As the world’s economy becomes increasingly globalised, international taxation has grown in relevance. Correspondingly, tax disputes between States have grown in frequency and importance.


Through its Model Tax Convention on Income and Capital (“the Convention”), the Organization for Economic Cooperation and Development (OECD) has formulated principles for, among other objectives, allocating taxing rights over cross-border income for the avoidance of double taxation.  The Convention serves as a guide for negotiating tax treaties between States. (Most of Nigeria’s current double taxation treaties with other countries have been formulated based on the provisions of the Convention).


Article 25 of the Convention provides  for the resolution of international tax disputes using the the Mutual Agreement Procedure (MAP); an alternative dispute resolution mechanism, to be carried out by the competent authorities of treaty States, for the purpose of allocating taxing rights over a particular source of income. The MAP, affords multinational entities seeking to establish fiscal symmetry between deductions and inclusions an opportunity to raise their concerns on issues of double taxation.


Paragraphs 1 and 2 of Article 25 of the Convention stipulates that where a taxpayer considers that the actions of one or more contracting States will result in his being taxed in a manner ‘not in accordance with the convention’ then he may present his case to the ‘competent authority’ of which he is a resident. The relevant competent authority is then under an obligation ‘to endeavour’ to resolve the case by mutual agreement with a view to avoid such tax which is not in accordance with the convention.


The effectiveness of the MAP is impeded by the following factors;


Lack of Transparency: The MAP is a non-transparent process which discourages active involvement of taxpayers. Once a taxpayer has presented its case to the relevant competent authority, the procedure takes place at the level of dealings between States. This leaves taxpayers in the dark as to how their claim is progressing or whether their position with regard to the issues in dispute has been adequately articulated.


It is not uncommon that, where several MAP cases are pending between two competent authorities, a “package” deal is struck; while one competent authority concedes defeat in some of the cases, the other one concedes in others and for the third category, an agreement to disagree is reached. In the end, the taxpayer may find his case solved or unsolved without knowing the reasons for this.



Inability to Mandate: The most significant limitation of The MAP, however, is its inability to mandate Treaty States to reach an agreement. This makes the MAP merely a system of consultation rather than dispute resolution; since it only requires an ‘endeavour’ to agree on a resolution to the issue in dispute, instead of a fixed obligation to do so. Although in practice, agreement is often reached, in some situations the MAP is closed by an agreement to disagree: possibly because the amount in dispute is simply too large and the competent authorities are reluctant to forgo a substantial amount of revenue.


These limitations of the MAP therefore logically pave the way for arbitration as a preferable alternative dispute resolution mechanism in international tax cases.


In 2010, the OECD took a step in the right direction when it introduced paragraph 5 to Article 25 which provides that where the competent authorities, have not been able to resolve a case in MAP within two years of its presentation, the issues which are preventing the competent authorities from reaching an agreement will be submitted to an independent arbitration board. The board will resolve the issues involved and then, under the MAP, the competent authorities will proceed to arrive at an agreement which will ensure that taxation is carried out in accordance with the Convention.


Arbitration under the Convention is however not without its short comings, some of which are considered below:


Arbitral proceedings can only be commenced where the competent authorities in MAP have failed to reach an agreement on disputed issues. Invariably, arbitration under the Convention is merely a supplementary proceeding to the MAP. This distinguishes tax treaty arbitration from other forms of arbitration where an arbitration clause or agreement to arbitrate makes arbitration the paramount dispute resolution mechanism in the event of disagreements between contracting parties.


Furthermore, tax treaty arbitration distinguishes between issues and the case. While the ensuing arbitration procedure is limited to resolving issues which competent authorities have failed to settle under the MAP, the decision of the case remains the responsibility of the competent authorities. After the arbitration decision has been rendered, the competent authorities reconvene and decide the case on the basis of the arbitrators’ determination of the disputed issues.


As a result of the above, notwithstanding the institution of arbitration, competent authorities are always free to reconsider and settle the issues pending in arbitration  before a decision is rendered. This limitation of the arbitrators’ powers is yet another distinguishing factor between tax treaty arbitration and other forms of commercial or government-private party arbitration where the jurisdiction of the arbitrators extends to the resolution of the whole case.


It is submitted that the defects of the MAP which the OECD sought to cure by the introduction of arbitration into international tax dispute resolution remains largely unrectified. This position is maintained in the light of the fact that arbitration under the Convention is only complementary to the MAP and is essentially non-binding on competent authorities.


It is suggested that the jurisdiction of the arbitrator in tax treaty arbitral proceedings should be extended to the resolution of the entire issues unresolved in MAP and that competent authorities be bound to the decision of the arbitrators. This would not only bring finality and speedy resolution of the dispute but would ensure greater transparency in the dispute resolution process for the benefit of taxpayers whose businesses may be adversely affected by prolonged negotiations between competent authorities.


It has been observed that States are so averse to submitting tax disputes to arbitration that they would rather earnestly endeavour to resolve such disputes through negotiation. However in the light of the above inefficiencies of the MAP, compulsory binding arbitration should be encouraged and adopted where the negotiation process between States has yielded no result.


Kenechukwu Uzodimma is a an associate at Streamsowers & Köhn, an associate of the Chartered Institute of Arbitrators and a professional student member of the Chartered Institute of Taxation

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