Sovereignty and Tax Treaty Dispute Settlement

States have been reluctant to accept arbitration as a complement to the mutual agreement procedure (MAP) to settle tax treaty disputes. They fear that arbitration will result in an undesirable loss of fiscal sovereignty. Whether such loss in fact occurs – and why this would be undesirable – has not been studied in much detail in international tax literature. This book fills this gap by providing in Part II an analysis of the actual loss of sovereignty suffered by the disputing states in the recently introduced MAP/arbitration procedures of the Multilateral Instrument (MLI) and the EU Dispute Resolution Directive (DRD) on the basis of the criteria of access, independence and enforceability. The outcome of this analysis is used to develop the view that these procedures do not strike the right balance between the affected taxpayer’s right to have double taxation eliminated and a state’s right to maintain a certain freedom to regulate in the general interest, including the possibility to mitigate the abuse of tax treaties.

Part IV of this book contains a proposal for a new mandatory MAP/arbitration procedure. The proposal takes into consideration the not always positive experience of states with the long-established practice of arbitration in international investment agreements to settle disputes between an investor and a host state as described in Part III of this book. The newly proposed mandatory MAP/arbitration procedure is based on the notion of “selective judicialization”, which implies that cases which are sensitive from the perspective of democratic self-determination may be excluded from its scope. This notion, however, equally implies that cases that are validly made and fall within its scope must be resolved in a fair and transparent way that provides the affected taxpayer relief from double taxation. The proposal, in particular, focuses on the role of the affected taxpayer in the procedure, the required limitations in the material scope of the arbitration procedure and the required level of institutionalization and judicialization of the arbitration procedure in order to improve its effectiveness.

This study analyses the loss of sovereignty suffered in the MAP/arbitration procedure of the OECD Multilateral Instrument and the EU Dispute Resolution Directive and proposes a new MAP/arbitration procedure that better balances the taxpayer’s right to an effective resolution and the state’s right to maintain a certain regulatory space in taxation matters.