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.