Señor Tza Yap Shum v. The Republic of Peru
ICSID · Investment (ICSID and treaty) · Peru · 7 Jul 2011
Why it matters
This case is a landmark for establishing that interim tax measures, if imposed arbitrarily and without adequate due process, can constitute indirect expropriation under a BIT. It clarifies the limits of a state's tax enforcement powers and sets a standard for assessing arbitrariness, including failure to follow internal procedures and lack of effective judicial review. The award also illustrates the application of the adjusted book value method for compensation when a company has a short operating history and negative cash flow.
Summary
Tza Yap Shum, a Chinese national, owned 90% of TSG del Perú S.A.C., a Peruvian fishmeal exporter. In 2004, Peru's tax authority SUNAT audited TSG and, using a presumed basis, assessed back taxes and fines of about S/.10 million. SUNAT then imposed interim measures attaching TSG's bank accounts and assets, effectively freezing its operations. TSG challenged the measures administratively and judicially, but the review bodies upheld them without adequate reasoning. TSG's sales plummeted, and it entered debt restructuring. Tza initiated ICSID arbitration under the China-Peru BIT, claiming indirect expropriation. The tribunal held that while the audit itself was not expropriatory, the interim measures were arbitrary because SUNAT failed to follow its own guidelines, did not provide reasoned justification, and the measures had a severe impact on TSG's business. The tribunal also found that TSG lacked effective due process. It rejected Tza's discounted cash flow valuation due to TSG's short history and negative cash flow, instead using adjusted book value to award US$786,306.24 plus interest at U.S. Treasury bond rates. No moral damages were awarded, and costs were split equally.
The detail
Parties: Señor Tza Yap Shum v. The Republic of Peru
Case number: ICSID Case No. ARB/07/6
Outcome: Tribunal found indirect expropriation and awarded US$786,306.24 plus interest to Claimant; no moral damages; costs split equally.
Quantum: US$786,306.24 plus US$227,201.30 interest
Applicable law: Agreement between the Government of the Republic of Peru and the Government of the People's Republic of China for the Reciprocal Promotion and Protection of Investment (BIT); ICSID Convention
Issues in play: The collision was between Peru's sovereign right to tax and enforce tax collection, and the investor's right to protection against arbitrary and expropriatory measures under the BIT. The tribunal balanced deference to state regulatory powers with the requirement of reasonableness and non-arbitrariness.
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