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The UN Grants Developing Countries Digital Taxation Rights

The jury is still out on how the OECD’s plans to tax the digital economy will play out for developing countries, but critics are not optimistic, many claiming that developed economies stand to fair much better. But if developing countries have one ally in their corner, it’s the UN Committee of Experts on International Cooperation in Tax Matters.

In late October, the Committee agreed to include a new article “Income from Automated Digital Services” to the UN Model Double Taxation Convention between Developed and Developing Countries that grants digital taxation rights to developing countries. Under Article 12B, income from automated digital services can be taxed in the country where the customer is located – even if the company providing the service has no fixed place of business there. For example, if digital users in Laos buy products on Amazon, Laos has the right to tax the online retail giant.

While most nations remain divided on how to tax the global digital economy, Article 12B appears to be the UN’s way of addressing the concerns of developing countries in a unified way. Many developing countries have intentionally excluded digital taxes from local tax laws to avoid tax treaty obligations, but if implemented, taxation based on digital users could mean significant revenue for developing countries.

Another gray area? The definition of a digital service. Though Article 12B’s wording hasn’t been finalized, the definition of income from “automated digital services” is deliberately broad (see sidebar). The final text will be discussed in upcoming meetings with a final vote in April 2021, at the UN Committee of Experts’ 22nd session. Stay tuned.

 

Sidebar: What Qualifies as a Digital Service?

“Automated digital services” can be defined in many ways. Here is what’s included under Article 12B:

  • Online advertising services
  • Online intermediation platform services
  • Social media services
  • Digital content services
  • Cloud computing services
  • Sale or other alienation of user data
  • Standardized online teaching services

And what’s not included:

  • Customized services provided by professionals
  • Customized online teaching services
  • Services providing access to the internet or to an electronic network
  • Online sale of goods and services other than automated digital services
  • Broadcast services, including simultaneous internet transmission
  • Composite digital services embedded within a physical good irrespective of network connectivity (“internet of things”)