The Taxpayer Trapped in the Middle: Why Neither ISDS Nor State-Centric Arbitration Solves the UN Tax Convention’s Problem

The author is Purvi Singla, a First Year B.A. LL.B. Student from Rajiv Gandhi National University of Law.

Keyword : Taxpayer Representation

Introduction

The lack of a globally inclusive and effective tax system leads to complex, time-consuming disputes between countries and with taxpayers active in multiple jurisdictions. The dispute resolution mechanism under the United Nations Framework Convention on International Tax Cooperation (UN FCITC) has been a source of debate but it has resulted in a common thread usually that the investor-state dispute settlement (ISDS) model is not the most efficient model. Critics of ISDS aptly point towards the structural flaws of investment arbitration, citing its costs and inconsistency but the conclusion is incomplete. Most analyses of the UN tax negotiations seem to overlook the crucial issue of the taxpayer missing from the core. The Intergovernmental Negotiating Committee (INC) is also working toward a protocol for prevention and resolution of disputes under the UN FTIC, with sessions running from 2025-2027. This blog argues that the current debate is creating a binary between ISDS private arbitration and state-centric arbitration procedures and that neither model is adequate. The fundamental issue is one of representation, which both mechanisms violate by binding a party without giving it a say. Adding to this, the Pillar Two global minimum tax regime further complicates the issue by generating a new class of disputes which the existing mechanisms are under-equipped for.

The Critique of ISDS’ System

The case against ISDS is expected and valid to an extent. ISDS grants private investors standing to challenge sovereign regulatory measures before international tribunal, allowing them to bypass domestic courts. Tax disputes and tax-related disputes are distinct, the former concerns the allocation of taxing between jurisdictions and are primarily, not investor protection claims. Therefore, allowing private actors to contest measures outside domestic frameworks risks subordinating fiscal sovereignty to arbitral scrutiny. This is evidenced by compensation awards in ISDS proceedings running into millions of dollars and arbitration can deter states from implementing legitimate tax reforms. Adding to this, the rise of third-party litigation funding where hedge funds and financiers back investor claims for a share of the award, has increased the stakes for speculative challenges to legitimate enforcement action. This frames ISDS as structurally incompatible with fiscal sovereignty It has been observed in scholarship that states will take suboptimal outcomes from international institutions because they want to retain sovereignty over fiscal policy which has been framed as structurally incompatible with ISDS in tax matters. This was voiced by Nairobi, India, Zambia in the third session of negotiations in November 2025 who opposed both mandatory and optional arbitration on grounds of sovereignty, cost and bias, with some high-income countries wanting to keep arbitration optional. This may lead to treaties not designed to meet the needs of lower income countries. The African Group’s position supports the view that developing countries are already disadvantaged by limited capacity to engage in long and complex arbitration processes. These costs are likely to increase further when disputes of detailed transfer pricing adjustments or allocation of taxing rights emerge.

The Taxpayer Standing Gap

An alternative to the ISDS system which has received more favorable support is the Mutual Agreement Procedure (MAP). This has been bolstered by enhanced transparency and possibly optional state-to-state arbitration and it operates as a consultation mechanism between competent authorities under Article 25 of the OECD Model Tax Convention. Two competent authorities negotiate towards a resolution without the taxpayer present after the matter is raised by a taxpayer’s state of residence with the other contracting state when the taxpayer faces double taxation; a situation where the same income is taxed by two different states. The issue with MAP is that it is undertaken on a “best endeavours” basis; therefore, there is no guarantee of full resolution and no enforceable deadline in most treaties. Adding to that, the taxpayer himself has no right to participate in the negotiation and is not even entitled to consult the written exchanges between the competent authorities as it is a semi-diplomatic process. Under some jurisdictions, a taxpayer may resume administrative or judicial remedies if no agreement was reached in MAP, while others like the United States do not even view MAP as a remedy due to the taxpayer being a non-party and MAP’s purpose not including performance of a review on the legality of adjustments or positions. Additionally, there is no guarantee of any domestic law recourse providing relief to international double taxation or resolution of issues that prompted MAP to request in a taxpayer-favorable manner. Such structural exclusion is significant as OECD statistics for 2024 show that the average time to conclude a MAP case is 27.8-30.9 months. If a MAP case is not resolved by a generally applicable deadline, the authorities may agree to continue their discussion and extend the time frame for discussion and resolution, further delaying relief. In the meantime, the taxpayer bears the full economic burden of double taxation while his cash is tied up, uncertainty can distort financial decisions, and there may be interests accruing on unpaid amounts. It is understandable that granting private investors tribunal standing may be too much, but it does not reach the conclusion to keep taxpayers out of dispute resolution entirely. Additionally, very few MAP cases are initiated by developing countries primarily due to financial and human resource constraints and small to medium sized enterprises across borders often cannot afford a process which runs this long with no guarantee of an outcome. This results in a system working adequately only for the selected many with the resources, failing to address interests of smaller economies which the UN FCITC should take into account and address.

The Issue of Pillar Two

The Pillar Two global minimum tax regime creates a new and structurally distinct category of international tax dispute by establishing a 15% global minimum effective tax rate for large multinational enterprise (MNE) groups. This is enforced through a qualified domestic minimum top-up tax (QDMTT), an income inclusion rule (IIR), and an undertaxed profits rule (UTPR). When the current framework is tested against this, inadequacy appears more visibly. As of mid-2025, 22 of the 27 EU members have implemented the rules with 65 countries adopting or introducing draft legislation transposing the model rules. The January 2026 side-by-side package is designed to address U.S. concern and shielding US-parented MNE groups from UTPR exposure.

There are two categories of issues arising from Pillar Two. Firstly, is the QDMTT problem, where, once an MNE challenges the tax before an ISDS tribunal against a state that has implemented a QDMTT, the OECD responds by disregarding the QDMTT’s “payable” status. This administrative guidance could lead to top-up tax collection under the IIR or UTPR in other jurisdictions. Due to this, an arbitral award in one bilateral proceeding could destabilize tax collection arrangements across multiple jurisdictions simultaneously which cannot be resolved simply by current dispute resolution mechanisms as they do not have the multilateral reach. Secondly, allocation disputes may arise where two states apply Pillar Two rules inconsistently and the MNE group could face double taxation with no clear recourse. These issues aren’t arising from a transaction between related parties, so they aren’t transfer pricing disputes per se; rather, they emerge from the simultaneous application of a multilateral rule by two states who disagree. MAP isn’t designed for such a pattern, and the Pillar one mandatory binding dispute resolution mechanism, a model for resolving, let’s say, GloBE-adjacent disputes, applies to Amount A of Pillar One, which the U.S. withdrew from in January 2025. It all points to the same conclusion that a bilateral mechanism cannot adequately resolve a dispute whose underlying rule is multilateral. Limiting the dispute to two parties when multiple jurisdictions are affected could resolve their disagreement but still leave the larger problem unresolved. Drafting discussions remain focused on questions like whether arbitration should be optional and how to relate the Convention to existing bilateral treaties rather than on new dispute categories that Pillar Two generates.

Towards a Third Technique

A reform should consider a third architecture, one which addresses the organising principle of the need to provide the binding party some say in the process. ISDS and MAP disregard it in opposing ways, one by giving states no real control over claims brought by private investors outside domestic settings and the other by determining the allocation of tax liability between states without including the taxpayer.  Firstly, applying this principle to taxpayer participation, the taxpayer should be looped in and there should be structured taxpayer participation. It need not provide a direct standing to initiate arbitration against states as concerns about fiscal sovereignty remain, but they must not be totally excluded from the proceedings. Minimum procedural rights such as the right to submit written representations to competent authorities, notifying the taxpayer of case status information and when MAP proceedings would stall could bring a basic due process standard and the UN FCITC could codify this. Secondly, applying the same principle at the interstate level. as Pillar Two disputes are inherently multilateral, the INC should resist the design of dispute resolution protocol which is a modified version of the bilateral MAP. The EU Joint Transfer Pricing Forum offers a model of how a multilateral body can facilitate consensus. A multilateral facilitation mechanism which doesn’t adjudicate could be established for GloBE-related disputes too such that, all that states whose tax collection could be affected by a decision should have a say in reaching it. Mechanisms for developing countries who lack capacity must be developed alongside. Capacity-building support and cost-sharing mechanisms are alone not sufficient. A differentiated access structure in which simplified fast-track procedures are available for disputes below a monetary threshold could promote more universal access which reinforces the principle as the state cannot really participate if the process is too costly or complex.

Conclusion

The UN FCITC presents an opportunity to recalibrate international tax governance. The ISDS critique is valid on many points, and the Convention should not replicate investment arbitration’s structural flaws. Rejection of ISDS should not leave taxpayers trapped between two states negotiating about their money at their pace with negligible recourse. They aren’t represented fully and have limited visibility in proceedings. The same principle disqualifying ISDS applies to MAP. A framework built on that principle would give taxpayers minimum procedural rights without granting them tribunal standing against states, and it would give all affected states a seat at the table in multilaterally consequential disputes. The negotiating sessions in 2026 and 2027 could determine whether the Convention builds a dispute resolution framework adequate to the current state of international taxation.