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Arbitration in tax disputes
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ab.gomaa@tamimi.com 
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Resorting to arbitration as an effective mean of dispute resolution highlights the importance of researching issues that may be subject to arbitration but are not commonly explored due to the widespread misconception that they are not arbitrable. Clarifying this ambiguity may pave the way for it to become another source of arbitration disputes. Among these issues is arbitration in tax disputes.
What comes to mind when the term “tax disputes” is stated is that they are disputes that arise between private law individuals and the tax authority regarding the determination of the tax base or its collection, and thus they are stigmatized as not being arbitrable. This is an issue that needs further elaboration and which will be addressed in the present article.
Arbitrability of tax disputes:
The prevailing position is that arbitration is not permissible in tax disputes because arbitration is based on a contractual relationship between the two parties, whereas the relationship between the tax administration and the taxpayer is a regulatory relationship based on the rule of law rather than a contractual basis. In addition, the tax authority is provided with public authority powers that enable it to achieve the interest of the public treasury; therefore, the arbitration agreement is considered a waiver by the state of its powers and privileges granted to it under tax legislation.
In addition to public authority considerations, tax disputes related to the basis of the taxpayer’s obligation to pay tax are matters in which conciliation is not permissible, as they are obligations related to public order[1], and therefore not arbitrable. This is based on Article 11 of the Egyptian Arbitration Law No. 27 of 1994, which stipulates that “[a]rbitration may only be agreed upon by a natural or legal person who has the right to dispose of their rights, and arbitration is not permissible in matters where reconciliation is not allowed.” Article (551) of the Egyptian Civil Code further states that “[i]t is not permissible to reconcile in matters related to personal status or public order. . ..”
There are those who disagreed with the prevailing opinion that arbitration is not permissible in tax disputes, and they saw the necessity of distinguishing between a tax dispute relating to =the taxpayer’s obligation to pay tax, in which reconciliation is not permissible, and a dispute over the amount that the taxpayer must pay as tax, which is a dispute over a tax debt similar to other debt disputes in which reconciliation is permissible, and therefore arbitration is also permissible. The advocates of this view believe that as long as reconciliation is permissible for state financial disputes in general, it is permissible in tax disputes, considering that they relate to a financial right.[2]
The advocates of this view supported their argument by stating that the Egyptian legislator permitted reconciliation in customs evasion crimes, as Article (124) of the Egyptian Customs Law stipulates that the General Director of Customs may reconcile during the consideration of the case or after its judgment, as appropriate, and in this case, all or part of the goods may be returned after paying the due taxes on them, unless they are the prohibited types.([3])
Moreover, the Egyptian legislator, in Article (54) of the Sales Tax Law, permitted the Minister or his authorized representative to reconcile in smuggling crimes before the issuance of a judgment, in exchange for paying the due tax, additional tax, and compensation equal to twice the tax. This results in the judgment of the termination of the case by reconciliation, the suspension of litigation procedures, and the suspension of the execution of criminal penalties, whether financial penalties or penalties restricting freedom.
In this context, this view holds that as long as the legislator has permitted reconciliation in criminal cases initiated in instances of tax evasion, then civil tax disputes whether under the jurisdiction of ordinary or administrative courts, can also be settled, and therefore arbitration is permissible, whether the subject of the dispute is a disagreement over the taxpayer’s obligation to pay tax or a disagreement over the amount of tax, as long as the administration and the taxpayer can directly agree on it. ([4])
We agree with the prevailing opinion that tax disputes arising between the taxpayer and the tax authority regarding the tax base are not subject to arbitration because they relate to public order ([5]), as the possibility of reconciliation in tax disputes is established for investment considerations, but it does not remove the public order nature of these disputes.
The prevailing view in most countries is that arbitration is not permissible in tax disputes arising between the tax authority and the taxpayer, with the exception of the United States of America, which permits arbitration in tax disputes with the tax authority, in accordance with Article 124 of the Tax Judiciary Legislation issued in 1990. The tax judiciary can appoint one or more arbitrators upon a joint request from the tax administration and taxpayers[6].
The foregoing was regarding tax disputes that arise between the taxpayer and the tax authority. As for tax disputes that may arise between contractors regarding financial rights caused by taxes, especially with regard to the tax that one party to the contract is obliged to deduct from the other party, such as the withholding tax stipulated in Article 56 of the Income Tax Law or value-added tax. These disputes are arbitrable without dispute.[7]
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The assertion that arbitration is permissible in tax disputes does not mean overlooking the special nature of tax disputes or themandatory nature of tax legal rules. The legality of resorting to tax arbitration is limited to not exceeding public order rules by respecting themandatory rules represented by tax law.
Arbitration and the Mandatory Nature of Tax Legal Rules:
Agreeing to arbitration in disputes relating to financial rights arising from tax disputes between private law individuals does not mean overlooking the special nature of tax disputes or the mandatory nature of tax legal rules. The legality of resorting to tax arbitration is limited to not exceeding public order rules by respecting the mandatory rules represented by tax law and not exceeding the principle of the parties’ autonomy to the tax dispute regarding the subject of the tax dispute under arbitration. Given the special nature of tax disputes, several considerations must be taken into account when resorting to arbitration to settle disputes related to financial rights arising from tax disputes.
The application of tax law to the dispute must be observed, as tax law has an independent nature and is distinguished from other branches of law. It should be noted that arbitration in tax disputes differs relatively from arbitration in general, as arbitration is a voluntary agreement to which the will of the parties freely directs, and the parties usually agree to define the scope of arbitration in terms of the matters it covers, the applicable law, and the arbitration procedures, which is known as the principle of the parties’ autonomy guaranteed in Article 39 of the Egyptian Arbitration Law.
Given the nature of tax disputes and the fact that tax laws are mandatory and relate to public order, the failure to apply tax law may result in the annulment of the arbitration award for violating public order. This legitimizes and provides a guarantee for the application of tax law when resorting to arbitration to settle disputes related to financial rights arising from tax, which ensures that resorting to arbitration does not conflict with strict guarantees against any violation of these mandatory rules.[8]
In addition, it is necessary to include an explicit provision in the arbitration clause stating that the financial rights arising from tax disputes shall be subject to arbitration between the parties to the contract. This is due to the fact that omitting this inclusion may raise a dispute about the extent to which the arbitration clause covers those rights. It may be argued that the financial rights arising from the tax derive their source from the law and not from the contract, and therefore the general provision for the submission of any dispute arising from the contract to arbitration may not cover those rights. However, if they are considered an integral part of the financial effects of the contract, they fall within the scope of the arbitration clause without requiring a special provision.
Based on the foregoing, it is clear that there is nothing to prevent resorting to arbitration to settle tax amounts disputes that may arise between private law individuals, especially since the nature of this dispute is characterized its connection to the investment context. Tax disputes often arise in the context of investment activities whose profits or transactions are subject to tax levies. Therefore, settling these disputes requires an effective mechanism that considers the economic, commercial, and investment dimensions characterizing this type of dispute. In this context, arbitration is a suitable mean for resolving tax disputes, due to its essential advantages, most notably speed in resolution, confidentiality in procedures, and flexibility in application, all of which are factors consistent with the nature of tax disputes and contribute to enhancing the investment climate and providing confidence to investors.
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Fathy Waly, Arbitration Law in Theory and Practice, Dar Al Maaref, 2007 ed., p. 124.[1]
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Ayman Mohamed Abdel Ghani Ibrahim, Arbitration in Tax Disputes Between Theory and Practice, Dar Al-Nahda Al-Arabiya, 2022 edition, p. 181.[2]
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Ayman Mohamed Abdel-Ghani Ibrahim, Arbitration in Tax Disputes Between Theory and Practice, Dar Al Nahda Al Arabiya, 2022 ed., p. 186.[3]
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Ayman Mohamed Abdel Ghani Ibrahim, Arbitration in Tax Disputes between Theory and Practice, Dar Al Nahda Al Arabiya, 2022 edition, p. 186.[4]
Appeal No. 2404 of 63 Judicial Year, session of 31/1/2001.[5]
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Iyad Mahmoud Bardhan, Arbitration and Public Order, Al-Halabi Publications, 2004 ed., p. 360.[6]
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Fathi Wally, Arbitration Law in Theory and Practice, Dar Al Maaref, 2007 ed., p. 124.[7]
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Ayman Mohamed Abdel Ghani Ibrahim, Arbitration in Tax Disputes Between Theory and Practice, Dar Al Nahda Al Arabiya, 2022 edition, pp. 234-235.[8]
