Trade and civil society groups are critical of a proposal to revise the UN model tax treaty to include software payments within the definition of royalties.
The proposed UN changes, included in a discussion draft released in February, would make it clear that source jurisdictions can levy a withholding tax on software payments. The discussion draft will be debated at the 22nd session of the UN Committee of Experts on International Cooperation in Tax Matters later this month.
The United States Council for International Business (USCIB) said it has “serious reservations” about the proposed changes, which they called “heavily flawed.” Allowing gross basis taxation to categories of business profits with a high level of expenses, such as software risks double taxation, economic distortions, and other issues, they said.
The USCIB further argued that subjecting all software payments to gross basis taxation fails to strike an appropriate balance between source and residence country taxation. Gross basis taxation should be limited to income that is not associated with significant ongoing costs, the USCIB said. This is not the case with software, which requires ongoing development as well as marketing and distribution costs.
The Silicon Valley Tax Directors Group echoed similar sentiments, arguing that proposed gross basis taxation fails to take into account that payments for software that “give rise to normal business income fully loaded with entrepreneurial costs.” The group contended that payments for software should be classified as business profits.
The International Chamber of Commerce also voiced opposition to the inclusion of software payments in the definition of royalties, suggesting that the change would increase double taxation and tax uncertainty.
The BEPS Monitoring Group, a network of tax experts representing various civil society organizations, called the discussion draft “seriously defective” but offered a different perspective than the business groups. The BEPS Monitoring Group contended that the proposed changes would undermine about 600 bilateral tax treaties that have already included specific mentions of computer programs as an example of copyright work and would retroactively deprive these states of taxing rights.
The proposed provision would “perpetuate a confused and misleading understanding of copyright introduced in 1992 in the OECD Commentary” that was later rejected by many states. many of which have chosen to clarify their actual treaties, the group said.
The UN model treaty proposal should follow the example of the existing bilateral treaties that simply add software among examples in the definition of royalties and that it could offer a standardized version of such language. The commentary should explain that the article applies to payment for “the use of or the right to use” the software copyright, said the BEPS Monitoring Group said, which is comprised of the Global Alliance for Tax Justice, Red de Justicia Fiscal de America Latina y el Caribe, Tax Justice Network, Christian Aid, Action Aid, Oxfam, and Tax Research UK.
The Information Technology Industry Council stated that the use of a software program copy – unlike the payment for the use of or the right to use a software copyright – is not a royalty any more than the payment for a copy of a book is a royalty. Thus, it objected to the expansion of royalties to include “any copy of computer software for the purpose of using it.”
The Confederation of British Industry similarly said that purchases of software copies should not be treated as royalties and that the proposed changes would create significant compliance issues and negatively affect cross-border software licensing.
The following groups submitted comments to the UN proposal:
- Annuar Nurakhmet comments on the discussion draft on the inclusion of software payments in the definition of royalties
- BEPS Monitoring Group (BMG) comments on the discussion draft on the inclusion of software payments in the definition of royalties
- Bombay Chartered Accountants’ Society (BCAS) comments on the discussion draft on the inclusion of software payments in the definition of royalties
- Confederation of British Industry (CBI) comments on the discussion draft on the inclusion of software payments in the definition of royalties
- Ganesh Rajgopalan comments on the discussion draft on the inclusion of software payments in the definition of royalties
- Information Technology Industry Council (ITI) comments on the discussion draft on the inclusion of software payments in the definition of royalties
- International Chamber of Commerce (ICC) comments on the discussion draft on the inclusion of software payments in the definition of royalties
- International Tax and Investment Center ITIC comments on the discussion draft on the inclusion of software payments in the definition of royalties
- Radhakishan Rawal comments on the discussion draft on the inclusion of software payments in the definition of royalties
- Silicon Valley Tax Directors Group (SVTDG) comments on the discussion draft on the inclusion of software payments in the definition of royalties
- Software Coalition comments on the discussion draft on the inclusion of software payments in the definition of royalties
- South Centre Tax Initiative (SCTI) comments on the discussion draft on the inclusion of software payments in the definition of royalties
- United States Council for International Business (USCIB) comments on the discussion draft on the inclusion of software payments in the definition of royalties
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