Arbitration and the United Nations Framework Convention on Tax

This policy brief by the International Institute for Sustainable Development (IISD) argues against the inclusion of investor-state dispute settlement (ISDS) in the protocol for the United Nations Framework Convention on International Tax Cooperation (UN FCITC). It highlights the structural failures of ISDS—including high costs, inconsistent rulings, and 'regulatory chill'—and warns that adopting such a mechanism would undermine fiscal sovereignty. The brief also draws lessons from the prolonged and complex reform efforts of UNCITRAL Working Group III to caution negotiators against the institutional lock-in and resource drains associated with international arbitration.

• The UN FCITC negotiations include a sensitive debate over a protocol for the prevention and resolution of tax disputes. While the mutual agreement procedure (MAP) is the primary mechanism under consideration, some states advocate for mandatory binding arbitration (MBA). Many developing countries oppose MBA, fearing it could constrain fiscal sovereignty and replicate existing power imbalances.
• There is a critical distinction between mandatory binding arbitration (MBA) and investor-state dispute settlement (ISDS). MBA is a state-to-state mechanism that results in a decision states must implement through mutual agreement. In contrast, ISDS allows private investors to bring claims directly against states, resulting in binding decisions enforceable through judicial mechanisms without the possibility of appeal.
• Tax-related ISDS cases have increased significantly, with 114 cases initiated between 2010 and 2021 compared to 51 before 2009. These claims are predominantly brought by parties from North America and Western Europe against states in South America, Eastern Europe, and Central Asia.
• ISDS presents severe financial and administrative risks to states. Average legal costs are approximately USD 4.7 million for states, and average damages awards between 2014 and 2023 were approximately USD 256 million. In the Yukos Universal Limited v. Federation of Russia (2014) case, the tribunal awarded approximately USD 50 billion in compensation.
• The ISDS system is criticized for inconsistent decision-making and creating 'regulatory chill,' where the threat of expensive proceedings pressures states to refrain from public policy actions. For example, after investors successfully challenged retrospective capital gains tax measures in India, the country adopted a new Model BIT that explicitly excludes taxation from its scope.
• The rise of third-party funding (TPF) and a specialized 'arbitration industry' further incentivize ISDS litigation. TPF lowers financial risks for investors, while a network of elite law firms and arbitrators—primarily based in the Northern hemisphere—benefits from the volume and complexity of these proceedings.
• The experience of UNCITRAL Working Group III (WG III) serves as a warning about the difficulty of reforming international arbitration. After seven years, WG III has failed to reach a definitive agreement on implementation, illustrating risks of 'institutional lock-in,' reform fatigue, and the disproportionate influence of arbitration specialists over general policy-makers.
• The IISD recommends that the UN FCITC actively discourage ISDS for tax disputes. It suggests including a carve-out clause, similar to the 2025 UN Model Tax Treaty, to clarify that tax measures implemented under the Convention do not breach other treaties and should not be submitted to other dispute settlement mechanisms.

APA

Lago, J. D. R., Readhead, A., Mataba, K., & Ostřanský, J. (2026). Arbitration and the United Nations Framework Convention on Tax. International Institute for Sustainable Development. https://www.iisd.org/system/files/2026-01/un-tax-convention-arbitration-isds.pdf

Chicago

Lago, Josefina del Rosario, Alexandra Readhead, Kudzai Mataba, and Josef Ostřanský. Arbitration and the United Nations Framework Convention on Tax. International Institute for Sustainable Development, 2026. https://www.iisd.org/system/files/2026-01/un-tax-convention-arbitration-isds.pdf.

Wikipedia

{{cite report |last1=Lago |first1=Josefina del Rosario |last2=Readhead |first2=Alexandra |last3=Mataba |first3=Kudzai |last4=Ostřanský |first4=Josef |title=Arbitration and the United Nations Framework Convention on Tax |publisher=International Institute for Sustainable Development |date=January 2026 |url=https://www.iisd.org/system/files/2026-01/un-tax-convention-arbitration-isds.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{lago2026arbitration, author = {Lago, Josefina del Rosario and Readhead, Alexandra and Mataba, Kudzai and Ostřanský, Josef}, title = {{Arbitration and the United Nations Framework Convention on Tax}}, institution = {International Institute for Sustainable Development}, year = {2026}, month = jan, url = {https://www.iisd.org/system/files/2026-01/un-tax-convention-arbitration-isds.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }