Photo by Nick Jio on Unsplash

The latest 2017 Organisation for Economic Co-operation and Development (OECD) statistics on the resolution of tax treaty disputes, through the unique tax treaty resolution mechanism known as the Mutual Agreement Procedure (MAP), show that tax administrations around the world are now resolving more disputes than ever before. While this is a welcome development, these statistics also report that the deluge of new tax treaty disputes  has meant that globally, the inventory of unresolved tax treaty disputes is still increasing. As these OECD statistics now cover 85 jurisdictions (including Australia) and almost all MAP cases worldwide, the rising number of unresolved tax controversies is clearly a problem of global proportions.

The MAP charges designated treaty country representatives, known as competent authorities, to endeavour to come to a mutual agreement where double taxation disputes and conflicts of tax treaty interpretation occur. The OECD reported that in 2017, more than 80% of MAP cases relating to transfer pricing were resolved, as well as more than 75% of other cases.

The unspoken implication here is that, while there was a successful outcome for the majority of taxpayers, a small but significant number of controversies failed to be resolved. This failure was due, at least in part, to competent authorities only being required to endeavour to resolve MAP disputes. The fact that they are not compelled to reach a resolution does not incentivise reaching a mutual agreement in all cases. Where such tax treaty disputes fail to be resolved, taxpayers may suffer unrelieved double taxation, despite fiscal justice requiring that income should be taxed once only. Double taxation presents an excessive and inequitable economic burden on taxpayers, to the detriment of international trade and investment.

As unresolved tax treaty disputes under the MAP impede cooperative and collaborative relations between countries in the global marketplace, it is necessary to explore whether the avenues of litigation or arbitration might provide a better controversy management outcome.

Is litigation the way to resolve tax disputes?

Taxpayers have long been reluctant to embrace litigation as a means of resolving international tax disputes. A 2007 global transfer pricing survey of 850 multinational taxpayers across 24 countries revealed limited experience with transfer pricing litigation, the main area of controversy in international tax. In 2007, only 28 instances of litigation had been reported since 2003, with only a few jurisdictions proceeding to court: 10 of these 28 cases occurred in Germany and Canada.

A decade later, a 2017 global transfer pricing survey of 623 respondents from 36 jurisdictions across 17 industries reported that the incidence of litigation had increased in the intervening years, with 17% of taxpayers having experienced litigation. However, only 21% of those litigants expressed satisfaction with the outcome of their case.

While some tax authorities are now reported as more aggressively pursuing litigation, the uncertainty and risks inherent in this process are not limited to taxpayers. Apart from the possibility of losing tax litigation, an adversarial attitude on the part of national revenue authorities may discourage investment and economic growth.

For example, in relation to India—a nation notorious for pursuing tax litigation—the comment has been made that: “Protracted litigation in tax matters and the overall time it takes to resolve a dispute in India has created a perception that the system is unfavourable to taxpayers in general and that even bona fide investment is vilified if a tax benefit is involved.” (Govind & Varanasi 2013).

The costly, complex, uncertain, adversarial and time-consuming nature of international tax litigation, along with its negative effect on cross-border tax cooperation, trade and investment indicates that it is not the optimal way to resolve tax treaty disputes.

Is tax treaty arbitration the solution?

The historical failure of the MAP mechanism to resolve all tax treaty controversies prompted the OECD to consider the introduction of supplementing this process with mandatory binding arbitration for cases where the competent authorities cannot reach agreement. Including a binding arbitration clause as part of the MAP article in tax treaties would ensure that, after a certain time period, unresolved issues could be submitted to an arbitrator, or an arbitral panel, thus achieving the certainty of a resolution in all cases.

While this certainty and finality would be beneficial to taxpayers and tax authorities alike, the pervading argument against such an initiative has been that it would interfere with a nation’s sovereign control over its power, discretion, and authority to tax. The issue of mandatory binding arbitration is a controversial topic, mainly because developing countries are wary of its effect on their tax sovereignty.

As the United Nations Committee of Experts on International Cooperation in Tax Matters has explained: “When disputes arise, some countries may be reluctant to leave the decision to an independent panel, because . . . they fear a situation in which they cannot question the outcome of a decision from an independent tribunal.”

Another concern developing countries may have is that they may be at a disadvantage under a mandatory arbitration process, being less experienced with this process. There is also a perception that arbitration is inherently biased towards developed countries.

Recognising the advantages of providing certainty to taxpayers through a process that would resolve their disputes, both the OECD and the United Nations provided for the option of mandatory binding arbitration in their Model Tax Conventions, in 2008 and 2011 respectively. However, the take-up of this option was low by both developed and developing countries.

In 2013, the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) acknowledged, in relation to ‘Action 14: Make dispute resolution mechanisms more effective’, that solutions still needed to be developed to address obstacles preventing countries from solving treaty-related disputes under the MAP. The specific obstacle of the absence of arbitration provisions in most treaties was highlighted as a concern.

Continued resistance to binding mandatory arbitration on sovereignty grounds, especially from countries such as India, resulted in this controversy management mechanism being removed from the minimum standards outlined in Action 14. Instead, the OECD decided to explore the possibility of the development of a MAP arbitration clause for inclusion in the Multilateral Instrument (MLI) under Action 15. The purpose of the MLI was to enable countries to swiftly modify multiple bilateral tax treaties by signing this single instrument.

Mandatory arbitration (Part VI in the MLI) was omitted from the core provisions of the MLI, so countries are able to opt out of this provision, if they so choose. Not only is sovereign autonomy preserved by countries being able to choose whether or not to apply binding arbitration under the MLI, but further alternatives can also be selected within the arbitration provision.

One such alternative is between two approaches to decision-making in the arbitral process: the “independent opinion” approach, where arbitrators reach an independent reasoned decision based on applicable law, or the “last best offer” approach, which is the default MLI arbitration process. Under the “last best offer” approach, the competent authorities dealing with a tax treaty dispute propose their most reasonable solution to the case, and then the arbitral panel must select what it considers to be the best solution to resolve the case.

This “last best offer” approach might not only  be cheaper, quicker and simpler for developing countries to implement, it may also go a long way to preserving sovereignty. This is because the arbitral panel is restricted to the two solutions proposed by the competent authorities: “Since the arbitrators are forced to adhere to the view of one of the contracting states, the latter have an increased control over the process as opposed to traditional arbitration, where the arbitral award does not necessarily reflect the position of either country.” (Petruzzi, Koch & Turcan 2015).

In its sensitivity to stakeholder sovereignty concerns and its provision of a more level playing field for developing countries, the MLI has now advanced the utilisation of mandatory binding arbitration as the optimal way to resolve tax treaty disputes.


To date, 86 jurisdictions are signatories to the MLI, including Australia. Australia is one of the 28 countries that has adopted the mandatory binding arbitration provision, and the door remains open for more countries to adopt this solution to their tax treaty controversies in the future.

While MLI signatories are currently in the minority, in my opinion the innovative approach to arbitration taken under the MLI represents a significant step forward for the potential utilisation of this dispute resolution tool in the international tax arena. At the very least, the adoption of mandatory binding arbitration will encourage competent authorities to resolve tax treaty cases speedily, to avoid undergoing arbitration.

While litigation is seen to be an inherently competitive and inefficient dispute resolution mechanism, arbitration under the MLI is likely to lead to more collaborative cross-border relations and have a salutary impact on the number of unresolved MAP cases, as well as on international trade and investment.


This is an abbreviated version of: Markham, M, “Litigation, Arbitration and Mediation in International Tax Disputes: An Assessment of Whether This Results in Competitive or Collaborative Relations” (2018) 11 Contemporary Asia Arbitration Journal 277-304.


Leave a comment

Your email address will not be published. Required fields are marked *