The claimaint, a US citizen and permanent resident of Mexico, operated a cigarette exporting business from Mexico. He sought damages from Mexico, alleging that various government taxation measures had resulted in a creeping expropriation of his property in contravention of Article 1110 of the North American Free Trade Agreement (NAFTA). The claimant further alleged that Mexico's taxation measures violated NAFTA Articles 1102 (national treatment) and 1105 (minimum level of treatment).
The facts of the case are somewhat convoluted; essentially, at all material times Mexico imposed a tax on the domestic sale and production of cigarettes, but no tax exported cigarettes. Domestic producers and re-sellers of cigarettes were still required to pay the tax, but were entitled to a rebate on export.
Due to industry agreements in the domestic market, the claimant's company was not able to buy cigarettes directly from producers but was forced to purchase them from bulk sellers such as Walmart. The cigarettes purchased by the company included the amount of the domestic tax, but the claimant was not always able to obtain the rebate on export because the invoices it supplied did not separately identify the amount of the tax. This led to a long-running dispute with the Mexican government: at various times the company was paid rebates notwithstanding the deficient invoices; at other times it was not. The law always remained the same but the enforcement of it changed from time to time. Finally, in December 1997, the law was amended to bar rebates to cigarette resellers such as the claimant's company, limiting rebates to the "first sale" in Mexico.
The Tribunal found that Mexico's taxation measures did not result in an indirect expropriation of the claimant's property because, amongst other things, the taxation measures were within the police power of the state: not every business problem experienced by an investor amounts to an expropriation. Further, neither NAFTA nor customary international law required Mexico to permit a "grey market" in cigarettes. The taxation measure could be rationally explained as directed to discouraging smuggling back into Mexico and to maintain high cigarette taxes to discourage smoking.
Notwithstanding that the claimant was unsuccessful on the expropration claim, the Tribunal found in his favor on the national treatment claim. The Tribunal found that there were domestic resellers in like circumstances with the claimant that were accorded more favorable treatment, because they were granted rebates at a time when the claimant was refused them. The claimant was accordingly awarded $9,464,627.50 Mexican pesos in damages, plus interest.
Note that Tribunal Member Mr Jorge Covarrubias Bravo dissented from this decision. The dissenting opinion, the Spanish language version of this decision, and other related decisions, are all uploaded here under "Related Documents".
Feldman v. Mexico, Award, 16 December 2002, 7 ICSID Reports 341; 18 ICSID Review-FILJ
Mexico
Dec 16, 2002
ICSID Tribunal (Prof. Konstantinos D. Kerameus, Mr Jorge Covarrubias Bravo, Prof. David A, Gantz).
Governments may bring complaints before intergovernmental bodies on tobacco-related issues. For example, one country may complain that another country’s tax regime discriminates against its exported tobacco products. In some cases, a treaty may allow a private party to file a complaint against a government before an intergovernmental body.
A violation of the right to equal protection under the law, or another form of discrimination. The industry may claim that regulations discriminate against tobacco companies or tobacco products. Smokers may claim that addiction is a health condition, so regulations discriminate against them based on their health condition. Facilities subject to smoke free laws may claim that smoke free (SF) exceptions (e.g., hotel rooms, mental hospitals, etc.) unfairly discriminate against SF businesses because the law should apply to all locations equally.
A violation of the right to procedural fairness. For example, a party may claim that a government agency did not consult with public or stakeholders when issuing regulations.
A violation of property rights, sometimes in the form of an expropriation or a taking by the government. The tobacco industry may argue that regulations amount to a taking of property rights because they prevent the use of intellectual property such as trademarks.
A claim of infringement on investment expectations as protected by international investment treaties.
Type of Tobacco Product
None
Limitations regarding the use of quotes The quotes provided here reflect statements from a specific decision. Accordingly, the International Legal Consortium (ILC) cannot guarantee that an appellate court has not reversed a lower court decision which may influence the applicability or influence of a given quote. All quotes have been selected based on the subjective evaluations undertaken by the ILC meaning that quotes provided here may not accurately or comprehensively represent a given court’s opinion or conclusion, as such quotes may have originally appeared alongside other negative opinions or accompanying facts. Further, some quotes are derived from unofficial English translations, which may alter their original meaning. We emphasize the need to review the original decision and related decisions before authoritatively relying on quotes. Using quotes provided here should not be construed as legal advice and is not intended to be a substitute for legal counsel on any subject matter in any jurisdiction. Please see the full limitations at https://www.tobaccocontrollaws.org/about.
"On the basis of this analysis, a majority of the Tribunal concludes that Mexico has violated the Claimant’s rights to non-discrimination under Article 1102 of NAFTA. The Claimant has made a prima facie case for differential and less favorable treatment of the Claimant, compared with treatment by SHCP of the Poblano Group. For the Poblano Group and for other likely cigarette reseller/exporters, the Respondent has asserted that audits are or will be conducted in the same manner as for the Claimant, and implied that they will ultimately be treated in the same way as the Claimant. However, the evidence that this has occurred is weak and unpersuasive. The inescapable fact is that the Claimant has been effectively denied IEPS rebates for the April 1996 through November 1997 period, while domestic export trading companies have been given rebates not only for much of that period but through at least May 2000, suggesting that Article 4(III) of the law has been de facto waived for some if not all domestic firms. While the Claimant has also been effectively precluded from exporting cigarettes from 1998 to 2000, there is evidence that the Poblano Group companies have apparently been allowed to do so, notwithstanding Article 11 of the IEPS law. Finally, the Claimant has not been permitted to register as an exporting trading company, while the Poblano Group firms have been granted this registration. All of these results are inconsistent with the Respondent’s obligations under Article 1102, and the Respondent has failed to meet its burden of adducing evidence to show otherwise."
Limitations regarding the use of quotes The quotes provided here reflect statements from a specific decision. Accordingly, the International Legal Consortium (ILC) cannot guarantee that an appellate court has not reversed a lower court decision which may influence the applicability or influence of a given quote. All quotes have been selected based on the subjective evaluations undertaken by the ILC meaning that quotes provided here may not accurately or comprehensively represent a given court’s opinion or conclusion, as such quotes may have originally appeared alongside other negative opinions or accompanying facts. Further, some quotes are derived from unofficial English translations, which may alter their original meaning. We emphasize the need to review the original decision and related decisions before authoritatively relying on quotes. Using quotes provided here should not be construed as legal advice and is not intended to be a substitute for legal counsel on any subject matter in any jurisdiction. Please see the full limitations at https://www.tobaccocontrollaws.org/about.
The claimaint, a US citizen and permanent resident of Mexico, operated a cigarette exporting business from Mexico. He sought damages from Mexico, alleging that various government taxation measures had resulted in a creeping expropriation of his property in contravention of Article 1110 of the North American Free Trade Agreement (NAFTA). The claimant further alleged that Mexico's taxation measures violated NAFTA Articles 1102 (national treatment) and 1105 (minimum level of treatment).
The facts of the case are somewhat convoluted; essentially, at all material times Mexico imposed a tax on the domestic sale and production of cigarettes, but no tax exported cigarettes. Domestic producers and re-sellers of cigarettes were still required to pay the tax, but were entitled to a rebate on export.
Due to industry agreements in the domestic market, the claimant's company was not able to buy cigarettes directly from producers but was forced to purchase them from bulk sellers such as Walmart. The cigarettes purchased by the company included the amount of the domestic tax, but the claimant was not always able to obtain the rebate on export because the invoices it supplied did not separately identify the amount of the tax. This led to a long-running dispute with the Mexican government: at various times the company was paid rebates notwithstanding the deficient invoices; at other times it was not. The law always remained the same but the enforcement of it changed from time to time. Finally, in December 1997, the law was amended to bar rebates to cigarette resellers such as the claimant's company, limiting rebates to the "first sale" in Mexico.
The Tribunal found that Mexico's taxation measures did not result in an indirect expropriation of the claimant's property because, amongst other things, the taxation measures were within the police power of the state: not every business problem experienced by an investor amounts to an expropriation. Further, neither NAFTA nor customary international law required Mexico to permit a "grey market" in cigarettes. The taxation measure could be rationally explained as directed to discouraging smuggling back into Mexico and to maintain high cigarette taxes to discourage smoking.
Notwithstanding that the claimant was unsuccessful on the expropration claim, the Tribunal found in his favor on the national treatment claim. The Tribunal found that there were domestic resellers in like circumstances with the claimant that were accorded more favorable treatment, because they were granted rebates at a time when the claimant was refused them. The claimant was accordingly awarded $9,464,627.50 Mexican pesos in damages, plus interest.
Note that Tribunal Member Mr Jorge Covarrubias Bravo dissented from this decision. The dissenting opinion, the Spanish language version of this decision, and other related decisions, are all uploaded here under "Related Documents".