THESIS PROPONENT: MICHELLE B.

FELLONE

THESIS TITLE: BALANCING THE INESCAPABLE NEXUS: ESTABLISHING AND

PROVIDING PARAMETERS ON THE EXTENT OF THE UMBRELLA CLAUSE IN INTERNATIONAL
INVESTMENT AGREEMENTS VIS-Á-VIS THE SOVEREIGN STATE’S POWER TO TAXATION

SUMMARY OF REVISIONS

1. The legal issue was better phrased to narrow the nature of the “taxation” referred to in the
thesis.

The legal issue this thesis strives to answer is up to what extent can an investor
invoke the umbrella clause embodied in an International Investment Agreement
—specifically a BIT— to protect its interest from unanticipated risks or
changes in legal framework scenarios solely targeting aspects with regard to
fiscal incentive measures unilaterally withdrawn by the Host State, in the form
of fiscal incentives?

2. The proponent revised the organisation of the thesis to reflect better the flow of the thesis
discussion.
Chapter 1 conveys the background of the study and its significance in the
rapidly changing world of our society today and an overview of the BITs and
how they relate to Umbrella Clauses. The legal issue of the thesis in light of its
importance in the Philippine setting is discussed in the world of investment
arbitration. The legal issues are to be answered by the thesis statement as
provided in this section.

Chapter 2 will discuss the sovereign right of the state in the context of
international investment agreements and how they relate to taxation as an
inherent right of manifested by the state actor.. This section will tackle what it
means to become a state particularly what characteristics must it have to be
considered a state under the principles of international law. In this section, the
historical roots of taxation, its characteristics, and its relationship with the
international investment law. Lastly, in addition to the right to taxation, the
right to administer fiscal incentives will also be tackled, to be able to see its
impact and as to whether or not they really play a big role in the country’s
financial necessities.

Chapter 3 will discuss the nature and origin of Bilateral Investment

Treaties and Umbrella Clauses. It will argue that one of the tools which can
efficiently safeguard investments from arbitrary powers and opportunistic
behavior by a state in order to make sure that they have the respective remedy
under a treaty obligation. It will also tackle one study that discusses the
relationship between taxation measures introduced by a host state and the
corresponding right of the investor to invoke his right under an Umbrella
Clause when there are factors that affect his right to enjoy certain rights and
incentives by virtue of standards which will be culled mainly from
 jurisprudence and also from scholars who are keen on seeing the so-called
“useless clause” as something really misconstrued.

This chapter also aims to thresh out the nuances and determining an
approach towards mapping the umbrella clause’s effects in investment
disputes, including among others the examination of the relationship between
BITs and Umbrella Clauses as laid down in existing International Centre for
Settlement of Investment Disputes (ICSID) jurisprudence and arbitration
awards and the essential characteristics, extent, and limitations of the
Umbrella Clauses to strengthen effectivity of investor state protection when it
comes to subsequent change in taxation measures within the host state. Lastly
this chapter also discusses the parallel model presented under the case of
Micula v. Romania as to the consequences of such withdrawal.

Chapter 4 is the legal synthesis section where the Umbrella Clause

Parameters in the context of subsequent withdrawal of previously awarded
fiscal incentives are laid down as the operational groundwork for the
operationalisation of the umbrella clause.

Chapter 5 presents the conclusion and recommendations of the

proponent offering reconciliation of concepts earlier discussed in Chapters 1-
3, the future of Philippine Bilateral Investments with Umbrella Clauses in the
Philippines, and the possible uniform interpretation of Umbrella Clauses. In
this chapter, the proponent also recommends the Philippine “Umbrella
Clause” Model to address subsequent withdrawal of fiscal incentives
previously enjoyed by the Investor within the Philippines and the reasons
behind such incorporation to future Philippine Bilateral Investments Treaties.

3. The proponent added objectives 5 and 6, under Part E, Chapter 1, to reflect the point the
proponent wanted to make as regards the distinction of the umbrella clause as a tool of protection
to the Philippines’ International Bilateral Investment Treaties as regards withdrawal of fiscal
incentives within the Host State outside the coverage of indirect expropriation.

5. To clarify that concessions or withdrawal of tax fiscal incentives to investors

do not fall within the ambit of indirect expropriation triggering compensation
under the latter.

6. To utilize umbrella clauses as an alternative way of protecting the future of

Philippine investments as regards the grant of fiscal incentives.

4. The Scope and Limitations were modified to clarify that the goal of the thesis is not identify
the operationalisation of an umbrella clause as one of the many remedies that an investor can
invoke to protect their interest as to withdrawal of fiscal incentives, and not to be liken to indirect
expropriation.

Indirect expropriation , while having the share sentiment and end goal as to
what it seeks to address as another remedy justifying compensation from the
Host state, is not the focus of discussion of the thesis, but what this thesis
achieved was to lay down the operational groundwork on how umbrella classes
 can be interpreted in lieu of an existing Bilateral Investment Treaty with an
umbrella clause and its effect to the future Bilateral Investment Treaties of the
Philippines.

5. An explanatory paragraph was added to the Scope and Limitations, under Part G, Chapter 1 to
better explain why the proponent chose to focus on “withdrawal of fiscal incentives” and not on
other areas. The proponent includes the paragraph to remove any confusion that “taxation in
general” will be the focus of the thesis.

The proponent resolves to focus on the specific manifestation of taxation

regime such as the grant and withdrawal of fiscal incentives and not just any
aspect of taxation as an exercise of sovereignty not only to narrow the focus of
the study, but to also show the distinguishing nature of fiscal incentives as
revenue foregone which cannot be easily equated to a simple property tangible
subject to expropriation. This can be gleaned from the fact that when fiscal
incentives are granted by the Host State, the investor have yet to have a vested
right therein. Later in this paper, this thesis will deal more on discussion with a
more complicated and nuanced understanding of how fiscal incentives fall
within the ambit of an umbrella clause.

Also, under :
#3, ii. Under A Survey of Notable and Relevant Umbrella Clause Cases.

The core of the thesis now comes down to finally understanding the
umbrella clauses in a more in depth manner through the determination of the
nuances found in the cases decided by the ICSID Tribunal with regard to its
interpretation. This section is allotted by the proponent to examine the different
approaches as to how the Tribunal have tackled notable cases involving
umbrella clauses. However, this section remains only as a presentation only for
the sole purpose of collating a survey of cases related to umbrella clause. The
proponent will rely on Micula v. Romania, which has parallel factual
background with the Philippines in analysing the use of umbrella clause in the
realm of the Philippines’ sovereign power to tax and its IIAs obligations,
including from time to time nuances that were applied to the case based on the
cases to be presented in this section.

The proponent will engage in a comparison and contrast viewpoint to

provide a conceptual map for what really is an umbrella clause and its
interpretation. This method is material to narrow down the valuable extent of
the umbrella clause in a changing legal framework, such one of taxation as an
inherent sovereign right, in relation to the withdrawal of fiscal incentives. The
proponent seeks to discover nuances in the case that may have come to the
attention of the Tribunal in its decisions. The results and findings, will be used
to build on the sound parameters and extent of the invocation of the umbrella
clause within an IIA.

6. Included an explanatory paragraph to further expound on the proponent’s plan to focus on

umbrella clauses as one of the tools to protect the investment of investors.
 This thesis argues that the utility of ‘umbrella clauses’ have yet to
exceed its full potential due to the insufficient safeguards existing investments
with no umbrella clauses are still experiencing regardless of whether or not
these disputes are elevated to an international court of domestic forum. As
such, as a protective measure against a state's sovereign power to withdraw
fiscal incentives, an umbrella clause will provide a fighting chance for the
investor interest post-investment decision making and post-unilateral act of the
sovereign host-state.

7. The proponent fixed the phrasing of the former proposed “elements” to enumerating the
“circumstances” to identify when an umbrella clause comes into operation, and likewise
modifying certain parts of the section where the term element has been used. This is to show that
these elements can co-exist with other remedies available to the investor, and that the thesis only
enumerated the circumstances and tailor fitted these such as it deemed necessary to determine
when an umbrella clause can be invoked by an investor.

Listed below are the circumstances to identify when will an umbrella clause
may operate when faced with withdrawal of fiscal incentives:

8. The proponent modified the phrasing of the said umbrella clause to make it more palatable to
signatory states should the Philippine government enter into another Bilateral Investment Treaty
with the inclusion of an Umbrella Clause.

4. A PHILIPPINE “UMBRELLA CLAUSE" MODEL TO ADDRESS SUBSEQUENT

WITHDRAWAL OF FISCAL INCENTIVES PREVIOUSLY ENJOYED BY THE
INVESTOR

This model can be culled to be formulated based from the specific

provisions of the
Mexico-Greece BIT, providing that:
“Each Contracting Party shall observe any other obligation it may have
entered into in writing with regard to a specific investment of an investor of the
other Contracting Party. The disputes arising from such obligations shall be
settled only under the terms and condition of the respective contract.”
The proponent however is of the view that it should not only end there,
but also include an additional clause after which states that, “pertaining to any
unilateral commitment imposed by the Host State taking into account the intent
and purpose to which the contract was entered into.”

9. The proponent included explanatory paragraphs to further provide a clearer explanation as to

why a Philippine “umbrella clause” model should be incorporated to FUTURE Bilateral
Investment Treaties with other countries. The last paragraph seeks to address especially the
concern the benefits of having such umbrella clause for signatory states.

In this way, both the Investor and the Host State can also be warned of any
expectations among the parties beyond and outside the contract with regard to
risks that cannot be covered immediately at the time the contract was entered
 into, regarding properties that the investor has no vested interest yet, like the
profits to be realised by investor from the grant of fiscal incentives by the Host
State. The generality of the provision will not open the flood gates of any
investment dispute because the interpretation will still be dependent on the
factors and circumstances averred by the signatory parties to the dispute. The
umbrella clause will only be satisfying the standard provided by the case of
Micula v. Romania.

As it stands, the umbrella clause is one of many remedies which can be

utilised by investors within a Host State to ensure that their rights as to the
fiscal climate or environment within the Host state stands steadily. this thesis
presented the scenarios and elements of the operationalisation and the
triggering factors of an umbrella clause. The umbrella clauses within Bilateral
Investment Treaties should not be trivialised as another clause to be taken for
granted as they can actually serve more good than harm to both the Host State
and the Investor, without the added pressure of expropriation over a property
to which the Host State has vested rights in. The umbrella clause can actually
cover those expected profits that the investor has yet to realise which is
essentially the nature of an umbrella clause that can empower investors to
invoke against the Host State.

The additional clause seeks to gravitate to the idea that unilateral

commitments such as to maintain fiscal incentives, while a prerogative of the
state under the guise of taxation, can be protected by an umbrella clause as
well, elevating the claim internationally. Taking into account the intent and
purpose goes beyond the contract but the expectation that it is indeed covered
under the umbrella clause, as one of the remedies that an investor may use. If
there is an umbrella clause present within the Bilateral Investment Treaty, the
investor and the Host state can share the same expectation towards withdrawal
of fiscal incentives that can fall under “unilateral commitments.” This can ease
the process of justifying any breach of the obligation before international
courts because there is an agreement that changing fiscal withdrawals is within
the ambit of the umbrella clause.

While frankly state sovereignty comes first, signatory states must delve
deeper into the practicality of an umbrella clause and not the stringent effects
that does actually more good than harm. The umbrella clause, covering
unilateral commitments such as fiscal incentive withdrawals by Host State, is
actually an attracting factor for investors to go to the Host State who can offer
such stability. The proponent finds that once there is an understanding that
unilateral commitments are fall within the umbrella clause, signatory states can
actually find safe harbor in the provision as another remedy for those states
with existing umbrella clauses within their Bilateral Investment Treaties and
for future Bilateral Investment Treaties. Likewise, the Host State can also be
prepared to not only structure its internal organisation in favour of their own
monetary benefits from the investment but also its reputation in the
international realm of International Investment Agreements.

10. The proponent included the specific Philippine Umbrella Clause model to wit:
“Each Contracting Party shall observe any other obligation it may have entered into in writing
with regard to a specific investment of an investor of the other Contracting Party. The disputes
arising from such obligations shall be settled under the terms and condition of the respective
contract pertaining to any unilateral commitment imposed by the Host State taking into account
the intent and purpose to which the contract was entered into.”

11. Included #3 in the recommendations to recognise the need for political initiative or political
will to concretise the aim of the thesis. The proponent includes in its annex a letter to the Board
of Investments as to the consideration of Umbrella Clauses in future Bilateral Investment Treaties
with other countries.

4. A POLITICAL INITIATIVE: A LETTER TO THE BOARD OF INVESTMENTS

PROPOSING THE INCLUSION OF UMBRELLA
CLAUSES IN FUTURE BILATERAL INVESTMENT
TREATIES WITH OTHER COUNTRIES (SEE
ANNEX 1)
ANNEX 1 :
A letter to the Board of Investments Proposing the Inclusion of
Umbrella Clauses in future Bilateral Investment Treaties with
other countries

ATENEO DE MANILA
SCHOOL OF LAW

Greetings!

I am Michelle B. Fellone, a senior law student from the Ateneo Law School and I am
writing this letter to your kind office presenting a proposal to incorporate a Philippine Umbrella
Clause Model for future Bilateral Investment Treaties and to examine further the usage of
umbrella clauses in the realm of investment protection.

The state policy I am basing this proposal on is one found in the Foreign Investment Act
which declares the policy of the State to “attract, promote and welcome productive investments
from foreign individuals, partnerships, corporations, and governments, with the supposed effect
of contributing to national industrialisation and socio-economic development.” As a State driven
initiative to open the gates of a State to foreign countries’ and to foreign individuals’ investments,
Bilateral Investment Treaties are crafted to ensure that there are sufficient safeguards towards
protecting both the investor and the Host State where the investment is undertaken. Your kind
office, I firmly believe seeks to ensure that this State Policy is realised.
 Unfortunately, as regards investment protection in cases that touch upon the grant of
fiscal incentives within the realm of the sovereign state’s power to taxation, investors find it
difficult to invest in Host States that veer away from a stable fiscal climate. As a solution to this
dilemma, umbrella clauses, which have long been part of some Bilateral Investment Treaties in
the Philippines, can be utilised to ensure that both the Host State and subsequent investors in the
Philippines to attain both ends of their bargain, under the governing contract and likewise under
their respective Bilateral Investment Treaties. Quite frankly, the novel utility of an umbrella
clause is trivialised and it is my purpose to present in my thesis the functionalities, practical use,
and advantage of having a Philippine Umbrella Clause Model for the Philippines.

As an overview of my thesis, I have discussed the importance of seeking more investor

friendly measures especially in the taxation framework of states, particularly the withdrawal of
fiscal incentives as one of the motivating factors for investors to invest in the Philippines. Next, I
have delved into the meaning and explored the nuances of umbrella clauses, by means of
examination of the several international cases tackling the matter. This would provide an insight
for your kind office to appreciate the misconceptions and the confusion surrounding the
operationalisation of umbrella clauses.

The Philippines in fact have entered into Bilateral Investment Treaties with umbrella
clauses with several countries. This only goes to show that it is now timely more than ever to
finally come up with a Philippine Umbrella Clause model and to be mindful of the recommended
interpretations of the Umbrella Clause based on past International Centre for Settlement of
Investment Disputes (ICSID) decisions to protect investors from unilateral commitments entered
into by the Philippines for our benefit and the benefit of the investor.

Attached herewith is the copy of my thesis proposal. May you find in your good graces to
understand what this means for international investments in the Philippines. Thank you for your
time and I am looking forward to what your Office would have to consider.

Sincerely,
MICHELLE B. FELLONE
Ateneo Law School
ID No 16-144

12. The formatting, footnotes, and bibliography of the thesis were revised in order to conform to
institutional standards. Typographical errors from the previous copy of the thesis were also
addressed.