## Facts

- A U.S. investor owned and controlled a Mexican company (CEMSA) that bought cigarettes in Mexico and exported them, seeking excise-tax rebates available for exports under Mexican tax law.
- Mexican law generally permitted exporters to obtain rebates but required invoices that separately identified the excise tax paid; in practice, only manufacturers typically issued invoices meeting that requirement, while reseller invoices often did not.
- For a period, Mexican tax authorities paid rebates to CEMSA despite invoice deficiencies and also paid rebates to a group of Mexican-owned exporters/resellers (the Poblano Group).
- Mexican authorities later stopped paying rebates to CEMSA and sought repayment of past rebates, while continuing to pay rebates to the Poblano Group without seeking similar repayment.
- Mexico amended its tax rules to restrict rebates to the “first sale” in Mexico, effectively excluding reseller-exporters such as CEMSA from rebates.
- Mexico adopted an exporter registration requirement; CEMSA applied, was audited after arbitration began, and was denied registration, while the Poblano Group obtained registration.
- The investor also relied on a prior Mexican Supreme Court judgment favorable to CEMSA on tax refunds, arguing Mexico’s nonimplementation formed part of the alleged taking.
- The investor brought arbitration under NAFTA Chapter 11 through the ICSID Additional Facility Rules on behalf of CEMSA.

## Issues

1. Whether Mexico’s denial of rebates, repayment demands, legal amendments, and registration denial constituted indirect (creeping) expropriation under NAFTA Article 1110.
2. Whether CEMSA and Mexican-owned exporters/resellers were in “like circumstances,” and whether Mexico accorded CEMSA “less favorable” treatment in breach of NAFTA Article 1102.
3. Whether Mexico’s conduct violated the minimum standard of treatment under NAFTA Article 1105.
4. Whether any claims were barred by NAFTA’s limitation period or restricted by NAFTA’s taxation provisions.

## Decision

- The tribunal held it had jurisdiction over timely claims within NAFTA’s limitation period, while excluding or limiting certain matters due to time limits and taxation-related constraints.
- The tribunal rejected the expropriation claim, concluding Mexico’s measures did not substantially deprive the investment in a manner amounting to an indirect expropriation under Article 1110.
- The tribunal found Mexico breached national treatment under Article 1102 by treating CEMSA less favorably than Mexican-owned comparators in like circumstances, particularly regarding rebate administration/enforcement and exporter registration.
- The tribunal found no separate violation of Article 1105 on the facts beyond what was addressed under Article 1102.
- The tribunal awarded damages of MXN 9.4 million plus interest for losses attributable to the discriminatory treatment.
- One arbitrator dissented, disputing the national-treatment finding and aspects of causation and damages.

## Legal Principles

- Adverse effects on an investment from taxation, regulation, or enforcement do not by themselves establish expropriation; indirect expropriation requires a substantial deprivation of the investment’s value, use, or enjoyment.
- A state retains regulatory authority, including in taxation and public health-related sectors; legitimate regulation, even if harmful to a business model, is not necessarily compensable as expropriation.
- National treatment under NAFTA Article 1102 requires comparison to domestic investors in “like circumstances” and prohibits less favorable treatment based on nationality, including through selective or differential administration and enforcement.
- Discrimination may be found where similarly situated domestic actors receive materially more favorable outcomes under the same regime without a persuasive non-nationality justification.
- Where discrimination is established, damages are limited to loss causally linked to the discriminatory conduct, not to losses from lawful regulation or time-barred acts.
- The minimum standard of treatment claim under Article 1105 may fail where the proven wrong is adequately addressed as discrimination under Article 1102 and does not reach the separate threshold associated with denial of justice or egregious arbitrariness.

## Conclusion

The tribunal denied the investor’s expropriation and minimum-standard claims but held Mexico violated NAFTA’s national-treatment obligation by discriminatorily administering cigarette export rebates and registration against a foreign-owned enterprise in like circumstances, awarding MXN 9.4 million plus interest for the resulting harm.


Feldman v. United Mexican States, 42 I.L.M. 625 (2003)