Belisa F. Liotti, Joy W. Ndubai, Marcelo H.B. Moura, and Ruth W. Maina are teaching and research associates and Ivan Lazarov is a postdoctoral research associate at the Vienna University of Business and Economics.
In this article, the authors review the notes presented at the 25th session of the U.N. Tax Committee by various subcommittees responsible for different aspects of international taxation.
- U.N. Double Taxation Convention Update
- Transfer Pricing
- Environmental Taxation
- Increasing Tax Transparency
- Tax, Trade, and Investment Agreements
- Extractive Industries
- Digitalization of Tax Administrations
- Digitalized and Globalized Economy
- Health Taxes
- Tax and the Sustainable Development Goals
- Wealth and Solidarity Taxes
- Dispute Avoidance and Resolution
- Negotiation of Bilateral Tax Treaties Manual
The 25th session of the U.N. Committee of Experts on International Cooperation in Tax Matters (UNTC) was held October 18-21, 2022, in hybrid format in Geneva, Switzerland. It presented the provisory outcomes of the proposed agenda of its subcommittees, whose mandates started in October 2021. The agendas focused on the 2030 agenda for sustainable development1 while dealing with dynamic and, to some extent, unexplored tax issues that are critical to developing countries.
The discussions covered more than 10 topics related to international cooperation in tax matters. Some of them are discussed in the next section.
U.N. Double Taxation Convention Update
On the update of the U.N. Model Double Taxation Convention Between Developed and Developing Countries (U.N. model), the subcommittee produced two notes for discussion,2 the “Proposal for the Inclusion of a General ‘Subject to Tax’ Rule in the UN Model” and “The Inclusion of Computer Software in the Definition of Royalties.”
Regarding the first note, the subcommittee presented the draft provision for the proposed subject-to-tax rule on taxation by the source state to be included in the U.N. model, asking for UNTC comments on the provision and suggestions on how to address some of the issues raised during the subcommittee’s meetings.
The subcommittee clarified that there was strong support among participants for the rule to have a broad scope, not limited to base erosion and profit shifting between related parties. While most of the participants endorsed the broad rule, others were concerned because the BEPS issues were the basis for the development of the provision. Regarding the inclusion of a maximum level of taxation by the source state, it was suggested that if the UNTC decides that the policy objectives of the rule should go beyond BEPS and achieve a minimum level of taxation, including payments between unrelated parties, then there should be a limit on the allowable level of source-country taxation. On the other hand, if the UNTC decides that the rule should apply only to BEPS payments or mobile income between related parties, a taxation limit may not be necessary, in which case countries could apply the domestic rate.
Moreover, the provision is intended to be self-executing, meaning that it will apply to any income falling under its scope and will cover existing regimes instead of only regimes adopted after the date the treaty is signed. During the meeting, concern was raised that some developing countries are not always fully aware of the national legislation of the treaty partner, which could harm the application of the subject-to-tax rule. Participants suggested including an obligation in the commentary requiring residence states to inform source states about any advantageous tax regimes. It was also mentioned that the commentary should make clear that, although it uses the term “income,” the provision applies more broadly to gains where support has been given by members of the UNTC during the discussions.
The provision includes a placeholder for states to consider exemptions (such as participation exemption and pension funds) that are appropriate in the bilateral context and that would not trigger application of the rule. Some proposed including in the commentary a draft text for the most common exemptions. Participants supported the idea but pointed out that exceptions should be avoided.
Also, the rule is primarily thought to be limited to the failure of the residence state to tax when the source state has ceded the taxing rights, but not the reverse. However, the subcommittee recognized that the reverse could also happen and included in the note a rule similar to the Nordic Convention that allows taxation by the residence state if the source has not exercised a taxing right granted to it under the relevant treaty.
Some participants expressed concern about the possible effect of this rule in situations in which the source intended double nontaxation; that is, it did not exercise its taxing rights to exempt the income in both states (specific pensions, alimony or child support, or war reparations). Others supported the idea of including a rule for the residence state to preserve the imbalance of countries’ taxing rights. Some advocate including an alternative provision in the commentary allowing residence states to apply the rule in bilateral negotiations only when they are linked with the low level of taxation set out in subparagraph (b).
Finally, concern was raised about duplication with work of the OECD inclusive framework and the overlap with the subject-to-tax rule envisaged under pillar 2. Some argued that duplicated work may lead to more fragmentation. However, suggestion was made to not draw parallels between these two initiatives, because the U.N. approach is broader than the one discussed at the OECD, thus not a duplication. Participants said that developing countries in the inclusion framework have made the point that they need a broader clause, and the subcommittee is following its mandate to find a solution for developing countries.
Computer Software in the Definition of Royalties
The other major topic at the meeting was the proposal to include payments for the use of computer software within the definition of royalties in article 12. The subcommittee presented what it has done so far, including the discussions it has had on the possible scope of such a provision. However, because there were different views during the subcommittee’s internal meetings on how to achieve certainty for governments and taxpayers because of disagreement over the application of the article 12 definition of computer software, the note asks for further guidance from the UNTC before continuing its work.
According to the members, the subcommittee has reached a point at which a decision must be made to provide certainty for countries. One alternative is to continue with the proposal of the former membership to expand the definition of royalties to include a reference to computer software, like the provision set out in paragraph 16 of the commentary on article 12. Alternatively, the commentary could be changed to clarify the issue.
Some participants worry that if there is a change only in the commentary, there will never be certainty, so the subcommittee should clearly include its view in the model. Others showed concern that an expansion of the definition may inadvertently take in rights that should be treated as business profits as royalties. In the end, most preferred including computer software in the article 12 definition of royalties, like that included in paragraph 16 of the commentary on article 12 of the U.N. model and providing commentary on what would or would not be covered by the expanded definition.
As a final point, the subcommittee called for other items to be discussed in 2023, including income from shipping activities, exploration and extraction of natural resources, international insurance activities, and technical issues resulting from the lack of sourcing rules in article 21 (for example, the risk of multiple taxation regarding pension distributions).
For transfer pricing, the dedicated subcommittee presented a progress report on the provisory outcomes of its seven workstreams.3 For work dealing with primary product guidance, an unpublished outline has been drafted that covers the global value chain analysis of these products4 via case studies of the soybean and coffee industry. Work on guidance for the pharmaceutical industry includes an unpublished outline detailing transfer pricing analysis of the sector along with an overview of some applicable specificities, such as government regulations, price controls, and parallel imports.
The third workstream made progress in developing a toolkit for tax administrations to improve their risk assessment from a tax audit perspective. On the other hand, the subcommittee temporarily put on hold its fourth workstream of transfer pricing domestic antiabuse rules to prioritize other workstreams.
The fifth focus of work, transfer pricing aspects of CO2 certificates, made significant progress following cooperation with the subcommittee on environmental taxation to deepen the description of the applicable regulatory framework, the notion of carbon credits, and the supply chain within the generation of carbon credits. Based on this work, the subcommittee will present draft guidance at the next UNTC (early in 2023).
The workstream on COVID-19 and economic downturn advanced considerably, leading the subcommittee to internally circulate an unpublished draft guidance document. The document focused on economic downturns and transfer pricing analysis steps5 when dealing with economic distortions embedded in the COVID-19 period.
Finally, work progressed on dispute avoidance and resolution in transfer pricing matters, in cooperation with the dedicated subcommittee on dispute avoidance and resolution. A clear workplan has been set to address practical challenges of the mutual agreement procedures and dispute avoidance mechanisms, with an eye on the perspective of developing countries.
Following the explanation, participants appraised the coordinated work of this subcommittee with other subcommittees, pointing out the need to avoid duplication of work and to better align on overlapping topics. The subcommittee will now analyze the inputs received and consider whether, and if so how, to incorporate them into the relevant workstreams. The subcommittee will present further outcomes at the next UNTC meeting.
The work of this subcommittee is divided into four workstreams:
interaction of carbon taxation with national measures;
the role of carbon taxes and other measures to support energy transition;
interaction between carbon taxes and carbon offsetting programs; and
carbon border adjustment mechanisms (CBAM).
The subcommittee envisions an additional workstream to consider environmental tax measures other than carbon taxes, with an eye on developing countries.
The first workstream experienced great advances on the interaction between carbon taxes and other environmental measures — such as emissions trading and climate policy — based on the outline6 in the United Nations Handbook on Carbon Taxation for Developing Countries.7 Similarly, for the second workstream, the subcommittee published an annotated outline8 and sought specific comments on the selection of archetypes, including framework assessment and the scope of information provided. Following ongoing cooperation with the transfer pricing subcommittee, this workstream’s pursuit of the interaction between carbon taxes and carbon offsetting programs made progress.
Like previous workstreams, a published annotated outline delved into the topic.9 The same trend was observed in the fourth workstream, whose outline is divided into three sections:
carbon leakage and ways to address it;
CBAMs and proposals; and
potential responses to CBAMs.
The subcommittee sought comments and guidance from the UNTC on the published annotated outline.10 Finally, the work carried out in the additional workstream consisted of consultations with developing countries to determine environmental measures, such as taxes related to deforestation, water management, waste disposal, wastewater management, waste gas, and plastics. These were addressed in the workshop on carbon taxation and other environmental taxation held September 27-29, 2022, which had more than 200 participants.
Following the subcommittee’s presentation, participants raised the issue of addressing CBAMs as an environmental measure and their potential implications for developing countries. Participants clarified that the work being carried out neither endorses nor rejects this measure but is aimed at sensitizing developing countries to the matter, in the sense of providing information and not advice. Also, it has been pointed out that the subcommittee could consider emphasizing the objective of selecting certain broad archetypes as well as the interaction of carbon taxes with excise taxes. The subcommittee will continue the work on the mentioned workstreams, whose outcomes will be reported at the UNTC’s upcoming sessions and as stand-alone papers made publicly available after receiving UNTC approval.
Increasing Tax Transparency
The focus of the subcommittee’s work has been on identifying gaps in the standards on exchange of information (EOI) and measures on tax transparency in developing countries to be able to provide targeted support and solutions to the identified issues.11 Accordingly, a questionnaire has been developed to gather views from jurisdictions on the challenges they encountered in their efforts to increase tax transparency. The subcommittee discussed the questionnaire in light of feedback received in previous sessions during its internal meetings and identified a number of gaps.12
During the 25th session, some of the issues arising from questionnaire responses — such as the problem of different interpretations of foreseeable relevancy — that can harm and delay EOI among jurisdictions with different views were discussed. Moreover, the use of treaty EOI for nontax purposes is not available in some jurisdictions because of local legislation. The subcommittee is working to understand the potential design of legislation to address this problem. Also, the fact that some assets, like cryptoassets, and beneficial ownership information are not usually included in EOI procedures harms EOI effectiveness. Bureaucracy and legislative procedure can also cause delays for countries to obtain information from banks.
The subcommittee presented the gaps they have identified so far, including countries not having the same level of legislation and IT structure. There is a need for more guidance on how to address them. EOI guidance is not available in many languages, such as Spanish, and the step-by-step process to change from EOI to automatic EOI (AEOI) in developing countries is not available.
The practical challenges identified for implementing international standards of EOI include:
the required technology and database management system;
the lack of compliance with and enforcement of the standards;
the limited human resources available for countries to comply with the standards in the stipulated time; and
the need to strengthen capacity to improve compliance with EOI foreseeable relevancy.
The subcommittee decided to continue to work with the jurisdictions that responded to the questionnaire, but also to reach out to more jurisdictions and international organizations (such as the OECD’s Global Forum) to collect further information to identify gaps and challenges. It was also suggested that the subcommittee work closely with the subcommittee on digitalization of tax administrations.
Tax, Trade, and Investment Agreements
The subcommittee on the relationship between tax, trade, and investment agreements has divided its work into three workstreams:
guidance on the relationship between taxation and international investment agreements (IIAs);
evaluation of the relationship between tax treaties and the General Agreement on Trade in Services; and
other interactions between trade (or mixed trade) agreements, IIAs, and taxation.
The subcommittee is prioritizing the first workstream (IIAs). A more detailed overview of its status is provided in the co-coordinators’ report.13 The subcommittee is developing a paper focusing on the treatment of taxation in IIAs. The paper will:
identify key provisions of IIAs and the impact that some of these provisions have on taxation;
propose ways to address the overlaps between taxation and IIAs;
address how to avoid the unintended consequences on taxation;
provide some thoughts on the potential impact of ongoing international reforms; and
develop an integrated approach (between tax and investment experts) to address taxation in IIAs as well as identify methods for implementation.14
The report has yet to generate any conclusions.
Overall, the paper is focused on providing practical guidelines on how to handle these issues and will reveal the different ways in which overlaps between taxation and IIAs have been dealt with in different countries. The objective is to develop a useful source of information for tax policymakers and administrators that require information on this issue. The final aspect will discuss how tax officials should get involved in the overall process of developing the investment policy of a country and how their perspectives can be taken into account in the process. The subcommittee remains open to suggestions that may be helpful in the development of this paper. However, the expectation is that it will be completed soon.
Given the importance of international tax reforms for IIAs and investment policy, the U.N. Conference on Trade and Development (UNCTAD) has been evaluating the issue. The UNCTAD Bridgetown Covenant15 requested that the organization study international tax issues in the context of investment policy. In their roadmap toward better informing investment policymakers about the overlaps with taxation and the impact of international tax reform, UNCTAD has produced several key publications. These include the 201516 and 202217 world investment reports; the Investment Policy Framework for Sustainable Development;18 a guide on IIAs for tax policymakers;19 and the tax-related investor state dispute settlement tracker.20
The IIA-investment policy initiative has been based on the overall finding that investment policymakers and negotiators are not aware of the impact of international tax reforms. According to the World Investment Report 2022, UNCTAD’s annual investment promotion authority survey, carried out in the first quarter of 2022, indicated that more than one-third of respondents were not aware of international tax reforms, and only up to a quarter had begun to assess the implications.21
During UNCTAD’s October meeting of the Trade and Development Board — following a presentation of some of the issues concerning the pillar 2 proposals that affect investment policymakers — members requested the continuation of the work on taxation and an extension to technical assistance for investment policymakers. With support from the Vienna University Global Tax Policy Center, UNCTAD is preparing a guide for investment policymakers on tax treaties; a policy brief on the impact of international tax reform on special economic zones; and a review of the impact of regional trade agreements, with investment chapters.
Overall, there is greater recognition that the impact of IIAs and trade agreements on taxation measures is important. Tax disputes are being taken into these forums, and there is a need to acknowledge the implications. In particular, the challenge of the cost of investor state dispute settlements needs to be dealt with as tax authorities become increasingly reluctant to engage in arbitration.
Forum shopping, particularly for IIAs, is an issue that needs to be more explicitly addressed. This is because the definition of an investor and their investment does not limit the potential for investment treaty shopping. When complex webs are used to invest in a country, it is even more complicated to evaluate whether or not an investor should be entitled to the benefits contained in an IIA. If not, there is the possibility of domestic investment becoming disguised as foreign direct investment and for third-country foreigners to gain access to the benefits of an investment treaty. Finally, there is a need to begin updating the network of IIAs to bring the old generation into line with current needs and developments.
This subcommittee’s workplans are laid down in three main areas.22 Under workstream A, on energy transition, the subcommittee will focus on energy production (the supply side) while the subcommittee on environmental taxation focuses on energy consumption (the demand side). This will involve the development of a questionnaire to collect information from countries on their national goals and measures adopted for energy management. Though not final, the subcommittee is likely to take the archetypes approach to country reviews.
The newly renamed Workstream B on Trade Mispricing and Valuation of Natural Resources23 highlights the importance of correctly valuing natural resources because the process is vulnerable to mispricing and directly reflects the amount of tax revenue collected. Though valuation may seem relatively straightforward for extractives, it has been pointed out that arriving at a fair market value requires consideration of different factors, such as contract length, impurity levels, and transportation costs, which are likely to result in adjustments to the listed costs.
The presented workplan delves into the valuation of minerals along with oil and gas and aims to provide case studies on potential valuation approaches, with identification of their benefits and challenges. Like workstream A, information will be gathered from tax administrations and taxpayers via questionnaires. These will cover not only valuation of products but also a broader range of issues, such as transfer pricing in the natural resources sector.
Workstream C has been divided into two main areas. The first deals with tax incentives, focusing on the potential impact of the pillar 2 project on the extractives industry along with potential policy responses at the domestic level. In this context, the important role of incentives in the extractives industry, because of the nature of the projects and high capital cost, was highlighted. Greater analysis will be needed to address the interaction of the common incentives in extractives and the GLOBE rules and the impact on the effectiveness of the incentives.
The workplan will also look at the effect of both sunset and stabilization clauses that may limit a country’s ability to react to pillar 2 at the domestic level. Part 2 of workstream C involves analyzing the permanent establishment concept applicable to the extractives industry. The subcommittee will liaise with the subcommittee on the update of the U.N. model for potential updates to article 5 to take into account unique qualities of the extractives industry. These issues include the:
taxation of subcontractors;
delineation of activities;
taxation of extractive industry personnel;
taxation of service providers; and
taxation of management and technical services.
Ultimately, the project aims to provide options for updating the U.N. model. These include: a stand-alone extractive industry article, a self-standing extractives PE in article 5,24 and an extractives PE under article 5(3). Draft work on the update of the U.N. model was expected to be completed by the end of 2022, and the draft finalized in the spring session, following meetings with the UNTC. The upcoming work will be coordinated with both the transfer pricing and U.N. model subcommittees.
The extractives industry continues to be of great importance to the UNTC and to resource-rich developing countries. For the implementation of pillar 2, this presents an opportunity for rationalization of tax incentives countries adopted. Many participants cited this as an opportunity to determine whether tax incentives afforded within the extractives industry remain “fit for purpose.” This is in line with ongoing debate on the need to eliminate tax competition and the effectiveness of tax incentives.
Finally, concerns raised over sunset and stabilization clauses further highlight the need for a coordinated approach to trade, investment, and tax policy. An understanding of the interaction of these disciplines is important to ensure that none hinders the objectives of the others. The Vienna University Global Tax Policy Center and UNCTAD have published a guide for tax policymakers on investment provisions that could be referenced as countries consider the impact of stabilization clauses, and investment agreements in general, on domestic provisions they may introduce in response to pillar 2.
Digitalization of Tax Administrations
The work of this subcommittee is looking at the opportunities that digitalization is creating to improve the functioning of tax administration. Because a lot of work on this topic has also been conducted in other forums,25 the mandate of the subcommittees is to review this work and ensure that the group adds value by identifying gaps on which to focus. The group has three main workstreams:
development of a roadmap for the digitalization of revenue authorities;
provision of guidance on the data governance framework; and
provision of means of monitoring technological developments so that tax administrations can keep pace with business developments.
All three topics are part of a draft outline for the guide to digitalization the group presented at the meeting seeking the UNTC’s views and input. The roadmap to digitalization is expected to be developed by taking some countries as benchmarks and inviting them to present at the UNTC’s meetings to facilitate the collecting of useful case studies.
During the meeting, there was a discussion on the second workstream — data governance framework. Several UNTC members and observers focused on the importance of the legal and technological frameworks surrounding the rules on cross-border AEOI. It was argued that a reason that developing countries do not engage in AEOI is the lack of technical capacity to process the information (both inbound and outbound). Also, it was argued that the data protection standards surrounding EOI must not be too onerous, otherwise they risk preventing it. Because the OECD has done substantial work in this area, it was suggested that it might be useful for the UNTC to join the discussion. The key question is what data protection standards a developing country must meet to qualify for AEOI.
Participants said that a more efficient cross-border AEOI should also enable prepopulated tax returns that can take advantage of cross-border information, such as for passive income. In the same vein, some domestic tax treatment may depend on foreign tax treatment — for example, under a subject-to-tax clause — making effective AEOI key to domestic compliance. While it has been stated that the guide presented by the group is comprehensive, participants acknowledged that there are many challenges that still need to be addressed and overcome by the group.
For example, the guidance should include clear manuals to spell out what tax administrations need to do or change in their systems. Also, a main challenge is that few people have both IT and tax law knowledge skills to assist with the issue. Developing countries consider it challenging to hire people who can design and implement these systems, especially in non-English-speaking countries. Lastly, participants noted the legal challenges and the lack of trust and security faced by the systems.
The importance of data-gathering and storage was also a point of discussion during the meeting. The first step in the digitalization of any process is data generation, which is an issue that many developing countries struggle with because private parties refuse to provide complete data. This systemic resistance must be overcome. Data storage also raises problems. For example, damage control mechanisms should be put in place to protect against the possibility of the electronically stored data being destroyed.
The importance of aggregate data availability was emphasized in relation to the ability of tax administration to monitor the effectiveness of taxation and improve it continuously. It was pointed out that because aggregate data does not contain personal or commercially sensitive data, it does not necessarily need a high level of data protection. Participants suggested that it could be useful to create a list of observers to whom countries can turn for help with the implementation of data-related measures.
We believe that while one might doubt the added value of developing yet another full-scale digital roadmap, the subcommittee could make substantial contributions to key elements of a digital roadmap with which developing countries are particularly struggling. Data governance and availability are examples, as evident from the lengthy discussions of the issues during the meeting. It might be useful to distinguish between two governance frameworks from the onset — the domestic and the cross-border.
The domestic framework would encompass domestic data generation, applicable data protection rules, and contingency mechanisms in the event a data center is compromised or destroyed. When contemplating the improvement of domestic data generation, it might be useful to reflect on the role of intermediaries (for example, financial institutions, digital platforms, investment institutions, and so forth) as sources of high-quality data and the role of digital as opposed to cash payments in improving compliance.
Contingency mechanisms to protect against the tampering with or destruction of data might involve new decentralized technologies that prevent a single point of failure, such as blockchain technology. The data protection standards might at first appear to impede data collection, but at the same time they should be viewed as rules that increase the trust of private parties in the system: One is more likely to disclose data when strict rules are in place.
For international data flows, mainly under AEOI, one needs to point out that using information not only for tax enforcement but also for tax compliance purposes (for example, prepopulated tax returns) might be challenging because of timing differences — for example, the AEOI is often not in real time but months after the relevant fiscal period in which the item of income should have been reported.
Digitalized and Globalized Economy
The work of this subcommittee focuses on two main workstreams. Workstream A is considering options for a new type of instrument to more efficiently implement the relevant provisions of the U.N. model into bilateral treaties. Workstream B relates to the function and relevance of the physical presence test and the necessity of a PE in the digitalized economy.
The focus of discussion during the session was the work carried out under workstream A. A “fast-track instrument” was presented as a potential option for implementing article 12B of the U.N. model and a limited number of other provisions, such as article 12A of the U.N. model, or a subject-to-tax rule. The idea is to strongly support a multilateral form when implementing new provisions, instead of proceeding to renegotiate bilateral tax treaties when a mutually agreed solution for updating old tax treaties is available.
The subcommittee’s initial proposal is that the instrument include the main text containing the provisions on how the instrument would operate, accompanied by one (or more) protocols addressing the substantive amendment of the existing bilateral treaties. This structure is expected to provide a framework within which each substantive change can be inserted in a separate protocol that deals only with that change. Thus, for example, if a country supports the inclusion of article 12A in its treaties, it would sign the main text of the instrument plus its first protocol. If it agrees to article 12B, then it would sign the second protocol. The country would then identify the treaty partners with whom they could agree to insert specific articles.
While members welcomed the idea, some concerns have been raised. Participants felt that it might be easier to start with less contentious provisions then articles 12A and 12B. Also, it is important to achieve a balance between optionality, workable provisions, and reducing the scope for bilateral negotiations. The instrument must also be capable of working with different languages and legal systems, be as simple as possible, be flexible, and build upon knowledge related to multilateral instruments.
Some participants pointed out that discussion on the topic should await political commitment. Several concerns were raised about moving the work forward. Participants said that there are old treaties in their network that are difficult to update because they do not follow any particular model. Moreover, there is the concern that by signing a protocol, countries might be tempted to enter into negotiations on multiple treaty provisions — a situation that is not very different from normal bilateral treaty negotiations. This would reduce the value added of the new structure. Some countries may also have constitutional constraints on ratifying blank protocols that later go into bilateral memorandums.
On the other hand, it has been suggested that work on the instrument should start and that countries may come around gradually. This is a new framework, and it is normal that countries are apprehensive at first. The BEPS MLI, for example, was covered in skepticism at the beginning. Thus, there is the idea that the work should not go forward on the basis of how many countries are on board, but rather on the basis that it is valid to continue exploring because if not pushed forward, countries might take more drastic measures, such as terminating a treaty.
A more nuanced question expressed was whether there is really a need to prioritize between both workstreams, or whether it would be better to deal with the issues more slowly and instead first tackle the more fundamental question of the attribution of taxing rights.
The subcommittee signaled it will continue its work on the development of an instrument to facilitate the adoption of relevant provisions in developing countries’ treaty networks, taking the comments into consideration.
We find the division between workstreams A and B helpful because workstream B deals with a more difficult and fundamental question (necessity of a PE test) that requires not only conceptual analysis but also a significant shift in the political endorsement for going forward. At the same time, workstream A proposes a conceptual framework that could be contentious — if the provisions to be amended are contentious themselves, such as article 12A or 12B of the U.N. model — but this does not have to be the case. The proposed instrument can very well serve as a fast-track, institutionalized instrument for amending and updating provisions.
For instance, there are numerous double tax treaties that are dated or have been concluded at a time when the socioeconomic conditions in a country were different (for example, treaties with Eastern European countries from before the fall of communism). Both treaty partners likely now adhere to new models but reopening full-scale treaty negotiations is not desirable. In these circumstances the proposed instrument might be used for making banal changes such as introducing an explicit beneficial ownership requirement to a passive income provision that does not contain one. There is the potential for significant added value from this kind of instrument that goes well beyond the added value of the sum of the treaty changes it would achieve. If such a fast-track instrument is deployed, it would create a significant treaty amendment forum within the U.N. framework, thereby shifting away some of the decision-making influence from the OECD.
The subcommittee presented three reports at this session. First, it presented the co-coordinators’ report,26 according to which the subcommittee has been working on the outline of the U.N. handbook on health taxes, to address concerns of both tax policy experts and health policy experts. Second, the subcommittee presented a note on chapter 4 of the U.N. handbook,27 which introduces the framework for designing health taxes. The goal is to integrate health taxes into the tax policy framework. It also introduces a number of concepts that are important for subsequent chapters.
Third, it presented the note on Draft Outlines of Additional Chapters,28 which includes draft outlines of the following chapters:
Chapter 2, “An Introduction for Policymakers: Looking at Health Taxes Through Different Lenses,” provides a high-level introduction to this topic through the views of different officials. It is directed at ministers of finance and ministers of health and includes explanations from a health tax expert for the former and a fiscal policy expert for the latter.
Chapter 5, “Setting the Health Tax Structure and Rate,” details guidance for those who will design health taxes. It includes a detailed explanation of considerations that should be taken into account — for example, how to structure the tax and a discussion of rates.
Chapter 6, “Health Taxes: Revenue Use,” discusses the use of revenue generated by a health tax because there may be different views. For example, the minister of health may want to earmark the revenue for health, but the minister of finance may not endorse the idea of earmarking.
Chapter 7, “Administering Health Taxes,” sets guidance on administrative issues, focusing on the fact that policy options are limited by what can be administered.
The subcommittee requested comments from the UNTC to be included when redrafting chapter 4 and drafting chapters 2, 5, 6, and 7. Further, it says that chapter 4 will be presented for approval at the upcoming session and draft submission of other chapters are expected in 2023.
Overall, participants praised the work carried out by the subcommittee and provided feedback. There were suggestions for the work to include policy options for states to help counter resistance to common issues such as taxes on tobacco, alcohol, and sugary drinks, and to take into account the regulatory framework. However, some members expressed concerns that putting too much emphasis on excise taxes may increase the risk of illicit trade. It was also suggested that not only taxes are collected in relation to health, but social security collection, for example, goes to health treatment. This affects the governmental budget and should be reflected in the guidance.
Moreover, it was suggested that the subcommittee include considerations in chapter 4 on potential issues of discrimination under the WTO framework when designing the tax. Participants also recommended to consider differences among developing countries, because imposing more taxes on lower-income people could be extremely harmful in some cases. The subcommittee acknowledged the concern but mentioned that in light of the sustainable developmental goals this is work that needs to be undertaken.
Tax and the Sustainable Development Goals
The link between sustainable development goals (SDGs) and taxation was a recurrent topic during all subcommittee discussions. Tax systems play an important role in SDGs, not only because they assist countries in raising revenues to finance sustainable growth, but they can also help reduce inequalities, promote inclusive growth, and mobilize domestic resources. However, developing countries do not always have the capacity to meet the technical needs of the tax arena.
The UNTC should be able to enable developing countries to meet the SDGs. One way is direct, expanding health, wealth, and environmental taxes. However, it is also important to understand how tax collection is relevant for jurisdictions to mobilize resources and reduce inequality. A key issue depriving domestic resource mobilization in developing countries and undermining their efforts to achieve the SDGs is illicit financial flows. Subcommittee participants said that to fight this problem, it is important to first analyze how technology can help through, for example, the use of block chain, AI, and machine learning.
Second, attention should be drawn to the key role that interagency cooperation plays. To be able to fight illicit financial flows, there must be cooperation between tax administrations, financial intelligence, central banks, exchange control departments, customs, the finance and justice ministries, among others. They must come together and develop a comprehensive cooperative work structure. Also, a question has been raised whether, with the existing tax rules, developing countries are able to get their fair share of taxation and mobilize domestic resources to achieve the SDGs.
The UNTC will continue to work on the topic to address the identified challenges and assist countries in the development of fair and effective tax systems domestically and internationally while also strengthening global cooperation for achieving the SDGs.
Wealth and Solidarity Taxes
The UNTC presented, and sought comments on, an expanded outline for a paper on the advantages and disadvantages of wealth taxes and available alternatives.29 During discussions, members suggested expansion of the scope to include the informal sector, treatment of assets held in foundations without profit-making purpose, and the treatment of art objects used as a way of saving money. It was also suggested that the paper consider the capacity of tax administrations to correctly identify and value assets. Other inputs included a call to take a balanced approach to the paper, considering on the one hand the objectives of the paper such as avoiding double taxation, and on the other hand aligning taxation internationally. The UNTC will provide elements to be included in the model legislation as an annex.
Wealth taxes present an opportunity to:
raise revenue needed to achieve SDGs;
mitigate growing wealth inequality; and
capture income sources not taxed.30
Whether this or an alternative policy is the correct approach continues to be a subject of debate, and the UNTC position is likely to be published with the proposed paper.
In relation to cryptoassets, no report has been presented for the 25th session. According to the subcommittee, it has been decided that cryptoassets is not an urgent topic, especially for developing countries. Moreover, recent developments on the matter have posed some difficulties for the subcommittee to provide an overview of the major issues on taxation of these assets for developing countries.
However, the subcommittee stressed that they are following the issues and are in contact with experts on the topic. To be able to make the topic accessible to all the members, the subcommittee proposed presenting a paper at the 26th session of the UNTC. The paper will analyze the issues and identify the most pressing for developing countries, as well as assess the potential role of the UNTC in helping.
Dispute Avoidance and Resolution
Similarly, no substantial paper on dispute avoidance and resolution has been presented at the 25th session.31 The subcommittee decided to adopt a “wait and see” approach to analyze what other forums are doing in relation to tax certainty, and then identify the issues and proceed with its own work. It was pointed out at the meeting that other subcommittees are producing guidance that could be coordinated with this subcommittee, such as the dispute resolution under advance pricing agreements. Also, participants urged the subcommittee to speed up the production of a guideline on the topic, because developing countries have faced relevant disputes with major countries and do not have guidance to assist them.
Negotiation of Bilateral Tax Treaties Manual
The subcommittee presented three notes at the 25th session. First, it presented the co-coordinators’ report,32 in which it is announced that the subcommittee will focus its work on making substantive changes in the manual to reflect the changes to the 2021 U.N. model. Therefore, the manual includes the following changes:
the addition of article 12B;
the gains from offshore indirect transfers;
insertion of the minority view on the inclusion of payments for computer software in the definition of royalties;
revised beneficial ownership language and other technical changes to section on article 10 of the U.N. model; and
provisions on collective investment vehicles and pension funds.
Second, the subcommittee presented the note on the Proposed Substantive Changes to the Manual,33 including those proposed as a result of changes to the text of the 2021 U.N. model. It has been clarified that the subcommittee hopes to provide a draft of the entire manual, with editorial changes, before the 26th session of the UNTC. Even though the subcommittee asked for comments from the UNTC on the proposed drafting of these substantive changes, no suggestions have been made during the meeting. The secretary pointed out that draft suggestions can be made in writing later.
Finally, the subcommittee presented the note on the proposed guidance on conducting tax treaty negotiations by videoconference.34 The subcommittee explained that the idea behind the manual is to express a strong view in favor of in-person negotiations whenever possible. However, it acknowledged the arguments in favor of conducting more negotiations by videoconference. The paper deals with various logistical issues to be addressed and stresses the importance of memorializing the results of the discussions through agreed minutes between the relevant parties.
Participants endorsed expressing strong support for physical meetings, because virtual meetings are helpful and necessary but may pose some difficulties in some situations and for concluding negotiations. Others asked that the merits of virtual meetings be included in the guidance — for example, the fact that they can be very flexible and allow negotiators to meet more frequently and for longer times. This can help to find solutions and conclude treaties. Another advantage raised from virtual meetings is having a better opportunity to train future negotiators, which is difficult in terms of resources in physical meetings.
The subcommittee then invited the UNTC to discuss the substantive guidance provided in the report and decide whether this guidance should be issued as a UNTC guidance and, if so, whether it should be issued in this stand-alone form or wait until the next revision of the manual after 2023.
This was the first physical meeting of the newly composed UNTC, and it provided an opportunity for members to review progress by the different subcommittees. Following intensive and constructive discussions, several critical issues that require action from the subcommittee’s mandates were highlighted.
First, for international investment agreements, forum shopping needs to be kept as a high priority. To mitigate it, similar to the approach adopted by tax treaties, it may be necessary that investors be required to meet specific criteria to gain access to the benefits of an investment agreement. Countries also need to update international investment agreements in accordance with developments of the world economy.
Also, the work being carried out by the UNTC reverberates with the future implementation of the pillar 2 project, offering an opportunity for the UNTC to offer guidance on specific topics. For example, work on the impact of the GLOBE rules on tax incentives offered by countries in the extractives industry sector provides an opportunity for rationalization of incentives and presenting policy response options in light of GLOBE rules.
Further, UNTC work on the digitization of tax administrations, particularly in relation to the development of a digital road map for tax authorities, could streamline and simplify data governance within these public bodies. In relation to the comprehensive topic of the digitized and globalized economy, the distinction of the workstreams pursued by the subcommittee should be highlighted and welcomed. While one of them deals with a fast-track instrument for implementation of relevant provisions of the U.N. model, the other addresses the fundamental question of the need for a PE test. As the latter could require a significant shift in political endorsement to proceed, its detachment from the other workstream prevents any potential negative effects from a lack of political will.
The UNTC recognizes that it has an ambitious agenda but felt that with support from governments, business, and academics, it would be able to fulfill its ambitious mandate.
1 G.A. Res. 70/1, U.N. Doc. A/RES/70/1 (Oct. 21, 2015).
2 UNTC, “Proposal for the Inclusion of a General ‘Subject to Tax’ Rule in the United Nations Model Double Taxation Convention Between Developed and Developing Countries,” E/C.18/2022/CRP.23 (Oct. 3, 2022); and UNTC, “The Inclusion of Computer Software in the Definition of Royalties,” E/C.18/2022/CRP.24 (Oct. 3, 2022).
4 For instance, within the process of planting and harvesting crops or trees.
5 Namely, accurate delineation of the transaction, recognition of the transaction, and selection and application of the most appropriate transfer pricing method.
6 See UNTC, “Environmental Taxation: Co-Coordinators’ Report,” E/C.18/2022/CRP20, at 9 et seq. (Oct. 3, 2022).
7 U.N., United Nations Handbook on Carbon Taxation for Developing Countries (2021).
8 Id. at 23 et seq.
9 Id. at 30 et seq.
10 Id. at 35 et seq.
11 See UNTC, “Increasing Tax Transparency: Co-Coordinators’ Report,” E/C.18/2022/CRP.32 (Oct. 12, 2022).
12 Id. at 3-4.
13 UNTC, “Relationship of Tax, Trade and Investment Agreements: Co-Coordinators’ Report,” E/C.18/2022/CRP.18 (Oct. 6, 2022).
15 UNCTAD, “Bridgetown Covenant: From Inequality and Vulnerability to Prosperity for All,” TD/541/Add.2 (Nov. 10, 2021).
18 UNCTAD, Investment Policy Framework for Sustainable Development (2015).
20 UNCTAD, “Facts on Investor-State Arbitrations in 2021: With a Special Focus on Tax-Related ISDS Cases,” 1 IIA Issues Note (July 2022).
21 See 2022 UNCTAD report, supra note 17.
22 See UNTC, “Taxation of the Extractive Industries: Co-Coordinators’ Report,” E/C/18/2022/CRP35 (Oct. 7, 2022).
23 Formerly named Workstream B on Undervaluation of Natural Resources.
24 With the option for countries agreeing on lower time thresholds.
25 See, among others, OECD, “Tax Administration 3.0: The Digital Transformation of Tax Administration,” Forum on Tax Administration (2020); Asian Developmental Bank, “Launching a Digital Tax Administration Transformation: What You Need to Know” (May 2022); Jae-jin Kim et al., “A Roadmap for Digitalization of Tax Systems: Lessons From Korea,” Inter-American Developmental Bank (2022).
27 See UNTC, “Health Taxes: Proposed United Nations Handbook on Health Taxes for Developing Countries Chapter 4 — General Issues in Designing Health Taxes,” E/C.18/2022/CRP.30 (Oct. 3, 2022).
28 See UNTC, “Health Taxes: Proposed United Nations Handbook on Health Taxes for Developing Countries Draft Outlines of Additional Chapters,” E/C.18/2022/CRP.31 (Oct. 4, 2022).
31 The subcommittee only presented a paper for update purposes. See UNTC, “Dispute Avoidance & Resolution: Co-Coordinators’ Report,” E/C.18/2022/CRP.34 (Oct. 6, 2022).
32 See UNTC, “Update of the United Nations Manual for the Negotiation of Bilateral Tax Treaties Between Developed and Developing Countries: Co-Coordinators’ Report,” E/C.18/2022/CRP.25 (Oct. 4, 2022).
33 See UNTC, “Update of the United Nations Manual for the Negotiation of Bilateral Tax Treaties Between Developed and Developing Countries: Proposed Substantive Changes to the Manual for Negotiation of Bilateral Tax Treaties Between Developed and Developing Countries,” E/C.18/2022/CRP.26 (Oct. 3, 2022).