Tax Treaty Arbitration: An Unacceptable Surrender of National Sovereignty or an Expression of Sovereign Power?

The release in 2016 by the Organisation for Economic Co-operation and Development of a draft multilateral treaty to modify thousands of global bilateral tax treaties was met with surprisingly strong support by the international community, with many states signing, ratifying, and implementing the treaty. One of the treaty's most contentious elements is the addition to the dispute resolution measures in bilateral treaties, a process known as mutual agreement procedure, of a mandatory arbitration procedure that is to be available where agreement cannot be reached under the conventional process. In contrast to the mutual agreement procedure, which includes no requirement that a final agreement be reached, the mandatory arbitration procedure can provide a guaranteed resolution of a treaty dispute. Although the arbitration article has been ratified by most developed countries, many developing nations have noted reservations to it, indicating that they will not incorporate it into their bilateral treaties. Central to the many arguments that have been put forward by opponents of mandatory arbitration in bilateral tax treaties is the argument that agreeing to mandatory arbitration would amount to an unacceptable surrender of sovereignty. However, when viewed critically in the context of tax treaties, this and many other concerns fall away or are revealed to be red herring arguments. A better view, this article suggests, is that entering into a tax treaty is an exercise of fiscal sovereignty, and any agreement to reduce taxing or other rights in the treaty should be seen as an element of that exercise of sovereignty to gain the benefits or advantages the parties seek through a treaty that grants mutual rights to and imposes mutual obligations on sovereign signatories.