The Dispute Settlement Mechanisms Under the MLI: A Work in Progress

Gianluca Darena*

On June 7, 2017, seventy-one jurisdictions signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”)[1] with the promise to thwart base erosion and profits shifting practices.[2]  On October 13, 2017, academics, experts, and practitioners from all over the world gathered at the University of Michigan Law School to debate about these recent developments that could potentially redefine the international tax regime (“Conference”).[3] 

Throughout the Conference, much attention was focused on the MLI’s dispute resolution mechanisms. Specifically, Part V of the MLI addresses the Mutual Agreement Procedure (“MAP”), while Part VI addresses the mandatory binding arbitration process.[4]

At the outset of the Conference, Professor Pasquale Pistone[5] engaged in an insightful comparison between the dispute resolution mechanisms in the MLI and under the new European Union (“EU”) Arbitration Directive.[6]  Specifically, Pistone argued that the fundamental difference between the EU and the OECD approach is that the EU Arbitration Directive considers taxpayers as “holders of rights”[7], while the MLI’s framework treats taxpayers only as “objects. In other words, the E.U. Arbitration Directive aims to regulate States’ relationships as well as taxpayers’ rights, while the MLI aims to resolve State-to-State disputes with taxpayers acting as mere spectators.[8] [9]

The author shares Professor Pistone’s view that the lack of taxpayers’ participation in the arbitration procedure is one of the most problematic aspects of the MLI. Indeed, by placing the taxpayers in the background, the MLI arbitration mechanism undermines the stated purpose of its enhanced MAP—making the dispute resolution mechanism more effective.[10] This effect can be observed in Article 19, Mandatory Binding Arbitration.[11] Specifically, Article 19(4)(b)(1) holds that the arbitration decision is not binding on either State or the taxpayer if a domestic court declares the decision invalid, or a “directly affected person[12] rejects such decision or files a domestic claim in either contracting jurisdiction.[13]  This mechanism is inevitable in a system where the adjudication of taxpayers’ rights is done entirely outside the taxpayers’ reach. Due process and audiatur et altera pars principles codified in the constitutional laws of the signatory jurisdictions would not permit a taxpayer to be legally bound by an arbitration process disallowing the taxpayers’ participation. Stated differently, without the taxpayers’ veto power, it may prove difficult to enforce the arbitration award in the taxpayers’ domestic jurisdictions.[14]

However, while the taxpayers’ veto power is necessary to attain consistency between the MLI and the constitutional laws of the contracting jurisdictions, it potentially curbs the effectiveness and efficiency of the arbitration itself.[15] First, what prevents any “directly affected person” dissatisfied with the MAP’s result to simply object and nullify the entire resolution effort? Second, States and taxpayers will be discouraged from opting into arbitration due to the lack of finality of its findings. It is evident that the OECD’s approach tips the balance in favor of effectiveness and efficiency at the expense of taxpayers’ participation in the arbitration process. After all, as Professor Pistone himself noted, the MLI’s dispute resolution mechanism is engineered to resolve disputes between States where the taxpayers’ rights acquire a secondary meaning. However, the decision to exclude taxpayers from the adjudication mechanism paradoxically has the potential to undermine its desired effectiveness and efficiency. As observed by Pistone, the MLI made great progress concerning global coordination from the perspective of tax authorities, but at the same time, it could have done a better job in coordinating taxpayers’ rights at the global level.

What is a possible solution? In the author’s opinion, to increase the overall effectiveness and efficiency of the dispute resolution process, the MLI should guarantee taxpayers procedural due process rights, such as the opportunity to be heard, to present evidence, and to submit briefs.[16]  This inclusion should be accompanied by an international tax dispute tribunal with the authority to review the arbitration awards de novo.[17]  Additionally, the review power of domestic tribunals should be limited to a small number of grounds for non-recognition.[18] Therefore, because the taxpayers’ procedural due process rights would be protected and appellate review would be available, the arbitration award could be immediately binding on all the parties involved and increase the effectiveness and efficiency of the MLI dispute resolution mechanism.[19] [20]

Following Pistone’s presentation, Professor Kim Brooks[21] posed two questions that caught the author’s attention: why does the MLI arbitration process lack justification, and why are the arbitration opinions not published?[22] Brooks argued that unreasoned and unpublished decisions lose some of their richness and, more importantly, do not have “the ability to build a baseline of knowledge from which other taxpayers can learn.”[23]  This statement implies that it would be desirable for arbitration decisions to have at least a practical precedential value.[24]

Although it is unquestioned that a cohesive system of precedents would improve consistency, predictability, and continuity of the international tax regime, the author believes that the current MLI arbitration framework was not intended to generate a system of precedents.[25] First, the MLI arbitration system is unfit for lawmaking functions, especially if devoid of taxpayers’ participation.[26] Second, it is unclear whether there is an organic system of tax treaties to begin with. There are more than 3,000 tax treaties in effect, and each of them contains different provisions, which in turn reflect different power relationships between contracting States.[27] Third, there is no hierarchy between the arbitration decisions.[28]  Finally, a self-standing appellate arbitration body that could correct ill-advised decisions is currently lacking.[29]  Based on the foregoing, many contracting jurisdictions expressed skepticism regarding the value of reasoned decisions in the MLI arbitration context. In fact, only a handful of the signatory jurisdictions opted for independent opinion arbitration, which allows the arbitrators to present their reasoned decisions.[30]

In conclusion, the Conference was an engaging and insightful event. Pistone’s and Brooks’ comments shed light on many often-overlooked aspects of international tax law. The MLI certainly was a leap forward in the right direction, however, many issues remain unaddressed. The contribution of academics, practitioners, and stakeholders is needed to progress towards a more comprehensive and cohesive international tax regime.

*Gianluca Darena is a practicing attorney at Moris & Associates, Miami, Florida; he holds a J.D. from Nova Southeastern University, and a J.D. from Università degli Studi di Roma III.

[1] OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (May 7, 2017), [hereinafter MLI].

[2] Recording: Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, OECD (Nov. 24, 2016),

[3] Reuven S. Avi-Yonah and Xu, Haiyan, A Global Treaty Override? The New OECD Multilateral Tax Instrument and Its Limits, (U. of Mich. Pub. L., Res. Paper No. 542, 2017).

[4] OECD, MLI pt. 5, 6 (May 7, 2017), [hereinafter MLI].

[5] Pasquale Pistone is Academic Chairman of the International Bureau of Fiscal Documentation, a Jean Monnet ad Personam Chair in European Tax Law and Policy at Vienna University of Economics and Business, and Associate Professor of Tax Law at the University of Salerno.

[6] Council Directive 2017/1852, Oct. 10, 2017 O.J. (L 265) (EU).

[7]  Id. at art. 1.

[8] Specifically, under Part V and VI of the MLI, the taxpayer’s active involvement in the MAP and arbitration procedures ends after the initial submission of her case to the competent tax authorities. See MLI supra note 1, at art. 16.

[9] See also P. Pistone & P. Baker, General Report, in The Practical Protection of Taxpayers’ Fundamental Rights 65-66 at § 9.6 (P. Pistone ed., 2015).

[10] See Action 14: 2015 Final Report in OECD/G20 Base Erosion and Profit Shifting Project: Making Dispute Resolution Mechanisms More Effective (OECD ed., Oct. 5, 2015),

[11] See MLI supra note 1, at art. 19.

[12]. The term “directly affected person” is also found in the EU Arbitration Directive. See EU Directive 2017/1852, supra note 1, at art. 2(1)(d). This term is vague in nature and easily subject to diverging interpretations. This uncertainty places significant questions over the class of people that may have standing to refuse arbitration results. However, as Pistone precisely pointed out during the Conference, this is less of a problem in the EU where the European Court of Justice has the power to develop a cohesive interpretation of what “directly affected person” exactly entails.  To the contrary, in the MLI’s context, the use of vague terms is less desirable because of the absence of an international tax dispute tribunal that could develop a cohesive interpretation of ambiguous terms.

[13] See MLI supra note 1, at art. 19.

[14] The inability of an arbitration award to bind parties who do not participate in the arbitration proceedings is a result that can be also observed in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997 (entered into force for the United States on Dec. 29, 1970) [hereinafter New York Convention]. In fact, Article V(1)(b) of the New York Convention prohibits recognition and enforcement of an arbitration award when one of the parties was “unable to present his case.” Id.  at art. 5(1)(b).

[15] For example, in the Bilateral Investment Treaties (“BITs”) context awards are usually binding. See, e.g., 2012 U.S. Model Bilateral Investment Treaty art. 34(4), (2012), The awards’ binding effect is possible mainly because the disputing party voluntarily elects to submit a claim under the BIT to arbitration and has an opportunity to participate in the arbitration proceedings by filing pleadings, memoranda, and briefs. Therefore, there is sufficient voluntary consent and participation to allow arbitration awards to be binding on disputing parties.

[16] For example, the E.U. Arbitration Directive allows an affected person an opportunity to be heard and to present evidence. See EU Directive 2017/1852, supra note 1, at art. 13. Also, domestic general anti-avoidance rules (“GAAR”) feature procedural safeguards such as notification procedures and an opportunity to heard for affected taxpayers. See J. Hattingh, The Multilateral Instrument from a Legal Perspective: What May Be the Challenges? 71 Bull. Int’l Tax’n 2 (2017).

[17] For an interesting proposal for a self-standing international tax dispute resolution body see J. Owens, A. Gildemeister & L. Turcan, Proposal for a New Institutional Framework for Mandatory Dispute Resolution, 82 Tax Notes Int’l 1006 (June 6, 2016).

[18] For example, the New York Convention in its Article V limits the possibility of nonrecognition to seven grounds. See New York Convention, supra note 32.

[19] In this theoretical scenario, the taxpayer would not have the power to reject the arbitrators’ findings which are affirmed by the international appellate body.

[20] For a more advanced solution to the problem of lack of taxpayers’ participation in cross-border dispute resolution procedures, see P. Baker & P. Pistone, BEPS Action 16: The Taxpayers’ Right to an Effective Legal Remedy Under European Law in Cross-Border Situations, 25 EC Tax Rev. 335, 341 (2016).

[21] Kim Brooks is the Weldon Professor of Law and Dean of the Schulich School of Law at Dalhousie University.

[22] The MLI also provides for the “independent opinion” form of arbitration that includes reasoned opinions but expressly states that such reasoned decisions do not have precedential value. See MLI supra note 1, at art. 23. As of the date of this article’s submission, most of the signatory jurisdictions that have opted for mandatory arbitration procedures have adopted the “baseball arbitration” form. See Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) Matching Database (beta), OECD (2017) [hereinafter OECD matching database],

[23] Kim Brooks, Commentator on Dispute Settlement under the MLI and the EU Arbitration Convention Panel at the University of Michigan Law School Tax Symposium: Perspectives on The Multilateral Instrument (Oct. 13, 2017).

[24] The MLI expressly states that the arbitrators’ decisions do not have precedential value. See MLI supra note 1, at art. 23. However, some of the MLI’s provisions are ambiguous and vague (e.g., the principal purpose test). Due to this ambiguity, the parties involved in the dispute resolution mechanism would inevitably rely on prior decisions to attain some certainty on how to prepare their position. It follows that notwithstanding the fact that the MLI expressly prohibits arbitration awards to have legal precedential value, any arbitration decision will have some practical precedential value. See Andrea K. Bjorklund, The Emerging Civilization of Investment Arbitration, 113 Penn St. L. Rev. 1269, 1294 (2009).

[25] For example, in the context of international investment treaties, it has long been argued that arbitration decisions are ill-suited to establish a system of precedents. Id.

[26] See J. Hattingh, The Multilateral Instrument from a Legal Perspective: What May Be the Challenges? 71 Bull. Int’l Tax’n 2, 2 (2017).

[27] Considering their respective differences, the same argument has been made in the context of international investment arbitration. See MLI, supra note 1.

[28] Id.

[29] See W. Mark C. Weidemaier, Toward A Theory of Precedent in Arbitration, 51 Wm. & Mary L. Rev. 1895, 1904 (2010).

[30] As of September 2017, only Greece, Malta, Portugal, and Slovenia will apply the independent opinion arbitration. See OECD matching database, supra note 22.

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