The Significance and Problems of Tax Treaty Arbitration: An analysis of the new Japan-Netherlands tax treaty

I analyze the arbitration clause of the new Japan-Netherlands tax treaty, which is the first instance for Japan to adopt an arbitration clause in its tax treaties. Disputes arising from tax treaties are typically settled through a mutual agreement procedure. Even so, the history of tax treaty arbitration is not new, the first being the Ireland-UK tax treaty of 1926. Adoption of an arbitration clause in the Japan-Netherlands tax treaty appears to have been prompted by the adoption of such clause in the 2008 OECD model tax treaty.

The most important feature of the arbitration clause in the Japan-Netherlands tax treaty is that arbitration is designed as part of the mutual agreement procedure. Only by designing arbitration as such can the basic nature of the mutual agreement procedure be maintained, whereby a dispute settlement is an intergovernmental process and an agreement reached between the competent authorities of the two countries has a domestic effect.

It should be noted that the arbitration procedure under the Japan-Netherlands tax treaty has three problematic points: transparency, rules for treaty interpretation, and control over arbitration. First, regarding transparency, at least arbitration decisions—which are in principle treated as confidential under the treaty—should be made public. Second, rules for treaty interpretation are defined as part of the arbitration procedure and the relevant provisions are set forth—not in the new tax treaty itself—but in the implementing agreement concluded along with the treaty. However, such rules should be provided for in the treaty itself, which is an official legal document duly endorsed by the parliaments of both contracting states. Third, regarding control over arbitration, the current system where domestic courts of both contracting states are given the control function is inappropriate. If any organization or body is to exercise control over arbitration, that function must be fulfilled by a separate arbitration committee. It is also possible not to prepare a control system.

Lastly, if we follow the OECD model tax treaty, we should not adopt it unconditionally but only after necessary revisions are made in view of conditions such as the national legal systems of the contracting states.