Report by James R. Border, Law Office of James R. Border, P.A., Fort Lauderdale, Florida

Over the past several days the UN Committee of Experts on International Cooperation in Tax Matters discussed the work done by Members concerning the tax consequences of the digitalized economy. Unlike the broad work being undertaken by the OECD in the BEPS project, the Committee has proposed the introduction of a new Article 12B, Income from Automated Digital Services, to the UN Model Convention, together with a Commentary.

For purposes of the proposed new article, income from “automated digital services” is any payment for “any service provided on the internet or an electronic network requiring minimal human involvement from the service provider.” Income characterized as a royalty or a fee for technical services is not within the article’s scope. Similarly, where the recipient has a permanent establishment in the source State to which automated digital service income is effectively connected, the income will be taxed through the permanent establishment. Thus, the proposed article will generally apply to enacted digital service taxes.

The tax which may imposed by the source state is 30% of the deemed net income derived from automated digital services. The net income is determined by applying the recipient’s profitability ratio of its automated digital services business segment to the gross income from the source state. For multinational groups, the profitability ratio is determined on a group basis.

Committee members and observers raised a number of significant issues with the current proposal including the possibility that more than all the income may be taxed if the provision is applied globally as well as how to characterize some payments as royalties, technical services or digital services. Further, the issue of digital services taxes generally may be precluded by the OECD digitization project.

Another aspect of this provision is that it is designed to assist developing countries, many of which have few or no treaties with the jurisdictions where income recipients are likely to reside. Consequently, there may be little direct benefit for these countries. Instead, if the proposed Article 12B becomes a standard of sorts, it may serve as a model for domestic legislation.

The Committee of Experts has decided to proceed with further development of the proposed Article 12B with a target for adoption at the next meeting. Special meetings may be required for the Committee to address all member concerns with the text.