The United Nations has approved to add Article 12B in the UN model tax convention in order to include the taxation of “automated digital services”. Article 12B attempts to provide a solution to the issue of global digital taxation which has been plaguing most nations.
Economic Laws Practice and The Dialogue today released a white paper titled Taxation of Digitalized Economy: Analysing the United Nations Article 12B Solution which analyzes Article 12B (approved by UN to be added in the UN Model Tax Convention to include “Automated Digital Services”) given the context of bilateral and multilateral tax treaties. This white paper then deep dives to discuss if Article 12B does indeed provide a viable solution. This report assumes even more significance given the recent G7 discussions on global taxation.
Article 12B appears to be a simple solution, it could however trigger several challenges on the implementational and technical grounds which are evaluated in the white paper.
The white paper covers a comparison between Article 12B and the OECD Inclusive Framework, both of which are trying to address the issues around taxation and increased digitalization.
Stella Joseph, who is a partner at ELP and co-author of this whitepaper suggests that “Given the dynamic geo-political shifts, working towards a multilateral solution seems to be the best way forward to address global tax challenges in digital services. The recent G7 agreement on their commitment to counteract tax issues also lays a strong foundation for the G-20 meeting in July 2021.”
Worrying issues such as ring-fencing which may give governments an opportunity to unilaterally impose tax measures for business models outside the scope of ADS have been discussed in detail in the report. Designing international tax rules based on sector-specific definitions and including only specific business models will prove too limited conceptually to result in a system fit for the long term.
Another angle covered in the report is that of gross-based taxation issues versus net-based taxation issues and discusses why MNE’s may be deterred from operating in certain markets.
“There is a greater need for all the countries to be on the same page on this issue be it developing or developed. Given the current economic situation globally, businesses need certainty. A multilateral international consensus-based framework would be the most prudent way forward to address tax challenges of digitalization,” says Nishant Shah, Partner at ELP.
Finally, the report discusses the implementation and enforceability challenges of Article 12B. Implications of dispute resolution, double or multiple taxations, and significant increase in compliance cost for the MNEs.
Kazim Rizvi, Founding Director of The Dialogue noted that “In the constantly evolving environment of increasing digitalisation, there is a need for a stable tax regime which provides certainty and uniformity to the businesses. Towards this, there is a need for a global framework on which there is a consensus among the countries. This white paper attempts to analyse the viability of Art 12B as a solution to such complex issues by analysing it from both technical and policy standpoint.”
