Originally published: March 2024
The UN Tax Committee will hold its 28th session today (https://lnkd.in/exJ7aD8Zhttps://lnkd.in/eixQNxTu). This committee is in charge of the UN Model Tax Convention (UN MC). Although this committee does not cover the hotly debated new general UN Tax Convention, the dynamics showcase how tax cooperation at the UN looks like.
On the agenda today is a proposal to amend Article 12A of UN MC to allow withholding taxes (WHT) on any B2B services (except for insurance and those covered under article 12B). As a recap, double tax treaties (DTTs) allow countries to tax business profits as allocated based on the arm’s length principle (ALP, Art 7 and Art 9 UN MC). Art 10-13 UN MC contain exceptions targeting passive income where source-based tax is allowed. Many developing countries have the instinct to protect their tax base against base erosion (a flawed concept: https://lnkd.in/e97aXScC). This leads to an expansion of taxing right (https://lnkd.in/eg8aBdnr) and Art 10-13 UN MC allow wide WHT. This does not necessarily help countries, as there’s the DTT tradeoff (explained recently by UNCTAD: https://lnkd.in/ebwZAPWM) is to give up taxing rights to stimulate investment. Art 12A UN MC currently applies on services perceived seen as more passive, but the proposal is to extend it to all services.
Tax activists often rail against the ALP led system, as they prefer formulaic apportionment (FA). Support for FA is mixed in developing countries, but an expansion of Art 12A would go into this direction. Art 12B gives taxpayers the option to switch from a tax on gross proceeds to net income based on group profitability. If this would also be applied to Art 12A, this would allow source tax on net profits on a wide range of services. Sales of goods would still be excluded, but the embedded royalty approach could widen the base there too (https://lnkd.in/e7ephxGK). The combination of Art 7, 9, 12, 12A and 12B UN MC would require allocation of profits through ALP and source tax on net profits on a lot of sales combined with a credit for the recipient. That’s a clunky version of SFA or DBCFT. DBCFT favours consumer markets and it’s not obvious that developing countries would fall in that category (https://lnkd.in/eW_AR8aF).
Though clunky, it points to a way FA could co-exist with ALP. The road there is unlikely though. Not only would the UN Tax Committee need to agree, the approach would also need to be implemented sufficiently widely in DTTs.
I don’t think there’s a grand UN tax design underlying these changes. A few months ago they were discussing a remote work proposal (now dropped) that went in the opposite direction (https://lnkd.in/e3EUiAX5). It’s just what you get if you decide by majority vote, you’ll slowly start picking up disjointed policy proposals that speak to countries’s instinct, but that do not form a cohesive whole.
Obvious disclaimers: this is not advice. These views are my own and do not necessarily represent my employer.
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