The present submission was made to the Intergovernmental Negotiating Committee on the United Nations Framework Convention on International Tax Cooperation per their request of input on WORKSTREAM II: DRAFT PROTOCOL ON THE TAXATION OF INCOME FROM CROSS-BORDER SERVICES.

We propose a practical approach that willing countries could implement quickly. The primary method we suggest would combine taxation based on net income by the country where services are delivered with ease of administration through a tax on gross payments.

The tax would be at a rate calculated by multiplying the operating profit margin of the MNE corporate group to which the recipient of the income belongs and the standard rate on profits in the country applying it. This would reflect the actual profitability of the enterprise concerned, taking into account its worldwide expenses and revenues. Profitability rates for services vary widely, and this method should produce a range from 1.25% to 17.5%.

Applying it to payments is the only way to ensure ease of administration. This would enable its immediate adoption by willing states whether acting singly or jointly, based on model rules and procedures for coordination. Alignment with existing incompatible tax treaties could be facilitated through a multilateral instrument.

This method should be coupled with an option for the enterprise concerned to accept a comprehensive methodology enabling taxation, at least once and only once, of its worldwide net income, adjusted for tax purposes, with tax rights apportioned among states based on agreed factors reflecting the location of its real activities (employees, physical assets and sales). This methodology could be based on the rules developed for the proposed multilateral convention for Amount A in Pillar 1 of the BEPS project, although they could be simplified.

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