• Article 12B gets green light

    B.M.R. On

    The UN Tax Committee has reached a decision: the proposed Article 12B (on the taxation of income from automated digital services) will be included in the UN Model Tax Convention.

    I remain doubtful whether this provision will actually make it into any real-life tax treaties, especially those treaties that matter where such income is concerned. For example, the United States (typically the residence state for the largest digital businesses) is unlikely ever to agree to such a provision in its tax treaties.

    Also, the provision can only have proper effect if the treaty partners actually have domestic legislation taxing this income. The treaty itself cannot give a right to tax if such income is not taxable in the jurisdiction of the treaty partners.

    And even if the treaty partners do have domestic laws taxing ‘digital income’, it depends further on the particular type of tax regime in place. This Model treaty provision applies only to ‘payments’ for automated digital services. As such, it won’t affect taxing rights that apply where a payment has not been made. For example, where the country levies a tax on the ‘value created’ (within its jurisdiction) by the non-resident company, even if there has been no actual ‘payment’ (from its jurisdiction) to that company.

    Still, considering the slow progress over at the OECD, one must not quibble over this development. It’s a start. Although one does rather wonder at the point of including (in a Model treaty) a provision that has scant likelihood of ever being used.

  • UN Committee of Experts – agenda published

    B.M.R. On

    The UN Committee of Experts has published the agenda for its 21st Session.

    The meetings will run from 20 to 29 October.

    As far as updates to the UN Model are concerned, Wednesday 21 October is the main day.

    Also worth following proceedings on Friday, 23 October. That’s the date scheduled for discussing the proposed Article 12B of the UN Model (dealing with taxation of automated digital services). This particular agenda item will be concluded on Tuesday, 27 October.

    The agenda may be subject to revision, so the dates given above may change.

  • Some thoughts on the draft Article 12B, UN Model

    B.M.R. On

    Back in August, the UN Tax Committee announced proposals for the taxation of automated digital services. Specifically they proposed the inclusion of a new article in the UN Model. But will this really work?

    The draft Article 12B would permit source states to tax income from automated digital services, where such income arises within their jurisdiction.

    Amid all the excitement about the draft provision, it’s worth sounding some notes of caution.

    First, it is a proposed article for a Model tax treaty. It is not effective until it finds its way into an actual, real-life tax treaty.

    Second, what are the chances of this Article actually being included in the tax treaties that matter, where digital taxes are concerned? Would developed countries (where the digital businesses are generally resident) consent to include this provision in their tax treaties? I wouldn’t bank on it.

    And if, for example, two developing countries include this provision in their own tax treaty with each other, what would be the point of that? The provision has its full effect if a developing country includes it in a treaty with a country where a relevant digital business is resident. Hardly likely to be the case for, say, two African countries.

    Also, as treaties do not themselves grant taxing rights, this provision can only work if the domestic law of the source state already taxes income from automated digital services. Very few African countries currently levy a tax on income from automated digital services. (Perhaps that might change, following the publication of ATAF guidance on drafting digital services tax legislation. Even so, I have my doubts about the feasibility of implementing such complex rules.)

    So I would say, don’t hang out the bunting just yet. The UN Tax Committee proposal is a good one, even a sound one. But we are still far from a comprehensive solution.