Arbitration and the United Nations Framework Convention on Tax
Risks and lessons from investor–state dispute settlement
Countries are currently negotiating a protocol on preventing and resolving cross-border tax disputes under the UN Framework Convention on Tax. This policy brief draws on investor–state dispute settlement (ISDS), developed under investment law, to identify the risks and lessons from its experience. It shows why this mechanism is ill-suited for tax disputes and provides a basis for negotiators to assess other arbitration options under discussion in the protocol.
Key Messages
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By examining ISDS shortcomings, negotiators can better evaluate whether and how arbitration, including mandatory binding arbitration, might be integrated into the dispute resolution protocol.
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ISDS enables private actors to directly challenge state tax measures, producing costly, inconsistent rulings that undermine fiscal sovereignty. The UN FCITC should actively discourage ISDS for tax-related matters both under and outside the Convention.
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Decisions on the role of arbitration are likely to shape cross-border tax governance for decades. Understanding ISDS experience will help negotiators avoid importing its flaws into tax dispute resolution and anticipate institutional risks and implementation challenges.
The UN Framework Convention on International Tax Cooperation (UN FCITC) represents a significant moment for global tax governance. Last year, governments chose tax dispute prevention and resolution as the focus of the second protocol to be negotiated alongside the Convention.
No comprehensive international mechanism to resolve tax disputes currently exists. As of February 2026, negotiators are considering options ranging from the mutual agreement procedure to mandatory binding arbitration. As these discussions unfold, ISDS, which is increasingly used for tax cases, offers a warning from investment law, highlighting the risks of poor policy design.
This brief examines why ISDS is poorly suited to tax disputes, identifying structural flaws—including high costs, inconsistent rulings, regulatory chill—and explaining what they mean for fiscal sovereignty. It draws lessons and highlights risks from ISDS to help negotiators in designing effective, predictable, and tax-specific dispute resolution under the UN FCITC. It further outlines ways the UN FCITC might proactively discourage the use of ISDS for tax-related matters arising under or outside the Convention.
Informed by stalled ISDS reform efforts at the United Nations Commission on International Trade Law, it also highlights the risks of locking in arbitration-based systems without proper safeguards, and the need to ensure the protocol reflects developing country priorities rather than importing flawed investment law mechanisms.
Participating experts
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