Threading between Scylla and Charybdis: developing a framework for arbitrating investor-state tax disputes

Tax disputes have traditionally been considered non-arbitrable, but the rise of investment treaties allowing investors to bring arbitration claims against states has raised difficult questions about reconciling fiscal sovereignty with investor rights. In that context, this article tackles the complex issue of determining when investor-state tax disputes can be appropriately arbitrated without impinging on state prerogatives. It builds on the nascent distinction made in Cairn v India between non-arbitrable ‘pure tax disputes’ and treaty-based ‘tax-related investment disputes’ alleging unfair tax treatment. The article explains why the consent-based nature of investment arbitration renders the latter category of disputes arbitrable, before developing a multi-faceted framework to guide arbitral tribunals in exercising jurisdiction despite sovereignty objections. Grounded in treaty interpretation, tax policy space, and proportionality analysis, this principled approach carefully balances states’ regulatory autonomy in tax matters with investment disciplines they voluntarily assumed. Overall, by resolving tensions between sovereign prerogatives and investor rights, the proposed structured framework charts a sovereignty-respecting course for arbitrating tax-related investment disputes.