International Tax Disputes: Arbitration, Mediation and Dispute Management edited by Hans Mooij

Nearly a quarter-millennia ago, one of the fathers of the American Revolution observed that ‘taxes… laid upon [the people] without [them] having a legal representation where they are laid… reduce[s them] from the character of free subjects to the miserable state of tributary slaves’.¹ While couched in revolutionary fervour, the basic observation took hold—taxpayers should have political standing and a democratic voice in the public system that taxes them. Sam Adams was speaking at a time when most people paid taxes to a single sovereign. Today, individuals and corporations often owe taxes in myriad jurisdictions around the world. Should they continue to have ‘legal representation where th[ose taxes] are laid’?

Take, for example, a case where a multinational corporation headquartered in a high-tax jurisdiction owns a subsidiary in a low-tax jurisdiction. Under the OECD’s new Pillar Two rules, that company will be subject to an effective tax rate (‘ETR’) in each jurisdiction; if the ETR in the second is below the global minimum 15 per cent, a top-up tax may be applied to ensure that the global minimum tax rate is met. If both apply a top-up due to differing implementation of the Pillar Two rules or fail to credit the other’s tax assessment, the corporate taxpayer could be subject to double taxation.

The system for resolving these sorts of multijurisdictional tax disputes has evolved over the past 50 years. Hans Mooij’s preface titled ‘A Silent Reform’ and the initial chapter in his edited book by Ubaldo Gonzalez de Frutos discuss this evolution in appropriate broad strokes. A half century ago, these disputes often found their way into domestic courts; by the 1970s a treaty-based mutual agreement procedure allowed taxpayers to ‘transform’ a dispute between themselves and a taxing state into a sovereign dispute between his home state and the respondent state (section 1.16). The upside to this reform was an appropriately internationalized process; the downsides are that the taxpayer loses control over the claim, his state merely commits to ‘exerting every effort’ on his behalf, and any resolution functions merely ‘as a pact between the competent authorities of both countries’ (id.).

As globalization lurched forward and private parties became more active subjects of international law into the 1990s, sophisticated taxpayers facing international tax disputes started to bypass their home sovereigns and bring binding arbitration claims against the taxing foreign state themselves, usually under bilateral investment treaties (BITs). The current effort at multilateral reform of the system to resolve tax disputes, in a way, seeks to merge the Mutual Agreement Procedure (MAP) and BIT concepts: providing a specialized and tax-specific mechanism for binding international arbitration, on the one hand, but allowing that arbitration to be initiated and controlled by taxpayers themselves, on the other.

This is not a surprising evolution; the history of international law is in no small measure the story of humanity’s slow march from placing its trust in its sovereign proxies to individuals becoming subjects of international law itself. A world governed by might has gradually given way to a world governed by rights; from the Nuremburg Tribunals of 1946, the adoption of the Universal Declaration of Human Rights in 1948 and the first Bilateral Investment Treaty in 1957, the global legal order has expressly sought to diminish and then encase state sovereignty within a prism of private rights, commercial interests, and stable international norms. This world order was put in place to protect these rights and interest from the excesses of state sovereignty; to ‘break the link between political citizenship and economic ownership’; and realize that ‘[t]he global system could be knit together from the level of the individual to the world’.² Without expressly saying it, Hans Mooij’s edited book places international tax disputes within the broader story of these evolutionary shifts, and then takes a diverse and multidisciplinary look forward.

For practitioners of international arbitration there is much to ponder in this book, as we find a new intersection of private rights and public obligations. The observations of H. David Rosenbloom at Chapter 7 rightly note that ‘the process for dealing with tax disputes’ in BIT arbitration and MAP arbitration ‘are about as similar as oranges and orangutans’ (section 7.01). Still, BITs continue to provide an ‘ad hoc forum’ for these sorts of disputes (section 7.17). There may indeed by ‘benefits of channeling tax disputes away from BITs and into tax treaties’ (section 7.22), but experienced scholars and practitioners of international law and dispute settlement writ large will query whether the state-to-state MAP process is the right alternative—indeed, one can question whether it even deserves to be called ‘arbitration’. Lessons can be learned from the evolution of commercial and then investor-state arbitration to build a credible and trustworthy system of binding tax dispute settlement; these lessons cause us to grapple with the relative need for reasoned awards (Chp. 2), the need for ‘specific, dependable and objective rules for appointing arbitrators’ (section 8.41), the need for transparency and publicity of arbitrators’ decisions (Chp. 8), and the ability to keep the costs of the process reasonable and predictable (id.). Rita Halabi offers a forensic critique of the new multilateral instrument, addressing technical but critical issues like the arbitrability of tax disputes, the lex arbitri, and the recognition and enforcement of awards (Chp. 10), and Kees van Raad addresses the consistent bugbear of international dispute resolution—the interaction of international and domestic legal standards (Chp. 23).

This book also provides substantive discussions that will appeal to international tax practitioners, and even development professionals. There are technical chapters on joint audits (Chp. 20) and certification in the data-driven world of international tax (Chp. 22). Hans Mooij offers a look into the costs of disputes as a matter of public policy (Chp. 21), and there are lengthy sections on dispute prevention tools like mediation (Chps. 15 and 16) and public–private collaboration for tax certainty (Chp. 18). Care is taken to survey the unique views of developing countries throughout the book (Chps. 3–6, 12–17).

In the end, this book makes a strong case for the proposition that the resolution of international tax disputes should endeavour to follow the flattened path of commercial and investment arbitration. This path was started in the aftermath of World War I, when humanity’s embrace of ‘idealistic internationalism’³ led to the idea of international arbitration as a unifying force. The creation of the International Chamber of Commerce (ICC) and its associated Court of Arbitration in 1923 called for arbitration clauses to ‘be declared valid by all countries’, that ‘all countries… render executory the awards of foreign arbitrators… without further discussion upon the merits’, and ‘that the procedure in legal arbitration should be uniform across all countries’.⁴ The advent of ‘Arbitration without Privity’⁵ under BITs in the post-World War II era added an additional layer to the ‘dream world in which capital moved unobstructed globally [and] was encased globally by [a] supranational third-party institution[] of arbitration’.⁶ The instruments creating these institutions were meant to ‘protect the world market against governments’, ‘limit the power of [those] governments to harm each other’, and at the same time protect private capital against self-interested sovereign prerogatives and the ‘spasms of democracy’.⁷ Tax policy is where these spasms and prerogatives often manifest, which is why a global institution of norms, rules, and processes to encase them in a system of pacific dispute settlement is so important to the proper functioning of the world economy.

This book is a terrific introduction to the many issues that will arise as we seek to interpose a global system of justice between domestic taxing authorities and multinational taxpayers.

Footnotes