Taxation and Currency Issues in Damages Awards
This article describes some of the issues that can contribute to the distortion of the value of awards received by claimants arising from the treatment of taxes and currency, and explores some possible approaches to reducing or eliminating potential distortions from an economic point of view.
Taxes, and particularly taxes on profits, are a fact of corporate life in the majority of jurisdictions. As a result, the treatment of tax in the calculation of awards of compensation made by tribunals in international commercial and investment treaty arbitration can have a significant impact on the value of an award to a recipient. Overcompensation and under-compensation are possible where taxes are not considered appropriately or at all.
The treatment of taxation in relation to awards of damages may, depending on the circumstances, be a question of the law of damages before it is a question of the assessment of economic loss. In the taxation part of this article, we focus on questions of economic loss arising in this context. These issues can be complex, given the nature of the calculation of an award, its timing and the international context in which many claims are made. Perhaps partly as a result, this area has often been given limited attention by tribunals and parties to disputes.2
Similarly, the treatment of currencies in the calculation of awards of damages can have a very significant effect on the value of damages received by a claimant, again potentially giving rise to overcompensation and under-compensation.
1 James Nicholson is senior managing director in FTI Consulting’s economic and financial consulting segment and Sara Selvarajah is an independent consultant specialising in tax. Neither author is legally qualified and nothing in this article should be taken as opinion or advice on matters of law.
2 Sara Selvarajah collaborated with James Nicholson on the parts of this article relating to taxation, which draw on an article the authors recently published in The International Arbitration Review (7th ed, 2016); the remainder of the article was prepared by James Nicholson.