By Julie Martin, MNE Tax
A subcommittee of the UN Committee of Experts on International Cooperation in Tax Matters today released its final draft of proposed Article 12B and commentary on income from automated digital services.
The new article and commentary, proposed for addition to the UN Model Double Taxation Convention between Developed and Developing Countries, would provide additional taxing rights to countries where an automated digital services provider’s customers are located. It is viewed as an alternative to the OECD-led work on Pillar one.
The subcommittee will present this final draft to the full Committee of Experts for their consideration and approval at their 22nd session, slated to be held virtually from April 19—28.
The new taxing right would apply to automated services, namely, income received with little human involvement from the service provider, that is derived from online advertising services, the supply of user data, online search engines, online intermediation platform services, social media platforms, digital content services, online gaming, cloud computing services, or standardized online teaching services.
The treaty provisions allow source countries to apply a withholding tax on gross payments made in exchange for the specified automated digital service. Alternatively, companies can elect for the withheld amount to be based on profits earned in the source country from the automated digital service.
While it seems unlikely that Article 12B would be agreed to in bilateral tax treaty negotiations with countries such as the US, where larger digital service providers are resident, the language could potentially serve as a model for developing country domestic digital services tax legislation.
The subcommittee also released comment letters responding to earlier drafts of the proposed article authored by the World Bank Group staff, the National Foreign Trade Council, and Baker and McKenzie.
In written comments, World Bank Group staff members said that they envisioned that the new proposal would be welcome by developing nations. The new treaty approach is in line with countries seeking more straightforward taxation of the digital economy and it allows jurisdictions to adopt a coordinated, aligned appraoch, they said.
The World Bank staff suggested that countries consider using online portals similar to the EU’s VAT mini one-stop-shop to handle the taxation of digitally provided services to consumers.
Catherine G. Schultz, Vice President for Tax Policy a The National Foreign Trade Council, commented that the OECD’s Inclusive Framework is the proper forum to address the tax challenges of the digitalization of the economy, not the UN. New Article 12B sends an inappropriate signal to developing countries that unilateral digital services taxes are an appropriate policy tool, Schulz said. She also argued that the tax would likely fall on nonresidents and thus is discriminatory, like a trade tariff.
Gary D. Sprague, Mary C. Bennett, and Juliana Marques, of Baker & McKenzie, argued that if Article 12B is adopted, Committee of Experts members that do not support the provision should be allowed to document their minority views in the final document. The firm provided proposed language for such a minority view.
Baker and McKenzie argue that a model treaty should be used to harmonize agreed principles and practices, not introduce a “highly unusual” national level imposition of a withholding tax on the business profits of a specifically defined business sector, such as provided for in proposed Article 12B.
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].
Latest posts by Julie Martin (see all)
- UN committee considers updates to model tax treaty, developing nation tax guidance - April 21, 2021
- UN Committee of Experts approves new digital tax article for model treaty - April 20, 2021
- Leaked copy of US proposal for Pillar One and Two multinational group tax reforms available - April 12, 2021
- US offers new “Pillar One” compromise plan for taxing large multinationals - April 8, 2021
- UN tax committee releases updated model treaty language on automated digital services - April 7, 2021
Be the first to comment