Digital taxation is one of the most contentious areas of international tax policy. On August 6, 2020, the United Nations (UN) Committee of Experts on International Cooperation in Tax Matters released a draft of the proposed new Article 12B for the UN Model Double Taxation Convention between Developed and Developing Countries (UN Model). The proposed Article 12B stipulates that the source state can impose withholding tax on income from automated digital services. It effectively treats automated digital services as technical services, giving rise to royalty-like income.
The proposed Article 12B differs from the unified approach in Pillar One proposed by the OECD. Pillar One treats this type of income as business profits and allows the “source state” to tax through creating a new “digital” permanent establishment threshold and introducing a formulary allocation method for attribution non-routine profit. International consensus is critical for this proposal to work.
The UN proposal seems to be simpler and easier to apply. The withholding tax would apply to the gross payments or “qualified profits from automated digital services”. It can apply in the absence of any global consensus. On the other hand, the UN approach may worsen unilateralism in solving a digital and global tax problem. It would be interesting to see if more countries will soon introduce digital services taxes.