Comments on Proposed Article xx to U.N. Model Tax Convention

April 15, 2024

Michael Lennard
Chief, International Tax Cooperation Section
Financing for Sustainable Development Office
Department of Economic and Social Affairs
United Nations Secretariat
TwoU.N.Plaza,RoomDC2-2172
New York, New York 10017

Re: Proposed Article xx on Dealing with Cross-Border Business Services

Dear Mr. Lennard:

On behalf of the U.S. Chamber of Commerce,1 I am writing to express our profoundconcernswiththeproposedadditionofanewarticle(“Articlexx”)tothe United Nations Model Double Taxation Convention between Developed andDeveloping Countries2021(“U.N. Model TaxConvention”).ProposedArticlexxwould combineexistingArticles5(3)(b),12A,and14intoanewprovisiondealingwithfeesfor cross-border business services to provide greater taxing rights to recipients ofservices supplied by non-residents in the form of a gross-basis withholding tax.2 Asset forth below, we believe this proposal would introduce a dangerous new contagion into the international income tax system and lead to the increased incidence of unrelieved double taxation on cross-border business activities.We strongly oppose this destabilizing proposal and respectfully urge its withdrawal.

Background

Ascurrentlydrafted,proposedArticlexxwouldallowfeesforservicesarisingin a Contracting State and paid to a resident of the other Contracting State to be taxed on a gross basis in the Contracting State from which the payment is made, regardless of where the services are performed.

Theterm “fees for services”wouldbedefined broadlyfor this purposeto meanany payment in consideration for any service, unless the payment is made by an employer to anemployee, for automated digitalservices, or to aninsuranceenterprise for insurance.An exception would apply wherethe beneficial owner of the fees for services has a permanent establishment in the other jurisdiction with which the fees are effectively connected.

Discussion

Adoption of proposed Article xx would represent a fundamental and destabilizing shift from the traditional, consensus-based international norms governing jurisdictional nexus for the imposition of tax.The physical presence and permanentestablishmentstandardfornexusisacriticalpartofboththeU.S.Model Income Tax Convention and the OECD Model Tax Convention.And it is a well-established international principle that business profits should be taxed in the jurisdictionwhere theeconomic activities that generate them arecarried out and wherevalueiscreated.3 Incometaxes areleviedat theplaceof sourceofincome, which for servicesisthe jurisdictionwhere they are performed—not thejurisdiction where customers or users are located.

The adoption of proposed Article xx would contravene the stated underlying objectiveof U.N.Model TaxConvention: theeliminationof doubletaxationwith respect to taxes on income and on capital.By expressly allowinga jurisdiction to tax incomederivedfromtheprovisionofservicesperformedbyanonresidentoutsidethat jurisdiction, proposed Article xx would significantly increase the incidence of unrelieved doubletaxationon cross-border income.Extraterritorial taxes imposed on the basis of the location of customers or users are not creditable under traditional international norms governing nexus and taxing rights.

ProposedArticlexxwouldalsocontraveneacriticalancillaryobjectiveof the U.N. Model Tax Convention, which is to provide a reasonable element of legal and fiscal certainty as a framework within which international operations can confidently be carried on.For instance, the proposed elimination of the physical presence standardinexistingArticle5(3)(b)(i.e.,the183-dayruleforestablishingaso-called “servicespermanentestablishment”)wouldbequitedisruptive.Withoutthecertainty provided by Article 5(3)(b), aone-day business tripcould potentially create a permanentestablishmentinthecustomeroruser’sjurisdiction,triggeringregistration requirements and business taxation based on limited in-country activity.This uncertaintywouldincreaseadministrationburdenonlocal-countrytaxauthoritiesand inevitably leadto moredisputes withtaxpayers,consumingscarceresourcesin exchangeforlittle(ifany)additionaltaxrevenues.

Anothercriticalconcernwiththeextraterritorialtaxingrightcontemplatedby proposed Article xx involves the basis on which it would apply—tothe gross amount of the fees paid.Inaddition to the risksofdouble taxationdescribed above, taxing fees for services on agross basis could easily lead to excessive or over-taxation and would be inconsistent with prevailing principles of international taxation.The imposition of such a gross-basis withholding tax (i.e., one applied solely on revenue before expense deductions) would hamper cross-border trade, increase compliance costs, and impede the growth of start-up businesses.

Finally,itisimportanttoacknowledgetheveryrealriskthattheadditionof proposed Article xx to the U.N. Model Tax Convention would set a dangerous precedent for less-scrupulous jurisdictions that may be tempted to disregarded internationaltaxingnorms toclaimadditional taxrevenue.Theresult wouldbea furtherproliferationofnovelextraterritorialtaxesthatdivergeinsignificantrespects from traditional norms of international taxing jurisdiction.

The preceding comments are by no means exhaustive but represent some of themostacute, widespreadconcernsamong our membercompanies withrespect to proposed Article xx.We would welcome the opportunity to discuss our comments with youor your colleagues in further detail and provide whatever additional informationyoumayrequire.Thankyouforyourtimeandattention.

Sincerely,

WatsonM. McLeish
SeniorVicePresident,Tax Policy
U.S.Chamberof Commerce

1 The U.S. Chamber of Commerce is the world’s largest business federation and represents the interests of millions of businesses of every size, industry sector, and region. As a founding member of the Global Business Coalition, the Chamber contributes to all private sector consultations with the G20 and routinely engages on the OECD/G20 Inclusive Framework on BEPS’s Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.

2 See Comm. of Experts on Int’l Coop. in Tax Matters, Co-Coordinators’ Rep. on Its Twenty-Eighth Session, U.N. Doc. E/C.18/2024/CRP.8 (Mar. 4, 2024).

3 See, e.g., OECD, Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project (2015).

About the author

Watson M. McLeish

Watson McLeish is senior vice president for Tax Policy at the U.S. Chamber of Commerce, where he serves as the primary adviser on all tax policy-related matters.

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