The initial proposal of a drafting group of the United Nations Committee of Experts on International Cooperation in Tax Matters has recently been released. This proposal arises from proceedings of the Committee in late June of this year. It is important to understand the context of UN work of this nature. The members of the UN Tax Committee are tax and finance officials of various UN countries, and their participation on the Committee is in their personal capacities and not as representatives of their governments. This is a significant distinction from how the OECD works; the OECD’s work is that of its members, which is the case also for the broader Inclusive Framework that arose from the OECD’s and the G20’s “BEPS” work and now comprises approximately one hundred and thirty countries.
The proposal of the drafting group and the cover note can be found here and here. Another commentary on the proposal, which incorporates some insight about how it is anticipated the United States may react, can be found here.
It is a long process, often, for work of the UN Tax Committee finally to be adopted in changes to the UN Model Tax Convention and its Commentaries. That Model is in a similar format and in many respects adopts the same or similar features of the OECD Model Tax Convention, though from its earliest stages with more focus on the interests of developing countries, which translates into greater preservation of countries’ source taxation rights than is the case for the OECD Model. Notably, the UN Model and related Commentary were revised to include Article 12A dealing with source countries’ rights to tax income attributable to the delivery of technical services to source country residents. This is a particular aspect of difficulties encountered in applying the typical tests of a taxpayer’s income earning business “presence” in a course country as a treaty threshold via the “permanent establishment” notion for the source country being able to persevere with a tax claim otherwise contemplated by its tax law. In a nutshell, Article 12A expands the scope of source country taxation for income arising from the provision of these kinds of services, which often do not require a typical presence in the source country. In a manner of speaking the advanced work of the UN Tax Committee reflected in Article 12A is an illuminating precursor to the work of the OECD and now the UN Tax Committee in relation to “digital” business modalities. The new proposal, which is at a beginning stage, would if adopted add Article 12B to the UN Model. Directly it would deal with the issues being addressed separately by the OECD in its two pillars proposals, specifically in Pillar 1 and the Unified Approach.
It must be said again that this proposal is at an early stage, though it does already reflect considered thought about the issues it addresses. Like its OECD cousin, it will likely face considerable critical scrutiny – perhaps even more than Article 12A faced in its gestation period, particular by the “home” (generally, “residence”) countries of large digital businesses for which “new” source country taxing rights of other countries would possibly affect the profitability of those businesses but also the fiscal condition of those home countries to the extent that the source country taxes were creditable against the home country tax liabilities. It will be interesting to watch how this proposal proceeds and in that connection the interaction of the institutional work of the OECD on matters “digital” and the personal endeavors of the UN Tax Committee and any ensuing changes to the UN Model Tax Convention to complement the advanced thinking captured in its recent Article 12A.