal writings and international arbitration rulings. The investigation reveals a shift in the tax stabilization clause's scope, and more importantly its objective, over the years. Drafters as well as legal opinion seems to be at odds with the restrictive nature of yesteryear clauses, which may unjustly tie the hands of a host state - and as such a more balanced approach is sought. These considerations lead to the main thrust of the study which is to determine what practical drafting steps can be taken to ensure the efficacy of these clauses. The focus leans on the most pertinent substantive components that such a clause should contain to ensure the risks and benefits of resource development are shared fairly. The procedure and objective of the renegotiation mechanism contained the clause is particularly important as it is this key ingredient that makes or breaks the tax stability of a project. The study builds on extensive writings on the subject and attempts to build a body of best practice in this regard.