Taxation of foreign investments is a key regulatory exercise in every sovereign State. Inasmuch as it is not designed to effect a dispossession outside the normative constraints and practices of the taxing powers, the right to tax foreign investments is also a legitimate regulatory exercise. Investment treaty arbitration (ITA) tribunals often examine whether taxation measures by host States are discriminatory, confiscatory and/or tantamount to expropriation in the light of applicable standards under a vast network of international investment agreements (IIAs).

Drawing on its drafting background and interpretation by arbitral tribunals, this paper aims to explore and shed light on the significance, scope and application of the “carve-out” mechanism on taxation under Article 21 of the Energy Charter Treaty (ECT). In this, it takes a comparative approach aiming to spot similarities and differences in drafting methodologies of some IIAs, Free Trade Agreements (FTAs) and the ECT. It provides a detailed analysis of the drafting background of Article 21 based on travaux preparatoires as well as interviews with former negotiators/delegates involved in the making of the taxation provision. The paper also focuses on the application of Article 21, and outlines a general guideline in reading the provision.