OECD Arbitration in Tax Treaty Law

1. S. 90Introduction

The necessity for arbitration clauses in income tax treaties (tax treaties) has steadily increased over the past century. The evolution of tax treaty arbitration can be traced back to its infancy in the draft of the League of Nations Model Tax Convention. Some researchers have concluded that current developments in tax treaty arbitration are not the consequence of improvised discussions, but the junction of different circumstances, such as dispute resolutions clauses related to transfer pricing issues.

Transfer pricing developments played a key role in the eventual introduction of arbitration clauses in various tax treaties. A consequence of transfer pricing audits has been increased economic double taxation because the adjustments made by one tax authority often did not correspond with those made by the other. This situation leads to taxation not in accordance with the provisions of the applicable tax treaty. Although these issues were meant to be resolved via mutual agreement procedure (MAP), this procedure fell short when there were no possible agreements between contracting states.

In 1989, the United States and Germany concluded the first arbitration clause in a t...