In February 2026 the intergovernmental negotiating committee (INC) continued discussions on the UN Framework Convention on International Tax Cooperation, looking at the early Protocol on taxation of cross-border services.
With increasing digitalisation in the global economy leading to an increase in cross-border trade in services, service providers can deliver their services without being present in a country. The services are not being adequately taxed under the current tax laws and tax treaties. The need to close this gap in fair taxation of services led to the decision to draft an early Protocol on the issue.
The Protocol on services taxation would take into account the reality of the business world including the mobility of people and digitalisation of services. Discussion within the INC has included consideration of the role of nexus; the allocation of profits between jurisdictions; the relevance of net or gross tax; and the taxes to be covered by the provisions.
Nexus rules
The Protocol would need to establish a nexus rule giving jurisdictions the right to tax a portion of the income generated where value is created, markets are located, revenues are generated or economic activities take place. There would need to be more discussion of the types of services covered by the Protocol, and the need for different tax treatment of different services in some cases. The relevant criteria would need to maintain their relevance as business models change over time. There would need to be neutral treatment of digital and traditional business models.
Profit attribution
Profit attribution along the lines of Article 7 of the UN Model would be relevant where net profit taxation is applied to services. Profit attribution and allocation would be different for services involving physical presence of individuals in the jurisdiction, as contrasted with remotely delivered, automated services with only minimal human input. The method of profit attribution would also be dependent on the nexus rules. Further discussion will be required in relation to nexus and profit allocation for taxation of services.
Gross or net taxation
Taxation of net profits is the most reliable way of ensuring that the actual income of the taxpayer is subject to taxation. However, net profit taxation requires more compliance time and costs, because it obliges the taxpayer to comply with administrative rules on filing tax returns. The tax administration may require more compliance time in establishing the income and expenses of the taxpayer, as expenses may be incurred abroad. Many developing countries therefore prefer to impose a gross withholding tax, saving compliance costs. However, some countries have expressed the view that imposition of a gross withholding tax on cross-border services is not equitable, especially for low margin businesses. A gross tax could affect the amount of investment into a country, influencing choices made by business.
When it is applied, a gross tax rate needs to be a fair approximation to net taxation. The tax rate therefore needs to be considered in relation to estimated profit margins and the main corporate tax rate. To arrive at the correct rates of gross withholding tax, various profit attribution models would need to be evaluated by means of detailed economic analysis.
Article 12AA of the UN Model provides for gross taxation; but allows a net profit approach to be followed if the taxpayer elects for this. So, if countries prefer to impose gross withholding tax, taxation based on net profits could be included in the Protocol as a backstop. Where gross tax is charged, the taxpayer could be given the option of alternatively filing a return on a net basis.
The extent to which a jurisdiction would need to tax cross-border services on a gross or net basis would depend on the nexus rules. If certain services are not covered by the nexus rules, a gross withholding tax could be imposed on those services. This would be practical where the payments for services reflect the value created. In some cases where no cross-border payment is made, such as collection and monetisation of user data from users by a digital group, tax could not be collected in this way.
