Contribution to the to UN INC on the Protocol on Taxation of Cross Border Services

The BMG has produced comments to the public consultation on the Issue Note of Workstream II negotiating the protocol addressing the tax challenges of the digitalization of the economy.

The taxation of cross-border services highlights critical gaps in current international tax rules. Services, increasingly central to economic growth, often involve minimal physical presence in market jurisdictions, undermining source-based taxation and favoring non-resident providers. This imbalance discourages local service sector development while enabling multinational enterprises (MNEs) to exploit "double non-taxation" through low-tax affiliates. A new paradigm is needed—one that fairly allocates taxing rights based on real economic activity rather than outdated physical presence tests. 

Two key approaches should be considered: (1) Taxation at source through withholding taxes (WTs) on gross payments, already in place in most countries though with limited enforceability due to the growing amount of tax treaties in place; and (2) Net-basis taxation under a unitary approach, apportioning profits via formulary methods (e.g., considering sales, employment and assets). While WTs offer simplicity, they are still the object of gaps, if implemented without significant economic presence (SEP) definitions. Conversely, net-basis taxation, though complex, ensures equitable profit distribution by linking tax rights to significant economic presence and value creation, particularly in digital markets. 

The proposed protocol must reconcile these approaches, prioritizing: 

-          Fair allocation via unitary taxation and formulary apportionment. 

-          Simplified source taxation for all services, irrespective of classification. 

-          Recognition of user-generated value in digital economies, especially for developing countries.