In the globalized and digitalized economy, multinational enterprises (MNEs) can carry out cross-border business activities at large scale utilizing digital technology with little or no physical presence in a country. The usual bilateral treaty framework for taxing cross-border business income, which requires a physical presence, often leads to the tax loss of market countries, usually capital importing developing countries. Different tax rules have also allowed MNEs to shift their profits to lower tax rate countries. At the same time, countries have been competing to attract capital by giving tax incentives and lowering their corporate tax rates. The competition has incentivized MNEs to shift their profits and is often particularly wasteful as the investment would often occur even without the offered tax incentives.
The increasingly digitalized and globalized economy thus continues to pose great challenges to the fairness and workability of tax systems – and to public confidence in them. This reality has led to concerted efforts to fairly address taxation of profits from modern ways of doing business and to reduce wasteful tax competition between countries. Responses have been diverse, including actual or proposed unilateral, bilateral, regional and multilateral actions.
Discussions in the international tax arena have proposed tax treaty approaches for consideration by countries to address the taxation of income generated without a physical presence. One approach is the two-pillar solution, as developed at the G20/OECD Inclusive Framework level. Another is the new Article 12B of the UN Model Double Taxation Convention, developed by the UN Tax Committee, to address the taxation of income from automated digital services in bilateral situations.
Article 12B, in the 2021 UN Model, preserves, in the treaty relationship, market country domestic law taxing rights on digital services, including online advertising services, supply of user data, online search engines, online intermediation platform services, social media platforms, digital content services, online gaming, cloud computing services, and standardized online teaching services. The Committee is currently working on a possible mechanism for wide adoption of the UN Model provisions relevant to taxing the digitalized and globalized economy, as well as other recent provisions, through a multilateralized form of implementation (a multilateral instrument). Such a mechanism would allow many existing bilateral treaties to be amended at once, sparing countries the onerous and time-consuming process of amending individual treaties.
The Committee is also examining the physical presence-based tax treaty thresholds or tests that currently apply before a country where profits are made can tax such profits of other countries’ residents. Such tests include “permanent establishment” and “fixed base” tests. The Committee is considering the function and relevance or otherwise of such tests to trigger taxing rights in an increasingly digitalized and globalized economy. The work is supported by the UN Tax Committee’s Subcommittee on Taxation of the Digitalized and Globalized Economy and by the Committee Secretariat in UNDESA.
UN Member States have called for more concerted effort at all levels to strengthen international tax cooperation as a way to help build the trust and spur the transformations envisioned in the Addis Ababa Action Agenda and the 2030 Agenda. They have also called upon the United Nations and other relevant international organizations to support developing countries, in particular, towards building policy and administrative capacity for the effective and efficient taxation of the digital economy.
Conference room papers (CRPs)
- Subcommittee Co-Coordinators’ Report - March 2022
- Issues note by the Secretariat - October 2021
- Subcommittee Co-Coordinators’ Reports - April 2021 September 2019 April 2019, October 2018
- Financing for Development Forum – Outcome documents - 2022 2021
- Special Meeting on International Cooperation in Tax Matters summaries - 2022 2021
- UN Virtual Workshop on Practical and Policy Aspects of Taxation in a Digitalized and Globalized Economy - September 2022, September 2020