ATAF has published a technical review of the proposed Article 12B of the UN Model.
Interesting because, if more African countries introduce digital services taxes (and ATAF recommends that they do), then these will have to work in tandem with any applicable treaty provision on automated digital services.
And, as the UN Model draft provision is the only such treaty provision on the table at the moment (albeit still in draft form), it’s worth the extra attention it’s getting from all quarters.
Several points in the ATAF document, but this one stood out for me: ATAF cautions that the scope of the UN Model draft provision is much narrower than what ATAF has been recommending for African countries. The proposed Article 12B applies only where there is a payment from the source country to the residence country (i.e. the country where the automated service provider is resident).
ATAF points out that, where the automated digital service is supplied free to a user in a market jurisdiction, the proposed Article 12B would not apply. This could happen, for example, where the service is provided for free to users within a particular jurisdiction, and the payment (to the service provider) comes in the form of advertising revenue, for example, from a third party in another jurisdiction.
The proposed Article 12B concerns itself only with the existence of a payment for automated digital services, seeks to identify the jurisdiction where that payment is sourced, and allocates the taxing right between that (source) jurisdiction, and the jurisdiction where the service provider is resident.
However, ATAF recommends a much broader approach. It recommends that countries levy digital services taxes based on ‘user participation’. Under this approach, a country would levy the tax if there were users of the service within its jurisdiction, even if those users are not themselves paying for the service. ATAF points to the value (to the service provider) created by user participation, together with the attendant network effects. ATAF insists that countries should be able to tax such value streams, irrespective of whether the revenues come from the users themselves.
Solid point, but again, that brings us to the issue of implementation. Levying a tax on the basis of user participation would be horrendously difficult. Those complexities have already been seen in more developed countries (see, for example, the discussions around the UK Digital Services Tax). We can expect the Africa situation to be even more challenging. Against that backdrop, the draft Article 12B approach appears a more realistic way.
You can access the ATAF document here.