"Country codes[2] defines codes for the names of countries, dependent territories, and special areas of geographical interest" Region or Flag sound like a fine compromise to me, what's the harm in people showing the flag of antarctica?
I hate politics. I can't offer any further advice as I myself don't know what the best course of action would be. I guess we should just keep it like this and say no to requests for new flags
Well being called a "country" doesn't imply anything. There is no sovereignty implied by somewhere being called a country. Leave it to non-native speakers to misunderstand terms like this