Inclusion of Software Payments in the Royalties Article of the UN Model Convention

The BMG has made a submission to the UN Committee of Tax Experts on the proposal, supported by its members from developing countries, to clarify that article 12 on Royalties in the UN model convention includes payments for the use of software.

September 2020

Summary

We support this proposal to clarify that taxation of royalties under article 12 should apply to rights to use computer programs or software, which are generally protected under copyright and sometimes also patent law. Uncertainty was created when the OECD in 1992 revised its model convention’s commentary to exclude such rights to use. Regrettably extracts of these revisions were included also in the UN model’s commentary, although it also noted that some members disagreed with that interpretation. In fact, explicit inclusion of payments for software in the royalties article has already been accepted in over 600 treaties, including many by OECD countries. It is clearly desirable for the UN model to include a standardised provision, and inappropriate that some have opposed this.

It is also important to clarify which payments can be considered to be ‘in consideration for’ such rights. We strongly suggest this should include all payments received from any users resulting from use of the software. A more restrictive interpretation would make the provision easy to avoid by claiming that rights to software are granted free although substantial income results from use of the software. A potential overlap with the proposed article 12B, which would grant source states the right to tax income from automated digital services, could easily be dealt with by clarifying in the commentary that 12B would not apply to any income that is taxed under article 12. Attention should also be given when drafting the commentary to proposed article 12B to clarifying the interaction between the gross and net bases of taxation that it proposes.