By Monique van Herksen, Member of the Subcommittee on Transfer Pricing under the UN Tax Committee
If your employer (or client) is an internationally operating company, the UN Tax Committee’s work is likely to affect you. The UN Tax Committee guides countries to advance forward-looking tax policies adapted to the realities of globalized trade and investment. It focusses on developing countries. In October of 2021, the UN Tax Committee convened for its 23rd Session.
The UN Tax Committee’s mandate
This is a challenging time. The COVID-19 pandemic has affected many countries, in particular developing countries. The COP26 agenda, with its focus on the race to net-zero carbon emissions and tackling the challenges of climate change, means governments need to operate while (using Greta Thunberg’s words:) “their house is on fire”. The OECD and the Inclusive Framework, a network of (currently) 141 countries and jurisdictions operating on ‘equal footing,’ are about to introduce sweeping global changes to tackle (tax) challenges arising from the digitalisation and globalisation of the economy, called ‘BEPS 2.0’.
The impact of the above three developments is major. The growth of climate change-related litigation is becoming a risk that businesses cannot afford to ignore. Corporate reporting requirements concerning environmental and climate impact are increasing. Regulators have announced they will take strong enforcement action concerning the Environmental, Social and Governance (ESG) criteria and standards for a company’s operations. This regards aspects such as carbon emission reduction, water pollution and deforestation but also gender and diversity inclusion, data security, executive compensation, political contributions and lobbying, and forebodes actions against greenwashing and the misselling of products.
The UN Tax Committee’s agenda
While many topics were considered, including taxation and the coronavirus disease; updating the UN Model Double Tax Convention; taxation of the digitalized and globalized economy; environmental and environmentally related tax issues, the relationship of tax, trade and investment agreements; increasing tax transparency; wealth and solidarity taxes; indirect tax issues including health taxes, three stood out and are mentioned below.
1. The update of the UN Model Double Taxation Convention.
A new Article 12B in the UN Model Double Taxation Convention allocates the right to tax income resulting from automated digital services (online advertising services, online search engines, social media platforms etc.) to the State of residence, but also allows for a (gross) withholding tax in the country of the payor. In practice, it may be challenging to differentiate between payments for software as a service (SAAS) and payments for products that have software embedded into them. If software is accessed in the cloud, without downloading, it can fall under Article 12B. However, if the software is downloaded and used, it would not fall under Article 12B. In today’s world any and all services are rendered (partly) digitally or via applications designed for mobile devices (apps). So it will be relevant to understand if those services, when offered cross-border, will be subject to a withholding tax.
2. Tax, trade and investment agreements
Increasingly, tax disputes are being raised under trade and investment agreements. Developing countries feature in a significant portion of those disputes. Usually the issue is whether an investor is (not) awarded air and Equitable Treatment under the trade and investment agreement as a result of imposition of the tax, whether it is awarded Full Protection and Security under the agreement or whether the tax imposed rises to the level of Expropriation. A change in tax regime may also trigger a stabilization clause included in contracts and considered a breach of an investment treaty. If and to the extent a global minimum tax will be agreed that will require countries to give up tax incentives that are in place, that may be considered to a violation of the provisions of existing investment agreements and trigger disputes. How to address this development will be considered by the Tax Committee during the coming term.
3. Indirect taxes including health taxes
Domestic revenue mobilization is an important reason to review the pros and cons of introducing new taxes. These may include health taxes, targeting the consumption of tobacco, alcohol and sugar-sweetened beverages for example but also indirect taxes.
What will happen next and how will become clear during the 24th Session of the Tax Committee in April of 2022.
Why it matters
There already is or most certainly will be (indirect) impact from the topics the Tax Committee is about to review and address.
The UN Secretariat can access resources to involve tax experts, plus that (outside) stakeholders are generally welcome to support the work of the UN Tax Committee with their know-how and expertise. You and your company can invest in providing know-how and expertise to the UN Tax Committee, its subcommittees and subgroups, either directly or through the Non-Governmental Organizations (NGO) operational and active in this field. You may, in turn, gain a (much) better understanding of developing country needs and perspectives. While providing insights in how your company or business sector really works, you may be able to tick several boxes relevant for your day-to-day business ranging from ESG-related matters to being able to anticipate upcoming changes and preparing your operational business for that.
The UN Tax Committee considers and supports the advancement of the SDGs in its agenda. These goals have the power to create a better world by 2030, by ending poverty, fighting inequality and addressing the urgency of climate change. While providing input or assistance, you will already contribute to SDG #17 (on Partnership for the SDGs) which includes encouraging effective partnerships and references the promotion of effective public, public-private and civil society partnerships to further the SDGs. Importantly, if the UN Tax Committee is successful, you are likely to (indirectly) benefit too.
Monique van Herksen is a Tax Partner with Simmons & Simmons, specialized in transfer pricing and member of Simmons’ Contentious Tax Team.
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