The Environment for International Investment and Japan

- Views on MAI Negotiations -

The Framework of MAI

Background on the Commencement of MAI Negotiations

International rules regarding investment have until now assumed a multi-structured conglomeration of investment rules based on: 1) Bilateral Investment Treaties (BITs) aimed at the promotion and protection of investments; 2) the OECD's Code of Liberalization of Capital Movements and National Treatment Instrument, which are limited in binding power; 3) multilateral treaties on dispute settlement; 4) the Trade Related Investment Measures (TRIMs) spawned by the General Agreement on Tariffs and Trade (GATT) Uruguay Round Talks; and 5) the European Union (EU), the North American Free Trade Agreement (NAFTA), APEC, Mercedo Comun del Como Sur (Mercosur), and other regional economic frameworks.

Along with the increasing importance of the role of investment in international economics, the need to set new comprehensive and binding international rules on investment with an understanding of the rules currently in existence has grown. The OECD opened discussions regarding the foreign direct investment in 1991, and at the Ministrial Meeting in May 1995, it was decided that negotiations on the preparation of the MAI would be conducted over the ensuing two years.

Elements of the MAI

The MAI contains three main elements: 1) investment liberalization; 2) investment protection; and 3) dispute settlement.
1. Rules regarding the investment liberalization include: a) basic principles such as the national treatment instrument, most favored nation (MFN) and principles of transparency; b) the handling of general exceptions, country specific reservations and temporary derogations; c) liberalization mechanisms such as standstills and rollbacks; and d) new areas such as privatization, key personnel, performance requirements, investment incentives and so on.

2. Rules for investment protection include general treatment, expropriation, and compensation protection from strife, liberalization of transfers, and subrogation.

3. The dispute settlement mechanism includes Investor-State dispute settlement as well as State-to-State dispute settlement. Related issues include: a) the use of existing mechanisms, such as the ICSID and the establishment of new standing agencies for settling disputes; b) the scope of application; and c) relation between international arbitration and domestic legal remedies.

In addition, discussions are being held regarding the definitions of investment and investor which form the premise for the overall contents of the agreement (whether or not portfolio investments should be included, how member-nation investment organizations formed in non-signatories should be handled, etc.); and the geographical scope of the coverage of the MAI (exclusive economic zone, continental shelves, etc.). Still other issues exist, such as the importance of the participation of non-OECD members and how to facilitate their membership in the MAI, and the relationship of the MAI to other international agreements.

Main Elements of the MAI Negotiations Investment Liberalization Basic principles: national treatment, MFN (most favored nation), principles of transparency, etc. General exceptions, country specific reservations, temporary derogations, etc. Liberalization mechanisms: standstill, rollback, etc. New areas: key personnel, performance requirements, etc. Investment Protection General treatment Expropriation and compensation Transfer, etc. Dispute Settlement Mechanisms State-to-state dispute settlement Investor-state dispute settlement Other issues (consolidations of claims, subrogation), etc.

The State of Play

The Negotiations were initiated in September 1995. Two- to three-day sessions were conducted every six weeks, while drafting groups, expert groups, and other sub-groups worked concurrently. At the first round of the negotiations, the Chairman and Vice Chairmen were appointed and the overall schedule of the negotiations was agreed upon. Discussions over the main issues was conducted from the second through sixth rounds of talks.

At present, drafts and/or notes by the Chairman have been produced for such issues as investment protection, key personnel, geographical scope of coverage of MAI, and so on. In addition, an expert group has been holding discussions on the treatment of taxation systems since April 1996.

Although these talks embrace a great deal of topics, the actual negotiations between OECD member countries is seen to be progressing at a pace in line with the original timetable, thanks to the cooperation of the countries involved. However, there is the strong concerns over the very establishment of the MAI held by non-OECD Member countries (particularly Asian countries). Also the latter stage of the negotiations regarding the adaptation of the MAI to each country's domestic conditions are expected to lead to tough negotiations between the countries involved. Therefore, further efforts to inform all countries of the significance of the agreement and to gain the understanding of all concerned will most likely be necessary.

Pre-consented Items of Interest for the Japanese Economy

From the content of negotiations and state of progress mentioned above, we conclude that the discussions currently underway will not cause us to lose any considerable part of the environment for international investment. At the same time, negotiations regarding the definition of investment and taxation systems are not reached consensus yet. In addition, there have not been enough discussions regarding the treatment of non-OECD Member countries and the method of entering the MAI. Our basic opinion on these three points is as follows.

The Definition of Investment and Investor

In order to agree with the essence of investment and cover all cases of direct investment, we should adopt wider definition of investment which includes portfolio investments. The definition of direct investment under current enterprise-based definition (such as the OECD Code of Liberalization of Capital Movements, etc.) is not sufficient to effectively protect the overseas assets of investors. Given that direct and indirect investment have become indivisible under current conditions, all investments except those pure financial transactions which clearly have no relationship to direct investment should be treated as investments. Should this broad definition be adopted, we believe that problems concerning individual stipulations can be solved by establishing exception clauses as needed. (Consideration of the possibility of introducing quantitative standards should be useful.)

In addition, along with the intensification of investment, the importance of intellectual property rights is increasing. Intellectual property rights should be incorporated into the definition of investment assets.

The definition of investor should be broadened to cover companies established in non-MAI member countries that are controlled by an investor in signatories. Although the existence of a variety of cases involving the nationality of subsidiaries and sub-subsidiaries can be imagined, the clearest possible definition (using quantitative criteria such as ownership of over 50% of the stock) should be adopted.

Taxation

Discussions are being conducted by the OECD Committee on Fiscal Affairs. The existence of bilateral tax treaties serve as the rule of internation taxation. Although these developments naturally should be respected, the text of the MAI should include provisions covering the interface between investment and taxation in order to make it a comprehensive agreement on international investment. Specifically, the OECD Transfer Pricing Guidelines should be incorporated with binding force.

Furthermore, the drawing up of the MAI should be seen as an opportunity to apply multilaterally the measures avoiding double taxation and preventing tax evasion in existing bilateral tax agreements.

Non-OECD Member Countries

In order to consider the liberalization of international direct investment and global economic growth, we must take into account non-OECD member countries regarding the MAI negotiations. Although the MAI negotiations are being conducted by the governments of OECD Members and they are expected to produce results of a high standard, it is intended to be an agreement also open to non-OECD Members. While maintaining the level of the agreement, it is necessary to formulate step wise measures to facilitate participation in the MAI by non-OECD Members. In addition, we must gain the understanding and sympathy of non-OECD Members toward the MAI. The Government of Japan, as the only Asian member country involved in these talks, should play a large role in this respect.

Major Items for Discussion

It is our hope that, among the many problems involving international investment, the issues which are important to business activities and should be improved from the viewpoint of the Japanese economy are addressed appropriately in the MAI negotiations. Important issues among the new liberalization rules are: 1) key personnel; 2) performance requirement (local content rules, etc.; and 3) incentives. The following issues are important in order to ensure the implementation of liberalization: 4) general exceptions and country specific reservations; 5) the treatment of regional economic agreements; and 6) the treatment of State governments such as those which exist in the United States, Canada, etc. In addition to the opinion voiced above regarding 7) taxation, we feel there is a need to consider individual issues such as cost management criteria in such areas as the transfer pricing and royalties. Issues particularly important to investors include: 8) dispute settlement; and 9) the stability of transfer and compensation for expropriation. Finally, item 10) business practices, should not be addressed in the MAI. Further details of these ten items are discussed in the following Itemized Discussions.