New Article 12b will create two ways for countries negotiating an agreement under the UN convention to tax cross-border payments for automated digital services. One option is through gross tax at a rate agreed by the two parties to the contract; the second option is based on net income and a proportional distribution formula.
Will these innovations put an end to the era of international planning and tax optimization in the context of gamedev, SaaS and other online businesses?
Let's think together.
To begin with, I will give the literal text of the draft article:
New Article 12B - INCOME FROM AUTOMATED DIGITAL SERVICES
1. Income from automated digital services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, income from automated digital services arising in a Contracting State may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the income is a resident of the other Contracting State, the tax so charged shall not exceed ____ percent (the percentage is to be established through bilateral negotiations) of the gross amount of the income.
3. Notwithstanding the provisions of paragraph 2, the beneficial owner of the income from automated digital services referred to in that paragraph may require the Contracting State where the income from automated digital services arises, to subject its qualified profits from automated digital services for the fiscal year concerned to taxation at the tax rate provided for in the domestic laws of that State. For the purpose of this paragraph, the qualified profits shall be 30 percent of the amount resulting from applying the beneficial owner's profitability ratio or the profitability ratio of its automated digital business segment, if available, to the gross annual revenue from automated digital services derived from the Contracting State where such income arises. Where the beneficial owner belongs to a multinational group,the profitability ratio to be applied shall be that of the group or, if available, of the business segment of the group relating to income covered by this Article.
4. The term “income from automated digital services” as used in this Article means any payment in consideration for any service provided on the internet or an electronic network requiring minimal human involvement from the service provider. The term “income from automated digital services” does not, however, include payments qualifying as 'fees for technical services' under Article 12A.
5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the income from the rendering of automated digital services, being a resident of a Contracting State, carries on business in the other Contracting State in which the income from automated digital services arises through a permanent establishment situated in that other State, or performs in the other Contracting State independent personal services from a fixed base situated in that other State, and the income from automated digital services are effectively connected with: (a) such permanent establishment or fixed base, or (b) business activities referred to in © of paragraph 1 of Article 7. In such cases the provisions of Article 7 or Article 14, as the case may be, shall apply.
6. For the purposes of this Article, subject to paragraph 7, income from automated digital services shall be deemed to arise in a Contracting State if the payer is a resident of that State or if the person paying the income, whether that person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to make the payment was incurred, and such payments are borne by the permanent establishment or fixed base.
7. For the purposes of this Article, income from automated digital services shall be deemed not to arise in a Contracting State if the payer is a resident of that State and carries on business in the other Contracting State through a permanent establishment situated in that other State or independent personal services through a fixed base situated performs in that other State and such expenses are borne by that permanent establishment or fixed base.
8. Where, by reason of a special relationship between the payer and the beneficial owner of the income from automated digital services or between both of them and some other person, the amount of the income, having regard to the services for which they are paid , exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the income shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
Comments:
Due to the rapid changes in the modern economy, especially with regard to cross-border services, a resident company of one state may sell its services in another state without a permanent establishment or without any significant physical presence in that state. The OECD / G20 Base Erosion and Profit Shifting Project, Action 1: Final Report “Addressing the Tax Challenges of the Digital Economy” (2015) illustrates how much governments are concerned about the unequal tax burden of digital service providers. With these considerations in mind, the United Nations Committee of Experts has identified revenue from automated digital services as a priority to be addressed in a larger project on taxation of revenue from services.
Countries' inability to tax the proceeds of automated digital services provided by non-residents leads to non-resident providers in certain circumstances having a tax advantage over domestic service providers. For example, income from automated digital services provided in the United States by a US supplier is taxed by the States at the normal corporate tax rates (21% FIT at the federation level and their SIT rates at the state level). In contrast, non-resident suppliers are not subject to any national corporate taxes unless they have a permanent establishment in the United States and can tax their profits with the low tax rates of their country of residence (for example, Hungary 9% CIT + council tax), or not tax at all (if we are talking about Estonia and Latvia,where 0% CIT from profit before distribution).
Article 12B has been added to the United Nations Model Convention to allow a State Party to the Treaty to tax the gross income from automated digital services paid to a resident of the other Contracting State at the rate bilaterally agreed upon in paragraph 2 of Article.
In this case, the company can choose the procedure for taxing net profit, which is provided for in paragraph 3, according to which the actual owner of income from automated digital services may require the State in which the income arises to tax its qualified profit for the relevant financial year at the tax rate provided for by the internal the legislation of this State. Qualified profit means 30% of the amount obtained as a result of applying the profitability ratio of the beneficial owner of the income or the profitability ratio of its automated digital business segment, if any, to the gross annual revenue from automated digital services received in the State in which such income arises. ...The profitability ratio of the beneficial owner of the income or the multinational group to which the beneficial owner of the income belongs is understood as the total annual profit divided by the total annual revenue found in the consolidated financial statements of the beneficial owner or the group to which it belongs or the business segment of automated digital services , depending on the circumstances.
Taxation of income from automated digital services on a gross basis under Article 12B may result in excessive or double taxation. However, the likelihood that payments may be subject to excessive taxation or double taxation is reduced or eliminated in accordance with Article 23 (Methods for Eliminating Double Taxation).
Automated digital services revenue for the purposes of Article 12B is payments for any service provided on the Internet that requires a minimum of human intervention from the service provider.
In accordance with the general principles set out in the UN Commentary, the following services are considered automated digital services:
- Internet advertising services;
- Services of an online platform that performs the function of mediation (marketplaces);
- Social networking services;
- Digital content services (automated provision of digital data, which includes computer programs, applications, music, videos, texts, games and software, etc.);
- Cloud computing services;
- Sale or other alienation of user data;
- Standardized online learning services.
However, the term “automated digital services” does not include:
- Individual services provided by professionals (consulting and other services, the result of which can be provided via the Internet);
- Individual online training services (online tutoring via skype);
- Services for providing access to the Internet or to an electronic network;
- Internet sale of goods and services (e-commerce), except for automated digital services;
- Broadcasting services, including streaming;
- Composite digital services embedded in a physical product ("Internet of Things")
For now, it remains to observe the reaction of countries to the UN proposal and wait for new Protocols and changes to the existing Double Taxation Treaties. Stay tuned ...