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Home \Litigation \Litigation by Country \Mexico \  Feldman v. Mexico

Feldman v. Mexico

The claimaint, a US citizen and permanent resident of Mexico, operated a cigarette exporting business from Mexico. He sought damages from Mexico, alleging that various government taxation measures had resulted in a creeping expropriation of his property in contravention of Article 1110 of the North American Free Trade Agreement (NAFTA). The claimant further alleged that Mexico's taxation measures violated NAFTA Articles 1102 (national treatment) and 1105 (minimum level of treatment).

The facts of the case are somewhat convoluted; essentially, at all material times Mexico imposed a tax on the domestic sale and production of cigarettes, but no tax exported cigarettes. Domestic producers and re-sellers of cigarettes were still required to pay the tax, but were entitled to a rebate on export.

Due to industry agreements in the domestic market, the claimant's company was not able to buy cigarettes directly from producers but was forced to purchase them from bulk sellers such as Walmart. The cigarettes purchased by the company included the amount of the domestic tax, but the claimant was not always able to obtain the rebate on export because the invoices it supplied did not separately identify the amount of the tax. This led to a long-running dispute with the Mexican government: at various times the company was paid rebates notwithstanding the deficient invoices; at other times it was not. The law always remained the same but the enforcement of it changed from time to time. Finally, in December 1997, the law was amended to bar rebates to cigarette resellers such as the claimant's company, limiting rebates to the "first sale" in Mexico.

The Tribunal found that Mexico's taxation measures did not result in an indirect expropriation of the claimant's property because, amongst other things, the taxation measures were within the police power of the state: not every business problem experienced by an investor amounts to an expropriation. Further, neither NAFTA nor customary international law required Mexico to permit a "grey market" in cigarettes. The taxation measure could be rationally explained as directed to discouraging smuggling back into Mexico and to maintain high cigarette taxes to discourage smoking.

Notwithstanding that the claimant was unsuccessful on the expropration claim, the Tribunal found in his favor on the national treatment claim. The Tribunal found that there were domestic resellers in like circumstances with the claimant that were accorded more favorable treatment, because they were granted rebates at a time when the claimant was refused them. The claimant was accordingly awarded $9,464,627.50 Mexican pesos in damages, plus interest.

Note that Tribunal Member Mr Jorge Covarrubias Bravo dissented from this decision. The dissenting opinion, the Spanish language version of this decision, and other related decisions, are all uploaded here under "Related Documents".

 
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