After the 28th session of the UN Committee of Experts on International Cooperation in Tax Matters in March 2024 in New York, ICC, through its Global Taxation Commission and in collaboration with ICC national committees, drafted a submission presenting practical business examples and highlighting the significant concerns that ICC members have regarding the Committee’s proposed Article XX on the taxation of cross-border services.
Cross-border trade in services has increased significantly over the past 15 years. According to the OECD and WTO, developing economies accounted for about one quarter of the global growth in the export of business services. Exports of telecommunications, computer, and information services worldwide quadrupled between 2005 and 2019, while legal, accounting, consulting, engineering and other business services more than doubled.
How would Article XX impact taxation of cross-border services?
The UN Committee of Experts in International Tax Cooperation proposed the addition of a new article to the United Nations Model Tax Convention. As currently drafted, Article XX would combine the existing Articles 5(3)(b), 12A, and 14 into a new provision dealing with the expansion of fees for cross-border business services. Article XX proposes to tax fees for any service regardless of where the service is performed and irrespective of the service itself.
The concerns ICC highlighted in this submission focus on the following aspects:
- Physical presence remains a key factor for the direct taxation of business profits.
The business community recognises the international tax challenges brought about by the digitalised economy. However, physical presence remains a key factor for the direct taxation of business profits. Changes to physical presence tests and the proposed amendments to the taxation of cross-border business services entail the risk of unintended consequences for developing countries’ economies, particularly those that are exporters of services.
- Negative impact on developing countries’ service exports
International trade data shows that a large amount of service exports now come from developing countries, and this amount is increasing rapidly. According to the OECD and WTO, several developing countries were among the top 25 exporters of services in the world by 2019, including Costa Rica, Ghana, India, Lebanon, the Philippines and Thailand.
Changes to physical presence tests or the expansion of taxation of cross-border business services will only stifle the growth of export-led services in developing economies.
- Increased administrative complexity
The new provision also increases administrative complexity for taxpayers and only brings about more tax uncertainty in an already increasingly complex international tax system. Under the new proposal, all service fees will come within the scope of taxation which will mean a much wider payment base to review from a withholding tax perspective. Depending on the source country, service fees could also attract different rates.
Additionally, countries will interpret differently what ‘fees for services’ encompass. Therefore, we do not foresee an immediate simplification for businesses or customers but anticipate potential tax disputes.
- Risk of over-taxation
Because of the increased administrative complexity and possible different interpretations, from a tax cost perspective, there is a risk of over-taxation, including double and multilayer taxation, if withholding tax is applied to each service payment made to service providers.
By presenting real-life examples and business experiences, ICC highlights the practical implications and contextualises the concerns raised above.
We also strongly recommend the UN Committee of Experts in International Tax Cooperation to commission an economic impact assessment of the proposed article that can outline the impact this will have on developing countries.
