Cairn energy: when retroactive taxation not justified by prevention of tax avoidance is unfair and inequitable

In late 2020, the Cairn Tribunal concluded one of the largest investor-state arbitration disputes to date. The core of the dispute was retroactive taxation of offshore indirect transfers of shares of companies with underling assets situated in India (crude petroleum and natural gas fields). The Tribunal decided that India had violated the fair and equitable standard under the UK–India bilateral investment treaty by the retroactive taxation without a specific justification for doing so. Notably, India failed to persuade the Tribunal that the retroactive tax law aimed against abusive tax avoidance. In the article, the authors aim to partly respond to a call of Professor Thomas Wälde for a systematization of the red flags arising from the conduct of host states in taxation matters viewed against investment protection mechanisms. By analysing the Cairn Tribunal’s reasoning, the authors identify and examine two red flags: (i) retroactive taxation and (ii) prevention of tax avoidance. Their conclusion is that states should exercise caution with such red flags rather than rush to terminate international investment agreements or carve out tax measures from the fair and equitable standard in remaining and prospective international investment agreements.