Rising Investor-State Tax Arbitration Cases Threaten Fiscal Sovereignty: Here’s what the UN Convention on Tax can do

The prevention and resolution of tax disputes has become a central challenge in global tax cooperation. Last year, amid ongoing UN negotiations on a Framework Convention on International Tax Cooperation (UN Convention on Tax)—the first-ever global treaty of its kind—countries agreed that the issue warranted its own dedicated protocol.

This agreement, to be developed alongside the convention, is meant to strengthen cooperation, reduce uncertainty, and provide fair mechanisms for resolving disagreements over international tax claims. But as countries move to draft the text, a pressing and growing reality cannot be ignored: tax disputes are increasingly being taken to ISDS, where private investors challenge national tax measures in international tribunals.

Such cases pose a direct threat to national tax sovereignty, one that negotiators have repeatedly flagged. They expose governments to potentially massive financial liabilities and constrain their ability to implement legitimate tax reforms, including those seeking to align with new international norms and standards.

So far, the UN negotiations have largely focused on disputes between countries under tax treaties, as well as on issues arising in situations where treaty coverage is absent. By contrast, the growing risk of tax disputes being diverted to ISDS mechanisms has received limited attention.

The UN Convention on Tax, through its dispute resolution protocol, presents an opportunity to both ensure that cross-border tax issues are addressed through tax-specific, state-to-state mechanisms and prevent their diversion into ISDS.  

Tax cases are increasingly being taken to ISDS

Arbitration allows parties to take a dispute to a non-governmental decision-maker rather than to a domestic or international court, resulting in a binding decision after both sides have been heard. In tax treaties, this usually takes the form of mandatory binding arbitration, a state-to-state process triggered after the mutual agreement procedure. ISDS, in contrast, comes from international investment agreements or contracts and lets investors sue states directly.

Tax-related ISDS cases have become increasingly common over the past 2 decades. Between 2000 and 2021, they made up about 15% of the 1,190 publicly known treaty-based ISDS cases. Of 165 tax-related ISDS claims in this period, only 51 came before 2009, while 114 were filed between 2010 and 2021. Cases under investment contracts are following the same trend. 

A threat to tax sovereignty

This rise in ISDS cases is a direct challenge to the right of sovereign states to set and enforce their own tax policies. ISDS gives a private actor standing to challenge tax measures through investment protection standards, in proceedings that are not anchored in the cooperative logic of tax treaties and that can generate binding outcomes with significant fiscal consequences.  

ISDS also suffers from several systemic shortcomings. The process is very costly, slow, and unpredictable. Decision-making is often opaque, legal precedent is limited, and awards can vary widely in how they are calculated. These features create legal uncertainty and can discourage governments from implementing legitimate tax reforms, as they risk costly legal challenges that could affect national budgets. Despite more than a decade of reform efforts at the United Nations, through the United Nations Commission on International Trade Law Working Group III on ISDS reform, these challenges persist, especially for countries with limited legal and financial resources.  

Following costly outcomes from ISDS claims, some states have responded by adopting “carve-outs” to explicitly exclude taxation from the scope of their bilateral investment treaties (BITs). India, for example, reformed its model BIT—which it uses when negotiating such new treaties—after facing major ISDS claims linked to retrospective capital gains taxes in the Vodafone and Cairn disputes, which resulted in billion-dollar awards against the state.

Other countries have added provisions requiring that disputes over whether a measure is a valid tax measure be referred first to the tax authorities in both the state where the investment takes place (“host state”) and the state where the investor is based (“home state”). Their determination is binding on the arbitral tribunal and must be made before ISDS proceedings can move forward.  

But these efforts to reassert tax sovereignty under BITs have largely fallen short. Tax carve-outs succeed in fewer than 20% of cases, partly because many BITs include tax “claw-back” provisions that still allow investors to challenge taxes under certain standards, like expropriation and non-discrimination. Tribunals have also at times interpreted carve-outs narrowly, like in the Yukos case, where the tribunal read a good-faith requirement into the definition of what constitutes a “taxation measure,” thereby limiting the scope of the carve-out. 

The UN Convention on Tax: A chance to stem the tide of tax cases going to ISDS 

Negotiating a protocol dedicated to tax disputes under the UN Convention on Tax is an opportunity to curb the growing number of tax-related ISDS cases and reassert the role of tax-specific, state-to-state dispute mechanisms grounded in tax treaties and domestic law, including recourse to national courts.

At a minimum, the protocol should include a carve-out clause that overrides access to ISDS for tax disputes. A useful starting point for discussion is the approach proposed in the Co-Coordinators' Report on the Relationship of Tax, Trade and Investment Agreements. This proposal would amend Article 25 of the UN Model Tax Convention by adding a new paragraph clarifying that taxation measures implemented pursuant to double tax treaties should not be considered breaches of other international agreements, including BITs, and should not be submitted to dispute settlement mechanisms under those other agreements. This proposal should be understood as a foundation on which negotiators can build to draft a carve-out under the UN Convention on Tax. It has received support within the UN Tax Committee, which underlined the importance of clearly distinguishing tax disputes from investment disputes and ensuring that tax issues are handled by tax specialists rather than investment arbitrators.  

However, further work would be needed to ensure that such a clause effectively addresses the specific features of BITs and the risks associated with ISDS. The first challenge concerns its scope. A wide range of tax measures—including customs duties, value-added taxes, and fiscal incentives linked to special economic zones—have been challenged in ISDS proceedings, yet many of these fall outside the current scope of the proposed convention. Limiting the carve-out to a narrow set of direct taxes would therefore leave significant exposure for states. Ideally, any effort to reduce the flow of tax disputes to ISDS should extend to both direct and indirect taxes, ensuring that the full range of fiscal policy instruments used by governments is adequately protected.

The second challenge lies in the large stock of legacy investment treaties. More than 2,500 international investment agreements remain in force, many dating from the 1990s and 2000s and containing far-reaching ISDS provisions. As a result, even if the UN Convention on Tax introduces safeguards for tax disputes, this legacy treaty network will continue to reinforce the role of ISDS in tax matters. Addressing this problem requires coordinated action between the tax and investment policy communities. This translates into considering reforms to BITs, including renegotiating or terminating outdated agreements, to ensure that tax measures are systematically carved out of ISDS across the existing treaty landscape.

Fortunately, the tax community has already shown that treaty networks can be updated collectively. The OECD’s Multilateral Instrument (MLI) enables countries to amend existing tax treaties in one step, by incorporating new provisions to curb profit shifting agreed multilaterally. More than 100 jurisdictions now participate, covering roughly 2,900 treaties. In this respect, the UN Convention on Tax provides a uniquely positioned forum for developing similar, coordinated solutions. To address the intersection between tax and trade, the 2025 UN Model Tax Convention also provides that disputes over whether a measure falls within the scope of a tax treaty can only be brought before the WTO Council for Trade in Services with the consent of both states. Taken together, these precedents demonstrate that coordinated multilateral action is both legally feasible and politically achievable, and the UN Convention on Tax provides a uniquely positioned forum to recalibrate the boundary between tax sovereignty and investment arbitration. 

Looking ahead: Avoiding the pitfalls of ISDS

As countries work to keep tax disputes out of ISDS, they will also need to think carefully about the dispute-resolution tools that could emerge under the UN Convention on Tax. While mandatory binding arbitration—currently under discussion—differs from ISDS, it still raises important design questions, including transparency, representation, and the independence of arbitrators, all issues discussed during our recent side event at the UN negotiations in February 2026.  

Tax dispute mechanisms should not replicate the weaknesses of investment arbitration. The UN Convention on Tax offers a rare opportunity to ensure that tax disputes remain within tax-specific frameworks and are handled by tax authorities, not investment tribunals. Getting this right will be essential to protect fiscal sovereignty while strengthening global tax cooperation. 

Watch our side event at the 4th Session of the Intergovernmental Negotiating Committee on the UN Framework Convention on Tax (February 2026)