Excluding Investment Arbitration through Double Tax Agreements with a New Article 25 of the UN Model: A Feasible Way Forward?

The general purpose of this article is to demonstrate that customary international law (CIL) has a significant role to play in connecting international tax law and international investment law. Bridging a gap between those sources of international law is not only an important endeavour in the theory of law but also in practice. This article purports to achieve the abovementioned general purpose by focusing on the application of the rule and principles of interpretation under the Vienna Convention on the Law of Treaties (VCLT), which represent a codification of CIL, to limited most favoured nation (MFN) clauses in tax treaties. The hypothesis of the authors is that a serious failure in a proper application of the VCLT to interpret the MFN clauses in tax treaties may lead to a violation of international investment agreements (IIAs), in particular the fair and equitable treatment (FET) standard. The analysis and conclusions are relevant to all tax treaties and IIAs containing the MFN clause and FET standard, respectively. They are also of relevance for the interpretation of all provisions of tax treaties, not only the limited MFN clauses, in accordance with the VCLT. Examining tax treaties through the lens of the FET standard allows the FET standard to be seen as a gateway for the systemic integration of tax treaties in accordance with the principle enshrined in article 31(3) (c) of the VCLT, because some of core elements of that standard are deeply rooted in sources of international law (general principles of law and custom).

Based on an analysis of 3,844 tax treaties, the Vienna Convention on the Law of Treaties and its Commentaries (VCLT), and case law of various domestic and international courts. The current orthodoxy maintains that courts are not required to compare all language texts of a plurilingual treaty but may rely on a single one for cases of routine interpretation. This view is erroneous, in violation of the VCLT, and the source of treaty misapplication; taxpayers are ill-advised to pay attention only to the text in their own language. In daily practice, the issue is of great relevance: almost three-quarters of the well over 3,000 concluded tax treaties are plurilingual. The BEPS MLI escalates complexity because it modifies a large number of treaties having texts in various languages. This study aims to (1) increase awareness about the pitfalls of the current orthodoxy and, in consequence, help diminish misapplication of plurilingual tax treaties through its abandonment, (2) show that sole reliance on prevailing texts is available as a pragmatic alternative in line with the VCLT, and (3) provide policy recommendations how residual cases may be eliminated. To support these goals, this study seeks to provide conclusive arguments and useful data to policy makers, treaty negotiators, judges, practitioners, and other scholars. Its analysis of all tax treaty final clauses is intended to help both taxpayers and courts interpreting tax treaties in practice. The general arguments presented in this book are however not limited to tax treaties, since similar issues play a role in the interpretation of other treaties, for example, in the field of foreign investment regulation. Note: Excerpt of my Thesis, consisting in TOC, Introduction, and Chapter 3 (Routine Interpretation: A Refutation), the latter being an updated and more extensive version of my previous paper 'Not in Good Faith — A Critique of the Vienna Convention Rule of Interpretation Concerning its Application to Plurilingual (Tax) Treaties'.

The Vienna Convention on the Law of Treaties (VCLT) contemplates the interpretation of treaties topic in its articles 31, 32 and 33, portraying the frame to be followed by one who is engaged in this difficult endeavor. Tax treaties are, fore and foremost, treaties. Therefore, the VCLT is the leading guideline for their interpretation. The United States has sixty-eight income tax treaties in force. If one logs on any website provider of case-law services and types “tax treaty,” more than six hundred cases will pop up. This paper focuses both on what courts have been doing and on what they could have been doing, according to the VCLT, when ruling about tax treaties, but theorizing an approach to the interpretation of tax treaties is not its intent. Regardless of the inference of Savigny and other jurists that “interpretation is an art” and “cannot be learned and governed by any specific rules,” in accordance with the preponderant point of view, customary international law has developed rules on interpretation of treaties, which are accurately contemplated in the VCLT. Still, the American judiciary does not exactly follow its rules. Nonetheless, the U.S. court decisions that have already applied the interpretation rules of the VCLT are “especially valuable” as substantiation of international law since they are rendered by courts of a nation not a party to the Convention, and their importance is further reinforced because the United States, as the most active treaty-maker in the world, decidedly influences the law applicable to treaties.

The Vienna Convention on the Law of Treaties (VCLT) contemplates the interpretation of treaties topic in its articles 31, 32 and 33, portraying the frame to be followed by one who is engaged in this difficult endeavor. Tax treaties are, fore and foremost, treaties. Therefore, the VCLT is the leading guideline for their interpretation. The United States has sixty-eight income tax treaties in force. If one logs on any website provider of case-law services and types “tax treaty,” more than six hundred cases will pop up. This paper focuses both on what courts have been doing and on what they could have been doing, according to the VCLT, when ruling about tax treaties, but theorizing an approach to the interpretation of tax treaties is not its intent. Regardless of the inference of Savigny and other jurists that “interpretation is an art” and “cannot be learned and governed by any specific rules,” in accordance with the preponderant point of view, customary international law has developed rules on interpretation of treaties, which are accurately contemplated in the VCLT. Still, the American judiciary does not exactly follow its rules. Nonetheless, the U.S. court decisions that have already applied the interpretation rules of the VCLT are “especially valuable” as substantiation of international law since they are rendered by courts of a nation not a party to the Convention, and their importance is further reinforced because the United States, as the most active treaty-maker in the world, decidedly influences the law applicable to treaties.

This chapter surveys the existing empirical literature on international arbitration. It seeks to be thorough but does not claim to be comprehensive. The chapter focuses on quantitative rather than qualitative empirical studies, and covers studies both of international commercial arbitration and international investment arbitration. Part I describes empirical research on the use of arbitration to resolve transnational disputes — in particular, the extent to which parties use arbitration clauses in international contracts, why they do so, and the frequency of international commercial and investment arbitration proceedings. Part II examines arbitral procedures, and Part III considers the applicable law in international commercial arbitration. Part IV looks at the demographics of international arbitrators, with emphasis on their diversity (or lack thereof), and arbitrator decisionmaking, in particular potential biases of party-appointed arbitrators, whether arbitrators make compromise awards, and the psychological aspects of arbitrator decisionmaking. Part V looks at the controversy over studies of outcomes in investment arbitrations. Finally, Part VI examines empirical studies of compliance with and enforcement of international arbitration awards, while Part VII considers their precedential effect, if any.

In the years since the Organisation for Economic Cooperation and Development (OECD) adopted its first draft tax treaty in 1963, the world has experienced an astonishing surge in international trade and investment. The tax treatment of these cross-border transactions is affected by double tax agreements. As tax treaty networks will likely continue to expand, concerns about tax treaty abuse might be expected to grow. The extent to which a countrys tax treaty policy favours developing countries - or not - depends upon the extent to which the country is prepared to adopt provisions from the UN model tax convention as opposed to the OECD model. Developing countries, in particular, should carefully consider the design of their tax treaties so as to effectively combat tax avoidance without sacrificing foreign direct investment. To this end, the Canada/South Africa tax treaty is compared and contrasted with these two models. The concept of beneficial ownership is reviewed in this context. It is contended that a general definition in South Africa's Income Tax Act of 'beneficial ownership' would assist in the interpretation of the term for the purposes of South Africa's tax treaties. It is submitted that the scope for the source taxation of passive investment income (viz. dividends, interest and royalties) in the developing country could be magnified through treaty negotiations.

The dispute resolution system of Double Tax Agreements (DTAs) has been a major focus for both tax authorities and researchers around the world. For several years Article 25 of the Model Tax Convention of the Organisation for Economic Co-operation and Development on Income and on Capital (‘OECD Model Tax Convention’), and Article 25 of the United Nations Model Double Taxation Convention between Developed and Developing Countries (‘UN Model Tax Convention’) had relied on a negotiation-based Mutual Agreement Procedure (MAP) as the only mechanism for the resolution of disputes arising from a tax treaty. In order to improve the function of the MAP mechanism, the OECD, in 2008, and the UN Tax Committee, in 2011, introduced a binding ad hoc arbitration clause in Article 25(5) of their respective Model Tax Conventions. However, the OECD and UN Model Tax Conventions have reserved very limited role for arbitration in resolving tax treaty disputes. After establishing that the inclusion of the current arbitration clauses in the OECD and UN Model Tax Conventions have not assuaged the tensions created by divergent interpretation or application of rules espoused in DTAs, this article examines possible techniques for improving the dispute resolution system of DTAs. Arbitration, Dispute, Double Tax Agreement, Model Tax Convention, Mutual Agreement Procedure, OECD, Taxation

The subject of the article.The article represents a research of conceptual properties and issues of applying reservations and declarations to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, developed in frames of implementing the OECD/G20 Action Plan on Base Erosion and Profit Shifting (BEPS). The Multilateral Tax Convention modifies the application of agreements for avoiding double taxation, that are covered by its action. Since January 1, 2021 it has been applied to 34 agreements for avoiding double taxation between the Russian Federation and such countries as the UK, Canada, Latvia, Malta, the Netherlands and France. The Multilateral Tax Convention provides for updating bilateral tax treaties – whether they were developed upon the OECD Model Tax Convention or the UN Model Tax convention. The Convention retains a great degree of flexibility in relation to the implementation of its provisions – especially by the means of reservations, made by the countries.The purpose of the articleis to identify the main characteristics of applying reservations and declarations in international tax law.The methodology.The study is based on empirical methods of comparison and description, theoretical methods of formal and dialectical logic.The main results.Reservations have played a minor role in international taxation until now – usually they reflected disagreement, expressed by an OECD member country with the provisions of the OECD Model Tax Convention or its Official commentary. Reservations were formulated in relation to a non-binding (model) document and their importance was limited. Such reservations cannot be associated with declarations, made in relation to legally binding documents like the Multilateral Tax Convention. Analyzing the general points of scientific dispute upon the mentioned range of issues, the author argues with researchers who deem that the structure of reservations to the Multilateral Tax Convention doesn’t correspond with the provisions over reservations in the Vienna Convention on the Law of Treaties, 1969 and thus recognize those reservations as “legal hybrids”.Conclusions.The structure of reservations to the International Tax Convention is deter-mined by the nature of double taxation agreements. The model lawmaking principle (the use of the OECD Model Tax Convention) allowed developing “umbrella” architecture of relationships between the provisions of the Multilateral Tax Convention and the norms of double taxation agreements. The article categorizes types of reservations as reservations of general nature and treaty-specific reservations. The article also considers the specific properties of reservations made in relation to the provisions of the Convention, which com-pose a minimal standard.

Cross-fertilization of international law entails interaction of norms in international law and can occur in the context of interaction between different sources of law; different branches of international law or different subject-matter areas; and interaction between a treaty norm belonging to a one area of international law and a customary norm arising from another area of international law. There are different avenues for cross-fertilization of international law: it can result from the application of Art. 31 (3) (c) of the Vienna Convention on the Law of Treaties (VCLT)1 in the process of interpreting a particular treaty, from the application of other rules of international law together with a particular treaty or from reference to the jurisprudence of other international courts or tribunals by adhering to the approach adopted in this jurisprudence. This article examines the question of cross-fertilization of international law in the context of the jurisprudence of the courts and tribunals operating within the dispute settlement system established under the UN Convention on the Law of the Sea (hereinafter ‘UNCLOS’ or ‘Convention’).2 It will demonstrate how these adjudicatory bodies have employed Art. 31 (3) (c) VCLT, Art. 293 UNCLOS which explicitly enables them to apply other rules of international law not incompatible with the Convention, and the international jurisprudence in order to interpret and apply the UNCLOS while situating it the broader context of international law. Note will be taken of UNCLOS provisions incorporating or referring to other rules of international law which also contribute to the cross-fertilization of international law.

This chapter surveys the existing empirical literature on international arbitration. It focuses on quantitative rather than qualitative empirical studies, and covers studies both of international commercial arbitration and international investment arbitration. The chapter first describes empirical research on the use of arbitration to resolve transnational disputes—in particular, the extent to which parties use arbitration clauses in international contracts, why they do so, and the frequency of international commercial and investment arbitration proceedings. Empirical studies have also examined an array of topics about the procedures in international arbitration. The empirical evidence typically comes from surveys or observational studies of commercial and investment arbitration proceedings. The chapter then considers empirical insights on selected topics such as the cost and length of arbitration proceedings, the size of arbitral tribunals, interim measures, multi-party disputes, challenges to arbitrators, the role of tribunal secretaries, and the use of mediation. It also looks at empirical studies on the applicable law in international commercial arbitration; the demographics of international arbitrators; and compliance with and enforcement of international arbitration awards.

The question of relation between the treaty and custom does not present a topic worth particular scientific attention there where the two institutions are not being confused. This does not only occur in Czechoslovak Doctrine of international law, but the reasons for such confusion imprint – in juristic works interpretation – on the functionality of the two institutions a content that is no longer in harmony with the development stage of the contemporary general international law and above all with its peremptory rules. The qualification of international custom as tacit treaty hitherto upheld in Czechoslovak writings of international jurists – is in respect of development essentially in accord with the international law prior to the Great October Socialist Revolution and the actual exposition of the relation between treaty and custom corresponds rather to the period when the coming Soviet power was confronted (also from the power aspect) with the imperialist international legal superstructure. This old conception is, therefore, incapable to express the nowadays indisputable normative reflection of the presence of the socialist social system within the class structure of the international community of states, in the content of its legal order – in the contemporary general international law. The question of the grounds of the origin and binding character of the customary law too little pursued by our juristic works is one of the main reasons for scientifically unfounded favouring of the international treaty to the detriment of international custom – of its functional importance in present day international law. This is in particular evident in the definition of peremptority of profiling rules of the contemporary general international law, their origin and reason for their binding character can not possibly be grasped by treaty form at all. Inapplicable, therefore, are also positivistic interpretations of the origin and binding character of customary law – the interpretation both by fiction of tacit treaty and by means of the so called “recognition” theory – at their time intentionally restricting attention to form which was to be complied with by rule makers, though from such mere form the content of unwritten law can not be known: or just in order to provide room to the positivistic doctrine for speculative deductions about the law as it should be. If it is impossible to elucidate the binding character of treaty rules without taking acount of material sources only sometimes (clausula rebus sic stantibus), then it is necessary to take acount of social and political circumstances – i. e. of material sources – attendant upon the origin of a rule of law and in abstractness expressed in the hypothesis of such rule, in the customary law always. This is indirectly but convincingly corroborated by the most refined of schools of legal formalism – the normativist school – declaring, namely, as a point of its programme material sources an unfit subject of interest of the international law theory, yet in the end the Very same school came to confess its inability to elucidate the origin and reasons for the binding character of international custom just by means of the formal sources of the law. The theoretical foundation for the exposition of the grounds of origin and binding character of international customary law – making use of the material sources of the law – was laid by the Anglo-Saxon law school and so by the school working currently with the instrument of custom even in the domestic field. Decisive for the school is not an a-priori form hypothetically set down by the international law, with which – according to the requirement of the doctrine – practice must comply to enable a customary rule to come into existence, but the very practice of the states is law constituting if it is also general (usus generalis) and if accompanied by awareness of necessity (opinio necessitatis), i. e. by the realisation of unfortunate consequences in the event of different procedure. The Anglo-Saxon interpretation of the grounds of the origin and binding character of the international customary law was adopted by authors of Soviet Doctrine of international law by stating (G. I. Tunkin) that for individual countries it is necessary to regard as binding rules that are recognised by the absolute majority of countries and governed by them, if among them are states of both systems, big powers included. Here the parallel appearing endeavour to bridge the existing dissension in the interpretation of the origin and binding character of international customary law led, however, in the end (most significantly in the instance of G. I. Tunkin) to emphasizing consensus and thereby – conformably to the positivistic school – to the qualification of the international customary law as unwritten treaty; from there is but a little step to absolute favouring of the written treaty against custom, if custom be so described as unwritten treaty. In the Czechoslovak juristic works the treaty is favoured too not only because it is accompanied by an explicit expression of will compared to the hypothetical tacit and moreover presumed expression of will in the instance of custom (whereby treaty character is assigned to custom), but also because written law is attributed a higher value as compared to unwritten law and written treaty rules owing to their precision are designated as more reliable for legal regulation among states, in particular of different systems. The misconception of the value approach is proved by the relation between the customary (i. e. unwritten) general international law as treated in this country on the one hand and its codification on the other which relation is considered to be determined by the principle lex posterior derogat priori. Actually codification does not override any prior generally valid custom regulation, since universality in the acceptance of a codification treaty is as a matter of principle not required for coming in force in the instance of codification. In particular it is impossible Ito split jus cogens by such codification treaty in two particular regulations – one acting among the treaty signatories, the other for the remaining relations, since thereby would be abolished the jus cogens itself which in general international law is invalid ab initio – as also worded in Art. 53 of the Vienna Convention on the Law of Treaties (1969). The purport of codification is, therefore, merely to provide the general international customary law with a binding interpretation otherwise taken care of in the first place by the doctrine. Regarding the rules with which a codification treaty contributes to international law developments, these are of particular validity so long until rendered generally valid by law-creating custom, to which quality the codification treaty could have given just the stabilising impuls, but not the very binding character of legal validity: the same result could be brought about by a universal adoption of the codification treaty which is practically unrealistic. It is therefore wrong to see in the codification primarily a formulation of new rules in written form as currently handed down in the Czechoslovak international law literature, a codification treaty serving in the first place the written exposition of the general international law, a quality not met by newly provided rules in such treaty. Favouring of the treaty on the grounds of its written character to the detriment of custom because of its unwritten form has in the Czechoslovak Doctrine of international law the most serious consequences possibly there where written statements acquire principles of international law in the acts of potentially universal international organisations. To them should allegedly belong the part of general international law or even of a “constitution” wherefrom the validity of concrete rules of the international law is derived, though the very acts of such organisations are but of a recommending nature and the principles contained therein are no rules of international law whatever, being just a generalising interpretation of concrete rules of this law.

The Vienna Convention on the Law of Treaties (VCLT) embodies Article 31(3)(c), prescribing that ‘relevant rules’ of international law must be taken into consideration while interpreting treaties, thereby promoting the idea of ‘systemic integration’. The absence of the definition of ‘relevant rules’ has caused problems in treaty interpretation. International Courts and Tribunals have not provided adequate guidance on the consideration of rules of international law for treaty interpretation. The objective of the article is to study that part of Article 31(3)(c) which concerns ‘relevant rules’ in order to establish certain factors that must be taken into account for determining which rules of international law become relevant for the purposes of interpretation of a treaty. This will be done by examining the background of systemic integration and analysing cases in this area of law.

The “international rule of law” is an elusive concept. Under this heading, mainly two variations are being discussed: The international rule of law “proper” and an “internationalized” or even “globalized” rule of law. The first usage relates to the rule of law as applied to the international legal system, that is the application of the rule of law to those legal relations and contexts that are governed by international law. In this context, the term international rule of law is often mentioned as a catchphrase which merely embellishes a discussion of international law tout court. The international rule of law is here mainly or exclusively used as shorthand for compliance with international law, a synonym for a “rule based international order,” or a signifier for the question whether international law is “real” law. This extremely loose usage of the term testifies its normative and symbolic appeal although it does not convey any additional analytic value. The second usage of the rule of law in international contexts covers all other aspects of the rule of law in a globalizing world, notably rule of law promotion in its widest sense. The increasing interaction between national and international law and between the diverse domestic legal orders (through law diffusion and reception, often again mediated by international law) is a manifestation of the second form of the rule of law. The structure of this bibliography roughly follows this bifurcation of the Rule of Law Applied to the International Legal System and the Rule of Law in a Globalizing World. Next to these two main parts, three further, separate sections discuss questions that arise at the intersection of the two variants or are of crosscutting importance to the rule of law as a whole. This includes sections on the Rule of Law as a UN Project: A Selection of UN Documents on the Rule of Law, the Interaction between the International and Domestic Rule(s) of Law, and the (International) Rule of Law: A Tool of Hegemony?.

Whether judicial and arbitral decisions are a source of law, and thus binding upon international courts and tribunals is from a theoretical perspective a relatively easy question, but nevertheless proves to be a controversial one when taking into account the practice of international courts and tribunals. Judicial decisions are explicitly mentioned in Article 38 of the Statute of the International Court of Justice (ICJ) as ‘as subsidiary means for the determination of rules of law’. While customary law, treaties and general principles, also set out in Article 38 of the Statute of the ICJ, are generally regarded as the main or formal sources of international law, doctrine and judicial decisions are categorised as subsidiary or material sources. Indeed, only customary law, treaties and general principles are a source of obligations for States, while judicial decisions, and the doctrine, cannot in themselves be considered independent sources of obligations for States. The only exception in respect of judicial decisions is the inter partes effect of a binding judicial or arbitral decision which in itself implies that the decision is a formal source of law applicable between the parties to the dispute. The principle that in and of themselves, judicial decisions are not a source or rights and obligations for states, stands in sharp contrast to the practice of many international courts and arbitral tribunals. Despite the absence of any rule on binding precedent in international law generally and in international investment law, many investment tribunals very often refer to previous investment law cases in their decisions. The question I will address here is whether outside the formal context of the states party to a dispute, a judicial or arbitral decision can be considered as a source of rights and obligations for states in the context of international investment arbitration. It is not the purpose here to be exhaustive in the sense that all cases which have cited previous decisions or which have discussed the notion and use of precedent in international arbitration will be analysed in detail. This chapter will rather focus on certain developments concerning the use of precedent in international arbitration and the cases that underscore this development. In line with the overall theme of the book, the focus will specifically lie on the question whether the use by international investment tribunals in their decisions of previous arbitral decisions can be seen as implying that these decisions amount to a source of rights and obligations for states. More specifically, I will argue that precedents are an important but subsidiary source of international investment law. The practice of arbitral tribunals to rely extensively on previous decisions is not problematic as such, and even a welcome practice since it furthers the development of the law relating to foreign investment. Crossing the line between treating precedents as a material or subsidiary source and as a formal source, when tribunals for example rely on precedents without other argumentation or when tribunals consider it necessary to follow a developed ‘jurisprudence constante’, poses serious problems since it runs counter the very foundational principles underlying investment arbitration and the formal absence of binding precedent in international investment law. I will first briefly address the status of judicial and arbitral decisions as a source of general international law (1). I will then analyze judicial and arbitral decisions as a source of law in the decisions of international investment tribunals (2). In doing so, the absence of a formal rule on binding precedent in investment arbitration (2.1), the de facto importance of the use of precedent in international investment arbitration (2.2), and decisions of international investment tribunals with a ‘quasi-legislative character’ (2.3) will be discussed. I will finally turn to the question how certain jurisprudential developments have impacted on State practice in international investment law (3). It should be noted from the outset that the use of precedents from courts and tribunals outside the area of international investment law will not be discussed here considering the overall objective of the book to focus on the sources of international investment law only.

This article conducts a comparative analysis of two types of international arbitration – investment arbitration and commercial arbitration – considering the nature of the dispute as the primary material-legal criterion for distinguishing between international commercial arbitration and international investment arbitration. The rele-vance of the topic is underscored by the current lack of a unified approach to key issues of arbitration and a clear classification of material-legal criteria for differentiating the aforementioned types of arbitration. Conse-quently, there arises a necessity to investigate the concept of international investment arbitration as one of the alternative methods of dispute resolution, as well as to analyze the similarities and differences between inter-national investment arbitration and international commercial arbitration for the purpose of determining the ap-plicable legal sources. The aim of this article is the characteristics of investment arbitration as an institution for examining investment disputes within the realms of public and private competencies, along with the essence of its process, taking into account the specific nature of the parties’ agreement under an international investment treaty for the resolution of disputes in investment arbitration. The topic reflects the problem of legal regulation and the search for alternative approaches to the resolution of disputes arising from investment relations. Since investment arbitration arises in the process of exercising State power, it usually affects issues of State and pub-lic interest that go far beyond the issues arising from the entry of the State into commercial relations. Invest-ment arbitration exists in the public sphere and serves as a unique form of mechanism for protecting the rights of foreign investors, based on a private model of judicial proceedings. The objective of this work is to analyze the distinctions between investment arbitration and commercial arbitration, which, despite their apparent simi-larities, are crucial for both domestic legal systems and international law. The methodology employed includes comparative, formal-legal, and analytical methods.