Learning from Across the Pacific: Lessons from a South American Tax Dispute for Cambodia and Southeast Asia

February 25, 2025

Introduction

Tax stability is essential for fostering cross-border investment, yet fiscal policy disputes can quickly escalate into international conflicts—a challenge that resonates both in South America and Southeast Asia. The Freeport-McMoRan v. Peru decision, rendered on 17 May, 2024, under the United States of America-Peru Trade Promotion Agreement (TPA), offers valuable insights for emerging economies like Cambodia.

As nations in Southeast Asia modernize their tax regimes to attract foreign investment, the Tribunal’s reasoning in this case provides a practical roadmap for balancing investor protections with the sovereign right to enforce domestic tax policies.

Case Overview

The dispute arose when Freeport-McMoRan Inc. (“Freeport”), a U.S.-based company holding a 53.56% stake in the Peruvian mining company Sociedad Minera Cerro Verde S.A.A. (“SMCV”), challenged Peru’s imposition of additional royalties and taxes. These fiscal measures were introduced after Peru enacted the 2004 Mining Royalty Law in response to rising copper prices, despite a 1998 Stability Agreement that had guaranteed fiscal and administrative stability for a major $237 million investment project until 2013. As Peru’s tax authority began assessing unpaid royalties and taxes from 2008 onward, Freeport argued that these enforcement actions breached both the Stability Agreement and the minimum standard of treatment guaranteed under the TPA.

Central to the dispute was the question of whether the penalties and interest imposed on unpaid taxes qualified as “taxation measures” under Article 22.3.1 of the TPA—thus excluding them from the Tribunal’s jurisdiction.

Claimant’s Allegations on Taxation Measures

Freeport argued that the penalties and interest imposed by Peru’s tax authority, on unpaid tax assessments against SMCV were not “taxation measures” as defined under Article 22.3.1 of the TPA.

According to Freeport, the term “taxation measures” applies only to obligations directly classified as taxes under Peruvian law, such as income taxes, contributions, or fees, and does not extend to penalties or interest. Freeport contended that penalties and interest are separate obligations intended to penalize or compensate for delayed payments, not taxes themselves. As such, Freeport maintained that these measures should not fall within the TPA’s tax carve-out and are subject to the Tribunal’s jurisdiction under Article 10.5, which ensures fair and equitable treatment.[1]

Respondent’s Defense on Taxation Measures

Peru, on the other hand, defended its fiscal measures by asserting that the penalties and interest imposed on SMCV for unpaid tax assessments are integral to its domestic taxation regime and thus qualify as “taxation measures” excluded from the scope of Article 10.5 of the TPA under Article 22.3.1.[2] The government underscored that the TPA defines “measures” broadly to include “any law, regulation, procedure, requirement, or practice” related to taxation. It argued that if the TPA’s drafters had intended to limit the carve-out solely to “taxes,” as Freeport suggested, Article 22.3.1 would have explicitly referred to “taxes” rather than the broader term “taxation measures.”[3] Peru argues that Freeport’s interpretation artificially limits the scope of this term.

Additionally, Peru highlighted that the TPA explicitly safeguards states’ sovereign authority to enforce tax measures, including penalties and interest, emphasizing that such measures are “taxation measures” because they “…(i) constitutes a measure for the enforcement of taxes, (ii) is a practice related to taxation, and (iii) is a measure related to taxation.”[4] Based on this reasoning, Peru maintained that the Tribunal lacked jurisdiction to consider Freeport’s claims regarding these measures.

Tribunal’s Decision on Taxation Measures

Ultimately, the Tribunal sided with Peru, concluding that Article 22.3.1 of the TPA barred Freeport’s Article 10.5 claims concerning penalties and interest on the Tax Assessments, concluding they were “taxation measures” outside its jurisdiction. It found that Article 22.3.1 broadly excludes taxation measures, with no applicable exceptions under Article 22.3.[5] Rejecting Freeport’s reliance on Peruvian law, the Tribunal interpreted “taxation measures” through international law under the Vienna Convention on the Law of Treaties, emphasizing the TPA’s broad definition of “measure” as “any law, regulation, procedure, or practice”.[6]

Further, the Tribunal agreed with prior jurisprudence[7] that “taxation” encompasses enforcement mechanisms, including penalties and interest, which are integral to a state’s tax regime.[8] Finally, the Tribunal agrees with the Murphy v. Ecuador tribunal’s finding, which considered that the purpose of the tax carve-out in the underlying treaty is to “preserve the States’ sovereignty in relation to their power to impose taxes in their territory.” It concluded that the penalties and interest fell under Peru’s domestic tax system and were excluded from the Tribunal’s jurisdiction.[9]

Implications for Southeast Asia: Stability, Sovereignty, and Systemic Gaps

For Cambodia and other Southeast Asian economies, the Freeport-McMoRan v. Peru decision carries profound implications. As these nations work to boost their attractiveness to foreign investors while simultaneously reforming their tax systems, this case serves as a cautionary tale. It highlights the challenges faced by low- and middle-income states—whether in South America or Southeast Asia—that often lack robust administrative frameworks to efficiently resolve complex tax disputes.

In the context of Cambodia’s evolving fiscal landscape, including reforms like the 2023 Law on Taxation, clarity in economic concessions, the structuring of qualified investment project agreements, and precise treaty drafting becomes essential. These measures can help prevent the ambiguities and uncertainties that lead to costly arbitrations. As cross-border investment continues to grow, proactive legal strategies will be key in balancing the drive for economic growth with the need to maintain fiscal sovereignty.

About Us:

With offices across Cambodia, Myanmar, Vietnam, Laos, and Bangladesh, our team specializes in resolving cross-border structuring and tax disputes. We leverage regional expertise and global treaty insights to safeguard client interests, ensuring that our solutions are both innovative and attuned to local regulatory landscapes.

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