A Note on Resolution of Tax Disputes Arising from DTTs and Implications for Developing Countries

Abstract

Countries sign bilateral double tax treaties (DTTs) to avoid or mitigate double taxation in cross border economic activity. It is hardly possible to ignore the effect of double taxation in the era of globalization. DTTs are signed between two countries to allocate tax jurisdiction between them and to avoid tax disputes between the taxpayer and the country concerned. Nonetheless, tax disputes crop up since such treaties may be open to interpretation at the time of implementation. Hence, DTTs contain tax dispute resolution mechanism. The widely recognized dispute resolution mechanisms are the mutual agreement procedure (MAP) –a kind of negotiation between the two contracting states– and compulsory arbitration. However, the aptness and efficacy of these tax dispute resolution mechanisms have been seriously questioned particularly from the vantage point of developing countries such as Ethiopia. Although Ethiopia has signed several DTTs with a view to attracting FDI, no study has been made which sheds some light on the essence and operation of the MAP in the DTTs. This note aims at exploring the tax dispute resolution mechanisms incorporated in DTTs since such mechanisms have implication for developing countries including Ethiopia. Key terms Globalization, International taxation, Double taxation, Mutual agreement procedure, Compulsory arbitration