Taxing digital companies: UN tax panel working on new set of rules

Discusses adopting multilateral approach in tax treaties for faster solution

The United Nations’ (UN’s) tax committee, of which India is part, is developing a set of rules to tax digital services in a way that is distinct from global tax deals for large multinationals, including Google, Facebook, Netflix, and Microsoft.

The committee is looking to absorb these rules in tax treaties multilaterally.

The committee -- comprising representatives from 25 countries, including India -- met two weeks ago, when it discussed the contours and implications of the UN model and whether it could be implemented multilaterally.

This multilateral route would be a parallel to the global tax deal drawn up under the auspices of the Organisation for Economic Co-operation and Development (OECD) and allows taxing small to mid-sized firms, regardless of their business size and threshold.

The OECD, composed of 139 countries, have been working on a consensus-based two-pillar package deal to alter the existing tax system in view of the challenges of digitisation.

Pillar one would be applicable to 50-70 multinationals due to its criteria of a high revenue threshold of euro20 billion and a minimum 10 per cent profitability. It deals with reallocating additional shares of profit to market jurisdictions where the users are.

Pillar two relates to a global minimum tax at 15 per cent.

Unlike the OECD, which offers consensus-based solutions, the UN model gives flexibility and greater taxing rights to enable countries to start taxing the digital economy.

The committee discussion assumes significance as it agreed to take the multilateral route even when the OECD’s “Base Erosion and Profit Shifting” multilateral solution has been in place and is designed to work effectively to address the challenges of the evolving international tax landscape of digital economy, transfer pricing, etc.

Among other nations, India too has adopted the OECD’s two pillars to tax digital giants. However, the BEPS scope is restrictive, unlike the UN approach, which is supposed to be broad-based and is intended to provide more flexibility, according to people privy to the discussions.

The committee is expected to meet next in November in Geneva, where it is likely to finalise the terms of the rules.

“Unlike the OECD’s pillar one, the UN model’s Article 12B is comparatively simple, and can be applied to MNCs not covered by Pillar one. This will result in fair distribution of taxing rights and countries will be more comfortable giving up unilateral measures like equalisation levy,” said Radhakishan Rawal, former partner at Deloitte India, and he wrote a concept note on UN multilateral instruments (MLIs).

“MLI is an innovative instrument to quickly transpose new provisions from treaty models to tax treaties, which otherwise can take decades,” Rawal added.

Under the OECD, finding middle ground has been challenging and the process went through many alterations. Also it is more of a political matter as it involves big technology firms which are tax-residents of developed nations like the US and any changes and redesigning in law would allow developing nations like India to seek tax from these firms.

“To avoid uncertainties, the UN panel may need to design specific approaches which may not need to overlap between the UN and other multilateral solutions,” said Amit Maheswari, managing partner, AKM Global.

Background

The UN, through its Committee of Experts on International Cooperation in Tax Matters, has released the finalised draft of a new Article 12B, to include income from automated digital services (ADS) in the 2021 version of the UN Model Tax Convention, also termed as UN Model.

Article 12B does not require any particular threshold, such as a permanent establishment, a fixed base, or a minimum period of presence, in a contracting state as a condition for taxing income from automated digital services.

The UN model, which is aiming to be simpler and faster than the pillar one solution, would give additional taxing rights to countries where an automated digital service provider’s customers are located.

The UN model allows market jurisdictions to levy a withholding tax on the gross amount of digital services income. It means it gives additional taxing rights to countries where an automated digital service provider’s customers are located.

The UN model consists of articles on the treaty’s scope and on definitions to be used in the treaty. For different kinds of income and capital, it allocates taxing rights before establishing how double taxation will be eliminated where the taxing rights are shared. It also includes articles that prevent certain forms of tax discrimination; provide for the exchange of tax information and assistance in tax collection between the treaty partners; allow the treaty partners to consult together, through the Mutual Agreement Procedure, to resolve disputes or address doubts concerning the treaty; and address certain types of treaty abuse.