Jyotistan is the 16th largest economy in the world, the 2nd largest country in the world by area and 4th largest military in the world. In 1985, the country was close to defaulting on its international debt obligations and decided to open up its economy to international business and trade. This resulted in a thriving private sector, the unleashing of the entrepreneurial nature of the people of the country and significant foreign investment – in particular from Naveta (as detailed below).

Naveta is Jyotistan’s largest democratic neighbor with a shared history and culture. It is the 8th largest economy in the world and the 30th largest country in the world by area. It has a strong and effective military. The economy is a mixed economy where private and public enterprises operate side by side – often times in competition to each other. The country’s Constitution prohibits any discrimination by the state in the way they interact with, and regulate, private and public enterprises and assets.

In 2002, both countries entered into a treaty known as Joint Declaration (JD) 545 of 2002. Under JD 545, both countries agreed to actively co-operate and support the development of the other, that they would respect the provisions of the Universal Declaration of Human Rights and ensure parity when it comes to the right of their respective citizens, to share such information that may be needed by the other country so long as such information requests were not prohibited by existing domestic law; to provide military support to each other against any and all third parties that seek to use force against either nation; to respect and give full effect to each other’s law consistent with International Law and best practices of the international community; and finally, to submit all differences that may arise between the nations to the binding jurisdiction of the International Court of Justice.

Pursuant to JD 545, significant cross border investments took place between the two countries – to the extent that Naveta corporations were the largest contributor of foreign capital into Jyotistan. Many experts believed that the commercial integration of the two countries worked because of the historic ties – culturally and historically and it was only a matter of time before both countries moved towards a full economic union. However, in 2012, differences arose on account of seemingly unconnected factors:

 

• Firstly, some groups operating in Naveta started to use various forms of social media to spread their religious beliefs – that resulted in fairly significant social and religious unrest in one of the states in Jyotistan. Jyotistan provided Naveta evidence that these groups were operating from its territory, which Naveta did not deny. However, when Jyotistan requested that Naveta take such steps as may be necessary to prevent any such further attacks, Naveta declined on the following grounds: i) the right to privacy while not specifically enshrined in its Constitution was included within the “right to life”; ii) and that the actions of the groups operating in Naveta did not amount to criminal conduct in its own nation; and iii) that while the Constitution prevented the state to take away individual rights of citizens in public interest, no public interest in Naveta had been affected.
  
  Jyotistan in response announced that they would be compelled to resort to cyber defense strategies – whereby they would authorize their military forces with the power to destroy, disrupt and usurp any adversary’s attempts to use cyberspace for interests against its own national interests. Naveta objected to such measures as being “overkill” and an effective use of force against its own national interests and its internal affairs.
  
  

• Secondly, and almost simultaneously, Jyotistan went in for elections and the opposition party came to power with a mandate to lower taxes, clean up the tax system, plug tax loopholes and bridge the country’s deficit. As a first step, they introduced a Tax Ordinance that introduced general tax avoidance rules with the following effect: i) all international commercial transactions (defined as transactions that had effective implications not just in Jyotistan) from January 1, 2010 could be reviewed by the tax department to ensure that they had not been structured with the sole purpose of avoiding taxes; ii) transactions that had been structured with the sole purpose of avoiding taxes could be subjected to a special tax, details of which were set out in the Ordinance. Tax experts believed that this effectively ensured that all commercial transactions would have to meet not just the “form” of the country’s historic tax rules but also the “spirit” of such rules – which effectively meant a retrospective amendment.

A number of public and private enterprises from Naveta functioned in Jyotistan and faced a potential impact running into significantly large amounts. The first two information requests under the Ordinance were made to Naveta corporations (one public enterprise and one private enterprise) – which only added to the feeling that the Ordinance was not intended to impact Jyotistan corporations. Naveta objected to the provisions of the Ordinance on the grounds that it violated the provisions of JD 545 – more specifically the provisions of ensuring parity between the citizens of Naveta and Jyotistan when it comes to the provisions of the Universal Declaration of Human Rights. Naveta also refused to entertain the information requests on the ground that sharing of commercial information as sought by Jyotistan amounted to a violation of its banking laws – which were based on customer information being treated as “confidential”.

Jyotistan ignored the objection except for a rather curt statement made by its Finance Minister: that there had been no discrimination since all international transactions were being treated the same. Naveta responded by saying that the “parity” clause needed to be read not just in “form” but also in “spirit” and that the impact of the Ordinance did have more of an impact on transactions by companies investing into Jyotistan (when compared to transactions by Jyotistan companies into other countries). The Finance Minister of Jyotistan accepted that this was true. Jyotistan also argued that state practice around the world had moved towards sharing of information requests in the context of tax matters – a principle that Naveta does not accept.

Given the long-standing relationship between the two nations, the Prime Ministers met to discuss the differences. They decided that they would refer the existing disputes, and any potential disputes that may arise from the said facts, to the International Court of Justice. Both countries felt that the dispute needed to be resolved from the perspective of the individual rights of their citizens, the public interest of both nations and the provision of the United Nations Charter.