On 13 August 2025, during the third day of the second session of the United Nations Framework Convention on International Tax Cooperation, delegates discussed creating a fast-track instrument to implement Protocol I on taxing income from cross-border services in a digitalised and globalised economy.

On 13 August 2025, during the third day of the second session of the United Nations Framework Convention on International Tax Cooperation (the Convention), delegates considered the potential development of a fast-track instrument to implement Protocol I (Workstream II) on the “Taxation of Cross-Border Services in a Digitalised and Globalised Economy.”

Workstream II of INC/Tax is charged with developing the first early protocol, on the “taxation of income derived from the provision of cross-border services in an increasingly digitalised and globalised economy”.

The draft text of the protocol will be submitted, along with the draft text of the UN Framework Convention on International Tax Cooperation and the draft text of the second protocol on the “prevention and resolution of tax disputes” to the UN General Assembly for its consideration in the first quarter of its 82nd session in the second half of 2027.

During the meetings, the workstream heard that the most significant barriers to taxing cross-border services consisted of the legal obstacles in tax treaties that do not reflect current ways of doing business. Many developing countries impose gross basis withholding taxes on almost all payments made from their jurisdictions, which allows them to tax without regard to where services are provided. Treaty rules that would enable taxation only when the service provider has a physical presence in a country do not align well with these domestic systems.

The meetings also highlighted that advances in digital technology make it easier than ever to provide services remotely, although some services do, of course, still require physical presence.

Recently, the focus has been on the treatment of digital services, but concerns regarding fees for management, technical and consultancy services go back decades.

The workstream therefore considered a number of situations (among them those in the following slides) to ask, if there were no existing international tax rules, should the state where services are consumed have the right to tax the payment and what would be the justification for doing so.

Possible Scope of Work 

At its organisational session, INC/Tax considered a note by the Secretariat on the four possible subjects for the second early protocol. In a footnote, this note stated:

The INC-Tax will have to further clarify, over the course of its work, how to interpret the subject of this first protocol, which might focus on traditional services provided through digital means of communication and/or genuine digital services. Depending on the interpretation of this subject, the INC-Tax might also need to delineate the subject from the “taxation of the digitalised economy.”  This description is to be understood as an orientation, and not as a limitation of the possible scope of the protocol.

The first task with respect to Workstream II is to agree on the scope of the protocol. The work plan for Workstream II anticipates that the INC Plenary will have an initial discussion of the scope and approach of Protocol 1 at its August 2025 Sessions, provide guidance to the workstream at its November 2025 Session, and begin discussing drafting options in late 2025.

In the early days of the second session, delegates focused on Protocol I’s core issues—possible new nexus rules, net vs. gross taxation, and differentiated rules for services—while also considering a fast-track instrument, similar to the OECD/Inclusive Framework Multilateral Instrument (MLI), to speed up adoption of provisions of the convention’s protocols.

Delegates sparked the debate as they raised concerns about challenges in implementing the MLI.

Key international tax issues under discussion included:

  • How a proposed fast-track instrument would interact with the Convention and its protocols, given that their content is not yet finalised.
  • Whether tax rates on cross-border services should be addressed within the instrument itself or deferred to the protocol.
  • Potential legal challenges for jurisdictions in applying such an instrument under their domestic laws.
  • The meaning of “self-executing” protocols, particularly since taxing rights, rates, and approaches (net vs. gross) remain undefined.

The session also considered “Information Exchange on Services,” raising questions about whether countries already collect such data, the feasibility of doing so, and whether related provisions should be placed in Protocol I or in the broader Framework Convention.

Further updates are expected as the second session concludes on 15 August 2025.