UN declines to amend model tax treaty on software payment taxation

The UN Committee of Experts on International Cooperation in Tax Matters, at its 22^nd session, held April 19–23 and April 26–28, decided against adding a proposal to add computer software payments to the UN model tax treaty’s definition of royalty payments. The changes would have made it clear that source jurisdictions can levy a withholding tax on software payments.

Instead, the UN Committee agreed to revise the Commentary to Article 12 of the UN Model Double Tax Convention between Developed and Developing Countries to include a minority view, based on an earlier subcommittee proposal. The revisions do not change the position taken in the commentary regarding the services discussed, but they acknowledge the difference in opinion.

These proposed revisions to the commentary may be taken up at a later session of the Committee.

The proposed revisions to the commentary state that some committee members expressed views that situations described in paragraphs 14 and 14.2 should give rise to royalties. Paragraph 14 describes a situation in which the rights acquired in relation to a copyright are limited to those necessary to enable the user to operate the program. Paragraph 14.2 refers to situations where the transferee obtains the rights to make multiple copies of a program for operation only within its own business.

The committee members who claim that such situations give rise to royalties contend that the software users in these situations are using copyright when operating the software. They argue that this conclusion is evidenced by the fact that the copying of the computer software if done without a license, would constitute a violation of copyright. These members disagree with the commentary that the commercial exploitation of the copyright is necessary to characterize the payment as a royalty.