By Julie Martin, MNE Tax
The UN Committee of Experts on International Cooperation in Tax Matters today released a proposed optional UN model tax treaty article that would grant additional taxing rights to countries where an automated digital services provider’s customers are located.
The proposed article and its commentary, drawn up by an ad hoc drafting group, departs significantly from the OECD-led Inclusive Framework’s unified approach to Pillar One, which also seeks to grant greater taxing rights to source countries.
The draft proposal would add new Article 12B to the UN Model Double Taxation Convention between Developed and Developing Countries, requiring a multinational group to pay taxes on payments for automated digital services under one of two approaches.
At its 20th session, held virtually June 22–26, the UN Committee of Experts established the new drafting committee, comprised of members from developing countries acting in their personal capacity, and authorized the digital tax work. The drafting group was asked to consider a proposal offered by Rajat Bansal from Indian Revenue but was not bound by it. Bansal became one of the 13 members of the drafting group.
As noted by Bansal on Twitter today, while the release of the proposal is significant, the work is still in its earliest stages. The proposal must still be reviewed by the Committee of Expert’s digital economy subcommittee and then again by the full Committee of Experts.
An important milestone reached today with publishing of Drafting Group proposal on UN website. Way to go though….
— RajatBansalIRS (@IrsRajat) August 6, 2020
According to Daniel Bunn, Vice President of Global Projects at the Tax Foundation in Washington DC, new Article 12B would create two routes for source countries to tax cross-border payments for automated digital services. One route is via a gross-based tax at a rate agreed upon by the two treaty parties; the second route is based on net income and an apportionment formula, he said.
Under the UN approach, a company could choose whether to pay based on the gross-based tax or the net income approach, Bunn explained.
The net income approach would apportion 30 percent of a company’s net income from automated digital services to countries where the revenues from those sales arise, he observed.
Bunn said the UN drafting group’s proposal is significantly broader though somewhat more streamlined than the OECD’s unified approach to Pillar 1.
“It is broader because it does not have the size, profitability, and local revenue thresholds that are envisioned in the OECD approach for Amount A. It is more streamlined simply because, without those thresholds, the proposed Article 12B determination of taxable income in the source country is more straightforward,” Bunn said.
“It is broader because it does not have the size, profitability, and local revenue thresholds that are envisioned in the OECD approach for Amount A. It is more streamlined simply because, without those thresholds, the proposed Article 12B determination of taxable income in the source country is more straightforward,” Bunn said.
The option for a gross-based tax as the default option also differentiates proposed Article 12B from the OECD Pillar 1 approach, Bunn noted. The explanation of the proposed article correctly highlights the problems that a high gross-based tax could create, he said.
“These include the possibility that a foreign digital services provider would simply raise prices for customers in the source country, the potential for a high rate to deter investment due to foreign tax credit limits, and the potential for an excessive effective tax rate on net income,” Bunn said.
Under the proposal, automated digital services subject to the new taxing right are defined as payments for services provided on the internet or an electronic network requiring minimal human involvement from the service provider.
As such, the following activities would be covered: online advertising services, online intermediation platform services; social media services, digital content services; cloud computing services, and standardized online teaching services. The sale or other alienation of user data would also be covered by the new tax.
Like the OECD’s Unified Approach, the new proposal seems unlikely to gain US support.
“In the context of the digital tax debate, I don’t see this proposal as a compromise proposal since it ignores some of the recent politics – particularly the fact that the US Treasury Secretary has opposed an approach that only focuses on digital businesses. Given this fact, there is likely much more work (both technical and political) to be done before there is a new set of tax rules for digital companies or other multinationals,” Bunn said.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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