Sovereignty and tax treaty dispute settlement The types of tax treaty disputes and the desirable level of judicialization of the settlement procedure from a sovereignty perspective

Disputes between states about the interpretation or application of bilateral tax treaties may lead to double taxation at the detriment of the affected taxpayer. States very carefully guard their sovereignty to tax and are, therefore, reluctant to accept arbitration as a complement to the mutual agreement procedure to settle tax treaty disputes.
This study demystifies the generally held belief that states suffer a loss of control in the mutual agreement/arbitration procedures by analyzing part VI of the Multilateral Instrument (MLI) and the EU Dispute Resolution Directive (DRD) on the basis of the criteria access, independence, and enforceability. The results of this analysis are, furthermore, used to establish that these procedures do not strike the right balance between the affected taxpayer’s right to have double taxation eliminated and a state’s ability to maintain their regulatory space in the general interest, including the possibility to mitigate the abuse of tax treaties.
The final part of this study contains a proposal for a new mandatory MAP/arbitration procedure which takes into consideration the lessons learned from dispute settlement in international investment agreements. The proposal carefully considers the affected taxpayer’s role in the procedure, its material scope, and the required level of institutionalization and judicialization. The procedure’s design is built on the notion of selective judicialization which implies that cases which are sensitive from the perspective of democratic self-determination may be excluded from the new mandatory MAP/arbitration procedure. This notion, however, equally implies that cases that are validly made and fall within its scope get resolved in a fair and transparent way that provides the affected taxpayer relief from double taxation.