• 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.

  • Draft Article 12B – ATAF’s viewpoint

    B.M.R. On

    ATAF has published a technical review of the proposed Article 12B of the UN Model.

    Interesting because, if more African countries introduce digital services taxes (and ATAF recommends that they do), then these will have to work in tandem with any applicable treaty provision on automated digital services.

    And, as the UN Model draft provision is the only such treaty provision on the table at the moment (albeit still in draft form), it’s worth the extra attention it’s getting from all quarters.

    Several points in the ATAF document, but this one stood out for me: ATAF cautions that the scope of the UN Model draft provision is much narrower than what ATAF has been recommending for African countries. The proposed Article 12B applies only where there is a payment from the source country to the residence country (i.e. the country where the automated service provider is resident).

    ATAF points out that, where the automated digital service is supplied free to a user in a market jurisdiction, the proposed Article 12B would not apply. This could happen, for example, where the service is provided for free to users within a particular jurisdiction, and the payment (to the service provider) comes in the form of advertising revenue, for example, from a third party in another jurisdiction.

    The proposed Article 12B concerns itself only with the existence of a payment for automated digital services, seeks to identify the jurisdiction where that payment is sourced, and allocates the taxing right between that (source) jurisdiction, and the jurisdiction where the service provider is resident.

    However, ATAF recommends a much broader approach. It recommends that countries levy digital services taxes based on ‘user participation’. Under this approach, a country would levy the tax if there were users of the service within its jurisdiction, even if those users are not themselves paying for the service. ATAF points to the value (to the service provider) created by user participation, together with the attendant network effects. ATAF insists that countries should be able to tax such value streams, irrespective of whether the revenues come from the users themselves.

    Solid point, but again, that brings us to the issue of implementation. Levying a tax on the basis of user participation would be horrendously difficult. Those complexities have already been seen in more developed countries (see, for example, the discussions around the UK Digital Services Tax). We can expect the Africa situation to be even more challenging. Against that backdrop, the draft Article 12B approach appears a more realistic way.

    You can access the ATAF document here.

  • OECD Tax Talks – what next?

    B.M.R. On

    Yesterday, the OECD gave us an update on the work of the Inclusive Framework on Pillars I and II. No agreement on the final package, but here’s what we got, anyway …

    We got the official reports on the Pillar I and Pillar II Blueprints (see here and here). Much of the content had been heavily leaked beforehand, but there you go.

    We also received the impact assessment. This time around, it includes full details of the methodology used. The previous one had been criticized for not including such details.

    And we also get a chance to comment on the Blueprints – public consultation opened yesterday, and runs till 14 December 2020. Here is the condoc.

    So no agreement; didn’t stop the OECD trying to put a positive spin on things, though – lack of agreement not withstanding, the Blueprint provides a ‘solid foundation for a future agreement’. I suppose we can take that.

    The Inclusive Framework now has a few more months to secure that elusive agreement. The new target is mid-2021.

    I’m still not banking on an agreement being achieved. Rather I foresee a proliferation in unilateral measures across countries. Expect more digital services taxes. This could then lead to a harmonization effort across the board, and perhaps also a treaty solution for allocating taxing rights, and relieving double taxation. A role perhaps for the recently proposed Article 12B of the UN Model? Interesting if things actually turn out that way.

  • 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.