Investor–State Arbitration Vs. Tax Sovereignty: Who Really Controls Cross-Border Tax Disputes?

Shudharshini E

doi:10.36948/ijfmr.2025.v07i06.61637

Investor–State Arbitration Vs. Tax Sovereignty: Who Really Controls Cross-Border Tax Disputes?

Author(s)	Ms. Shudharshini E
Country	India
Abstract	Taxation represents one of the most fundamental expressions of state sovereignty, an inalienable power that underpins governance, welfare provision, and democratic legitimacy. In contemporary globalisation, however, states increasingly enter into bilateral and multilateral investment treaties that empower foreign investors to challenge domestic measures—including tax legislation—before international arbitral tribunals. Initially conceived as a protection against direct expropriation, investor–state arbitration (ISA) has evolved into a powerful mechanism through which investors contest a wide range of regulatory and fiscal decisions. The rise of ISA has thus brought the exercise of taxation—a quintessential sovereign function—into tension with international commitments designed to protect foreign investment. This article critically examines who truly controls cross-border tax disputes: sovereign states or international arbitral tribunals. It contends that ISA increasingly encroaches upon tax sovereignty, despite treaty drafters’ attempts to carve out taxation from arbitration or restrict tribunal jurisdiction. Arbitral bodies frequently interpret these provisions narrowly, invoking doctrines such as fair and equitable treatment (FET), indirect expropriation, and most-favoured-nation (MFN) clauses to assert jurisdiction over tax-related disputes. Drawing on landmark cases such as Occidental v. Ecuador, Yukos v. Russia, and Vodafone v. India, the article illustrates how tribunals shape fiscal space, constrain democratic decision-making, and influence domestic economic policy. It explores constitutional implications, including the separation of powers, legitimacy, and the rule of law. Through comparative analysis encompassing the United States, the European Union, India, Latin America, and Africa, it evaluates the efficacy of emerging treaty models and global tax reforms in safeguarding sovereignty. Ultimately, the paper proposes a framework balancing investor protection with fiscal autonomy through clearer treaty drafting, specialized adjudicatory mechanisms, and harmonization with global tax initiatives. Without reform, ISA risks transforming taxation from a sovereign prerogative into an adjudicated privilege, undermining both democratic legitimacy and the integrity of international investment law.
Field	Sociology > Banking / Finance
Published In	Volume 7, Issue 6, November-December 2025
Published On	2025-11-25
DOI	https://doi.org/10.36948/ijfmr.2025.v07i06.61637
Short DOI	https://doi.org/hbcnvk

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Investor–State Arbitration Vs. Tax Sovereignty: Who Really Controls Cross-Border Tax Disputes?

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