Behind Sovereignty: Concerns About International Tax Arbitration and How They May be Addressed

Traditionally, most international tax disputes are channelled through the mechanism of the mutual agreement procedure ( MAP). While international tax arbitration is widely believed to offer a promising supplement to the MAP, the majority of jurisdictions are still hesitant or even resistant in their attitude towards this mechanism on the grounds that arbitration in tax matters would infringe upon their domestic sovereignty. In this article the author points out the emptiness of the sovereignty argument, arguing that what truly matters are those genuine concerns which lie behind the sovereignty rhetoric. The article draws on
the lessons learned from international investment arbitration, which recently witnessed a striking backlash from academia and practitioners. Several of the concerns about international investment arbitration that fuelled this backlash are of particular pertinence to the discussion of international tax arbitration, namely, the perceived bias of arbitrators, the equitable review of domestic law in relation to international investment rules, and the increasing costs of arbitral proceedings. The dynamics of the issues affecting international investment arbitration and their implications for the tax equivalent are fully evaluated. Based on this evaluation, the author proposes ways to address these potential challenges to international tax arbitration, with an emphasis on the institutional reform of the tax arbitration mechanism. This proposed institutional reform is further tested by
means of a case study of TRIBUTE, a recent initiative of the institutional forum for international tax dispute resolution.