UN committee to draft model tax treaty provisions addressing digital economy, transfer pricing manual updates approved

By Julie Martin, MNE Tax

The UN Committee of Experts on International Cooperation in Tax Matters, at its 20th session, agreed to consider adding new provisions addressing the taxation of the digital economy to the UN Model Double Taxation Convention between Developed and Developing Countries, UN officials have confirmed.

The Committee of Experts also adopted new and revised chapters for the United Nations Practical Manual on Transfer Pricing for Developing Countries and approved changes to the UN model tax convention’s commentary. Moreover, new chapters were approved for inclusion in UN handbooks on tax dispute avoidance and resolution and on environmental taxation.

The session was conducted virtually through a series of meetings held June 22–26.

Speaking at a July 2 Inclusive Framework on BEPS meeting, Navid Hanif, Director of the Financing for Sustainable Development Office in the UN Department of Economic and Social Affairs, confirmed that the Committee of Experts decided to consider adding a new clause to the UN model tax convention after it examined a paper (CRP25) drafted by the co-coordinators of the Subcommittee on Tax Challenges related to the Digitalization of the Economy.

The paper includes attachment 2, written by subcommittee member Rajat Bansal in his personal capacity, that is critical of the OECD’s pillar one unified approach. Bansal argues that there is no sound basis for the unified approach’s allocation of only non-routine profits to market jurisdictions or its use of thresholds other than thresholds based on local revenue. Bansal proposes an alternative approach for taxing the digital economy that would be implemented through a new tax treaty article redefining nexus and profit allocation.

As a result of those discussions, the Committee of Experts decided to task a drafting group to produce a draft proposal for an optional UN model provision by July 31 for review by the full committee, Hanif said. He said the drafting group will consist solely of members from developing countries.

Hanif told the Inclusive Framework that the guiding principles for this work include avoiding double taxation and non-­‐taxation, preferring taxation of income on a net basis where practicable, and simplicity and administrability.

“The draft proposal will seek to take on board relevant discussions about clarifying objectives and recognizing practical complexities. The drafting group is fully aware of important processes in this area and will have those considerations in mind when drafting a proposal,” Hanif said.

Michael Lennard, Chief of International Tax Cooperation Section in the Financing for Sustainable Development Office at the United Nations told MNE Tax July 8 that group drafting the new UN model provision will consider Bansal’s proposal but will not be constrained by it. He noted also that Bansal is part of the drafting group.

“It is important to recognize this as ongoing committee work rooted in its expertise,” Lennard said. He said the Committee of Experts’ constant focus across all its workstreams is supporting country efforts to mobilize domestic revenues, especially the least developed countries, and others in special situations.

Lennard also pointed out that the Committee of Experts often includes provisions in the UN model text, or recognizes possible provisions in the model treaty commentary, with the perceived pros and cons outlined. Any such provision in the model would of course need to be negotiated in a particular bilateral agreement, Lennard added.

The UN tax committee accepted changes to the commentary (CRP.8) on how to apply a provision of the UN model dealing with the taxation of capital gains derived from the alienation of interests in a local company or similar entity when these interests are alienated by an entity that is fiscally transparent.

The committee also approved a clarification (CRP.6) of certain articles of the UN Model to address situations where income is received through an intermediary who is not the beneficial owner of that income, Lennard said.

Lennard reported that a draft provision on offshore indirect transfers (CRP.11) was discussed at the 20th session. While ongoing work and consultation on the draft were approved, the text will be again reviewed at 21st session after further work and consultations, he said.

Extractives, environmental

Hanif also noted that a  chapter on tax incentives in the UN’s Handbook on Taxation of the Extractives Industries by Developing Countries was approved by the Committee of Experts.

The committee also approved a chapter on the design of carbon taxation for its forthcoming new Handbook on Environmental Taxation. Further, the committee agreed to seek public comments on the other draft chapters, Hanif said. Progress was also made on updated guidelines on the tax treatment of official development assistance (ODA) projects, he said.

A detailed report of the outcome of the 20th session of the UN Committee of Experts on International Cooperation in Tax Matters will be made publically available by the committee in the coming weeks.