OECD Arbitration in Tax Treaty Law

1. S. 298Introduction

Nowadays, due in most part to the globalization phenomenon, foreign direct investment (FDI) has seen a dramatic increase. The development of communication technologies, e-commerce, and transportation systems have promoted FDI. Thus, investors looking to inject money in foreign jurisdictions need to observe and analyze several factors within the state in which they are projecting to invest. Investors seek an adequate return of their investments through strong legal protection and efficient statutory frameworks.

When dealing with transnational investment, the question arises as to which jurisdiction is going to be entitled to tax the profits realized from these operations. It is not uncommon for jurisdictions to disagree with regards to the application of the tax legislation due to the different approaches given by them.

In order to address this problem, international instruments provide for dispute resolution mechanisms such as the Mutual Agreement Procedure (MAP). Nonetheless, MAPs have proven to be somewhat ineffective at the moment of addressing tax treaty related issues. In most cases, the MAP provision requires only that the competent authorities “endeavor” to reac...