The subcommittee on tax challenges of the digital economy of the UN Committee of Experts on International Cooperation in Tax Matters held a meeting from 25 to 27 August 2020.

The subcommittee considered the proposed new Article 12B to the UN Model Tax Convention which covers the taxation of automated digital services. The draft Article would permit income from automated digital services arising in a contracting state to be taxed by withholding in that state, but if the beneficial owner is resident in the other contracting state the draft Article provides that the tax charged may not exceed a specified percentage of the gross income.

The percentage to be applied would be established by negotiation between the parties to the agreement, taking into account that a high level of withholding tax may lead to the resulting additional costs being passed on to consumers in that state and could deter investment if it cannot be wholly offset against taxable income in the home country.

Under the draft Article the beneficial owner of the income may require the contracting state where the income is sourced to subject the qualified profits (as defined) from automated digital services to the normal tax rate applying in that state.

Income from automated digital services is defined as payments for services provided on the internet or an electronic network requiring minimal human involvement from the service provider.

There is support for the draft Article within the subcommittee but it has proposed that the drafting group responsible for developing the article should continue its work. The views of the subcommittee and of other observers in relation to the draft article will be communicated to the Committee of Experts. A revised draft of the article will be presented to the 21st session of the Committee of Experts which will take place from 20 October to 6 November 2020. The next steps will then be decided.