OECD Arbitration in Tax Treaty Law

1. S. 50Introduction

Since the adoption of the first bilateral investment treaty between Germany and Pakistan in 1959, close to 3 000 bilateral investment treaties (BITs) have been signed. BITs are used to mitigate political risks and thus provide an arable ground for foreign direct investments (FDI). A quintessential feature of BITs is that they “include dispute settlement provisions […][that] ensure the effective implementation and enforcement of the treaty, in order to reduce uncertainty to foreign investors”. Given that BITs are signed primarily between capital-exporting and capital-importing States and that both they and double taxation agreements (DTAs) have an impact on the location decisions of MNEs, the disputes under BITs and the procedures for their resolution can be a relevant blueprint for drafting tax arbitration provisions, especially between developing and developed nations, particularly in matters relating to the tax treatment of MNEs.

The last twenty years were tumultuous for investment arbitration as critiques were raised regarding its costs for developing nations, legitimacy, and overall desirability. Improving arbitration procedures led to the UN Convention on Transpa...