Preserving Tax Sovereignty
Leveraging the UN Tax Convention to stop tax-related cases from being diverted to investor–state dispute settlement
Tax measures are increasingly being challenged through investor-state dispute settlement (ISDS), exposing governments to costly proceedings, high-value claims, and constraints on legitimate tax reforms. As countries negotiate the UN Framework Convention on International Tax Cooperation, this report examines how its provisions can be shaped to prevent tax disputes from being redirected into ISDS, ensuring they are addressed through tax-specific mechanisms.
Key Messages
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Tax-related ISDS cases are putting growing pressure on tax sovereignty. Investors are increasingly challenging tax measures through investment arbitration, leading to costly proceedings, high-value damages claims, and regulatory chill.
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Existing safeguards have not stopped tax disputes from reaching ISDS. Tax treaties dispute settlement mechanisms and investment treaty carve-outs have often failed to prevent investors from pursuing arbitration claims.
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The UN Framework Convention on International Tax Cooperation offers a critical opportunity for action. It can help establish clearer boundaries between tax dispute resolution and investment arbitration.
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Countries can use the Convention to set out language aimed at preventing tax measures from being challenged under ISDS. Options include substantive safeguards to protect the tax policy space, procedural safeguards to exclude tax-related ISDS, and a coordinated amendment to existing treaties.
Tax measures are increasingly being challenged through ISDS, raising fundamental questions about the relationship between tax sovereignty and investment protection. As countries negotiate a landmark agreement on tax cooperation at the UN Framework Convention on International Tax Cooperation, including Protocol II on tax dispute prevention and resolution, this briefing examines how the agreement could help prevent tax disputes from being diverted into investment arbitration.
Drawing on new empirical research conducted in partnership with NYU School of Law, the report maps more than 130 tax-related ISDS cases and identifies patterns in how investors have used ISDS to challenge government tax measures. The findings show that tax-related claims often arise even where tax treaties dispute settlement mechanisms and investment treaty tax carve-outs already exist, exposing states to costly proceedings, significant damages or risks, and constraints on their ability to reform their tax systems.
The report then presents a menu of options for negotiators. These include strengthening protections for tax policy space in the UN Framework Convention, establishing procedural safeguards under Protocol II to prevent tax-related disputes from reaching ISDS, and creating a coordinated mechanism to address existing investment treaties. Together, these options aim to ensure that tax disputes are handled through appropriate tax mechanisms while preserving governments’ ability to implement legitimate tax policies.
Participating experts
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