International Tax Arbitration: What it Means and How it Has Evolved

Abstract

For years, there has been ongoing tension between developed countries, that have pushed to impose arbitration as a last resort mechanism for resolving tax disputes, and developing countries opposing it due to limitations in resources, capacity (Mooij, 2017),22 and a lack of negotiating experience (Bawney, 2021).23 In this political context, the principle of legal certainty, which ensures that taxpayers have the right to seek resolution for legal disputes, has been juxtaposed with the principle of sovereignty.24 The principle of sovereignty, derived from the statist-Westphalian25 tradition, emphasizes non-interference by third parties, whether they are states or individuals, in a country’s internal affairs. After two decades of refining the doctrine and regulations surrounding international tax arbitration, which will be examined in this chapter, developing countries are now confronted with a dilemma. In order to participate in the Pillar One mechanism of the Inclusive Framework, they must decide whether to accept mandatory and binding arbitration. If they do so, they will be eligible to receive their share of the taxable base, referred to as “Amount A,” which provides a potential source of financing. This decision will require them to sign a multilateral treaty that facilitates the resolution of disputes within their jurisdiction26. However, in exchange for the revenue, they will be required to adhere to mandatory binding arbitration. This application of the principle of “do ut des” (give and take) applies specifically to tax disputes related to Pillar One, including disputes over transfer pricing, business profits, and determining whether the subject matter falls within the scope of Amount A. It may also extend to issues concerning “Amount B.”