‘An Unprecedented Surrender of Fiscal Sovereignty’: Tax Arbitration and the Defection Problem in the Double Taxation Regime

In June 2017, 27 states agreed to submit to mandatory, binding arbitration amongst themselves to resolve disputes over tax revenue from multinational companies that cause firms to incur double taxation. This is a radical change in position since 1984, when such a proposal was rejected by the OECD as ‘an unprecedented surrender of sovereignty’. It also contradicts the prevailing historical institutionalist story of the international tax regime’s development, in which the double taxation problem could be resolved through a ‘sovereignty-preserving ’network of ‘self-enforcing’ bilateral treaties. This article revisits the development of the international tax regime to demonstrate that its sovereignty-preserving design has been eroded over time by incremental responses to a growing defection problem. This is demonstrated through documentary analysis and interviews with key actors in international tax negotiations. While recent IPE scholarship on the international tax regime has been preoccupied by its changing character in response to the new challenges of tax avoidance and evasion, we demonstrate that incremental, but radical, change has also been driven by its inability to resolve the double taxation problem for which it was created in the first place.