Article 12B grants new taxing rights to the source state on income derived from automated digital services. Income derived from automated digital services means income derived from a service provider with little to no human involvement, e.g. online advertising services, digital content services, social media services, standardized online teaching services. However, this does not include income derived from ‘fees for technical services’ (which are payments for services of a managerial, technical of consultancy nature for which in principle Article 12A1 would apply) or customized digital services.
The UN model tax treaty allows source countries to apply a withholding tax on gross payments arising from automated digital services. According to the UN, a taxation on the gross amount simplifies compliance for enterprises and is a simple and efficient method to enforce tax for developing countries with a limited administrative capacity. The beneficial owner of the income from automated digital services may request to be taxed on its qualified profits for a net basis annual taxation instead of a withholding tax on the gross payments.
The application of the article does not require a permanent establishment, fixed base or minimum period of presence. However, when the beneficial owner of the income derived from automated digital services carries on a business through a permanent establishment or fixed base and those services are effectively connected with this permanent establishment or fixed base, Article 7 of the UN Model Convention (regarding ‘business profits’) will prevail on Article 12B.
The UN sees the new article as an alternative for the complex OECD Pillar One proposal. Unlike the Pillar One proposal, article 12B only applies to the digital economy rather than the entire economy and does not use any revenue thresholds. As this new article 12B will be introduced in the UN model tax treaty, this does not directly impact existing tax treaties. However, when new treaties are negotiated based on the UN model, this new article 12B will become part of treaty negotiations.
In addition to Article 12B and the taxation of the digital economy, the UN has released numerous other documents, including a new Practical Manual on Transfer Pricing for Developing Countries and a Handbook on Carbon Taxation for Developing Countries. However, an agreement about a potential amendment of the model provision regarding income from royalties (art. 12 UN model tax treaty) targeting also computer software payments has not been reached yet.
Tiberghien’s international tax team will continue to monitor these developments. In case you have any further questions or want to discuss this, please do not hesitate to contact the author.
Kimberly Van Sande - Associate (firstname.lastname@example.org)
1Article 12A permits the source state to impose withholding tax on payments of fees for technical services made to non-residents.