UN Transcripts — https://transcripts.un.org/en/asset/k13/k133yfcwis
(11th meeting) Intergovernmental Negotiating Committee on the United Nations Framework Convention on International Tax Cooperation - Fourth Session — Economic and Social Council — 10 February 2026
Language: en
Automatically generated transcript — may contain errors. Not an official United Nations record.

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Co-Lead · Rami [0:04]:

So now we are starting by continuing our discussion for work stream 2 protocol 1. Yesterday we ended up with the slides that we have in the screen right now. We were left with some stakeholders who were asking for the floor and we finished because of the time, because after six we lose the interpretation and also mics.

So we stopped there yesterday. Now I think we're going to resume the floor for the stakeholders on this slide. Then it's up to the CO lead how she would like to move forward with the next slides.

So now I'm handing over the floor to the CO lead Lisa to start the discussions over to you.


Co-Lead · Lisa [0:50]:

Thank you very much. Rami. Yes, good morning and welcome.

And we had agreed with interested parties that if we did start earlier than yesterday we could have a coffee break. So that's why we are now starting. We need a coffee break.

We had finished the discussion by members and we had opened the floor for stakeholders on the issue of Nexus. And I would like to suggest that we after the stakeholder we open the floor again for members to come back on Nexus. I think that the positive thing with being together is that you can talk things over, you listen to what other has said. That's the point of why we are sort of expressing our opinions is to hear what others think and reflect on that. And that's why we want coffee breaks as well.

Because over coffee breaks one can sort of discuss and get a little bit more insights into different solutions that we would like to hear from you, your views on. So I will open the floor again of course to those of you who want to give us sort of your views on Nexus. I see now my, I have three stakeholders on the screen. I will start with stake, stakeholder four, which I think is Bombay Chartered Accountant Society. Is that still the case?

Yeah. Okay. Welcome, please go ahead.


Bombay Chartered Accountant Society · Stakeholder [2:27]:

Thank you. Chair.

My yesterday's intervention was about, you know, how with a minor tweak in the domestic law, countries can still levy taxes on digital services. Now today I'm going to speak on the. What's the, what's there on the screen? So the first question, you know, is there a support for differentiation of type of services? I would say that's not advisable.

That's only going to increase the litigation. What is done manually today or in a hybrid fashion can certainly be done hundred percent automatic tomorrow without years to come. Again, what is the level of human intervention? How are you going to measure it? Can there be a separate parameter thresholds for different kind of services?

That's, you know, that's, that's that's going to be a very difficult thing to do. Again, when we look at the provisions like let's say we speak about article or royalties, okay, this article doesn't give me a separate rate for copyright of a literary work, for a copyright of artistic work. It doesn't give me a separate tax rate for patent or a separate for trademark. So only one rate is given. So I would say one single rate may be sufficient as against giving multiple rates.

If multiple rates are given and if the differentials are done, it will certainly help our community, the consultants and the chartered accountants and the lawyers, because that will increase the litigation. Next question on the level of nexus or the parameter for nexus. I would say we may want to draw some analogy from the existing articles. Article 10, 1112, where the location of the payor is the primary nexus and then physical presence is the secondary nexus. So the source country gets a taxing right with a cap on the taxing right.

If there's a payer situated there and if the non resident has a P, then it gets a kind of unlimited taxing rate on a net basis. We may probably want to continue the same structure for the purpose of services as well. And if we are to think of a secondary nexus, you know, instead of talking about P, we can talk about, we can take significant economic presence as a second parameter. So the way the article may flow is that if a payer is resident in developing country, that country gets a taxing right. If the service provider also has a significant economic presence, the payer country gets a higher taxing rights.

That may be the two layers of nexus we can consider.

So we have started this journey in a particular fashion by looking at the COVID rate, by looking at the nexus. If I have to visualize how ultimately this work will kind of look like at the end of it, the protocol to my mind may substantially look like article 1112 or 12B. So another approach could be that, well, we start with Article 12B on the screen and request people to comment. Are they happy with that or they want to change something? Thank you very much.


Co-Lead · Lisa [5:51]:

Thank you very much for that input. I do know that it's going to be difficult, but don't underestimate this group. We have a lot of very bright people here. So thank you for that input. We have stakeholder three, which is the ibfd.


Speaker 5 [6:09]:

Please go ahead.


IBFD · Stakeholder [6:11]:

Thank you Khalid for giving me the floor. I will not speed attempting to propose a solution, but just for the food for thought here. So since we all recognize that it is within the sovereignty of Every state to reintroduce whatever nexus it feels it should have. And what we are focusing here is the interaction of those rules in a cross border setting and how we recognize those nexus rules within the given standards we have now.

I think there needs to be appropriate coordination when it comes to this. Still keeping in mind that we are trying to foster cross border trade and investment and so particularly the removal of the barriers to this. And so a lot of my comments will be focused around elimination or double taxation. I think one key thing we should keep in mind is establishing and maintaining neutrality in the treatment of both traditional business models with digital economy models. So even when I hear about the introduction of separate nexus rules, I feel that then even if we consider still retaining the physical presence of nexus rules, there needs to be some form of moderation, even if we reduce the triggers to ensure that the outcome is similar of what triggers taxation in the source state.

So neutrality is also very essential in when we start thinking of defining or introducing new rules.

So I've heard a lot of discussions around categorization and just like the previous speaker, that also has its problems because then upon one what parameter would we and I think it's been established and recognized widely that we do not want to ring fence the digital economy because all industries are affected by it. And if, if we are looking for future proof rules then we should somewhat accommodate the fact that how all businesses operate would change eventually.

So different nexuses I believe has its own difficulties which needs to also be considered in this platform. One of them is if we recognize multiple nexus rules, especially establishing a source it, then we have to think along the lines of how we create a hierarchy of these roles, eventually ensuring that there is allocation of taxing rights to eliminate double taxation. And so how we would establish that hierarchy is something that needs to be thought about. We need to know that the current rules we have looked mostly in a residence source state situation, but in a situation where we have a source state sourced state situation, then we have to think and rethink on who has the obligation to eliminate double taxation there and how we prioritize these rules. So I feel that we need to look at it in context of Article 5, where we are trying to establish a fair allocation of taxing rights, not just for the allocation of taxing rights, but to ensure that there is a fair share of tax that is given to each jurisdiction that is involved.

And so I believe everyone involved in this context should have the availability of exercising any residual taxing rights they might have and ensuring that there is some revenue they can gain from whatever standards that are being established. There was also discussion yesterday about Article 7 and I think the concept of value creation came up multiple times.

There was an interesting comment that came up from the floor where we can instead of doing an overhaul, maybe modify what we believe this concept represents whereby we look at both the supply and demand sides of a transaction, looking at both production and sale activities as value adding. And then because the theory is, or I believe the justification is that if you create activities and products and you sell them without selling them, there is no value addition to the business. So without revenue being generated which is represented through profits, that we have to look at the whole cycle of production until sale to actually see that value has been created in totality. So I think this is something that could also be looked at just to see if that is a route we would like to go through. But there is also the issues that it brings on its own.


IBFD · Stakeholder · Ibifti [11:38]:

Still keeping the concept if we have all agreed also that it is outdated and it's not reflective of modern realities. So these are just a few things that I thought of and I think it would be interesting to see how the further deliberated on when we are developing these rules. Thank you.


Co-Lead · Lisa [12:01]:

Thank you very much Ibifti. That was very helpful.

Interesting. And you know we are in unchartered technological economies that sort of develop very quickly and we do need input from all of you to think about these things properly. So I thank you for that input. I have ataf now. Please go ahead.


ATAF · Stakeholder [12:26]:

Thank you Khalid and good morning delegates. Our intervention today is a follow up to the intervention we made yesterday when you asked the question about the need for differentiation of the services. And in our intervention we did mention that it is important that we take a differentiated approach. And that's because we're definitely going to have to think about different nexus factors for the different categories of services.

And now to the specific question on the nexus factors. We want to begin by aligning our submission this morning to the comments made yesterday by Nigeria on behalf of Africa Group and of course similar delegates that came from, I mean similar comments that came from the floor in relation to the the same issue. We listened carefully to submissions made yesterday and we noted strong emphasis on the physical presence tests. And we wanted to submit that we are concerned if we overemphasize or overrate these kind of tests then we will not be addressing the very issues that brought us here. And therefore we need really to go beyond the physical presence test.

That doesn't mean it's not Important, but it's really important that we go beyond the physical presence test. I think from what we see within our membership, there are certain tax treaties that contains fees for technical services or some described as management fees articles in the treaty. But the test to get taxing rights over withholding tax is largely a physical test, which means that the non residents will have to perform those services in the jurisdiction for that jurisdiction to have taxing rights. And it is those kind of provisions that we see in the treaty that obviously been concerning. And so we need to go beyond that kind of test, particularly now in a digitalized globalized environment.

And that's also the main reason why also the Model Convention, in particular the UN Model Convention, goes beyond that test and locates the payer in a jurisdiction. As long as the payments arise in a jurisdiction, then there is taxing rights in that jurisdiction. And for that reason we want to strongly emphasize that we still need to use the payment or appear in a jurisdiction as an important nexus factor. Definitely. In addition to other factors, in particular the location of users and for the location of users, I think we had very good comments yesterday by various delegations why that is important and just to illustrate, I think a common example is seen where you got highly digitalized businesses generating significant online advertising revenues.

But the way those revenues are generated, they could be generated from a jurisdiction A, but actually it's the advertiser in that jurisdiction targeting users in a jurisdiction B. And so we want to go beyond where the payments has come from in that kind of an example and look through to the jurisdiction where the users of those, where those adverts are viewed as the location for the taxing rights. And so we want to strongly recommend that in addition to payments, also location of users be considered, particularly in case of ads and similar services. We also had some comments proposing to have some thresholds would strongly oppose those views. We don't think it's a good idea, at least not at this stage.

We should first look at what works in terms of granting taxing right as appropriate factors. Then after that, if there is need, we'll consider the threshold at a later stage. But for now we don't think it's a good idea to talk about thresholds at this juncture.


Co-Lead · Lisa [16:55]:

Thank you, thank you very much for that input.

I think I can say, and unless I'm incorrect and then I stand to be corrected, we are looking at physical presence, but we are not under or overestimating it. We are looking at definitely more than physical presence. That's the reason we're Here so just to make that clear, I have Ghana a member that has asked for the floor so please go ahead. Ghana


Ghana [17:33]:

Madam Chair

Ghana alliance with African Group's proposal that nexus should be based on payment or remittance based triggers market engagement and permanent establishment and fiscal presence.

Madam Colleague regarding permanent establishment and fiscal

establishment Ghana law defines Ghana Ghanaian permanent establishment as a place where a non resident carries on a business substantial equipment of machinery in Ghana construction, assembly or installation project greater or equal to 90 days service provision in Ghana agent activities on behalf of non residential. The definition captures various business activities providing clarity on Ghana's understanding of permanent establishment and physical presence. Madam Kohlid Ghana law distinguish between government payment where the payment source triggers tax regardless of where the services are rendered and then payment by other entities where services must be rendered in Ghana to trigger tax. While tax neutrality is a consideration, Ghana believes clear rules are needed to protect public funds and recognize government's role in generating economic activities.

Ghana therefore supports a mixed nexus medal in response to the questions the specific questions Ghana responds as follows. Question 1 Is there a support for providing different tax rules for different tax types of services? Ghana says yes. Ghana supports different nexus rules reflecting services

nature and payer types. For question 2 are the proposed approaches in section 3b appropriate? Ghana supports a combination of physical presence and permanent establishment for traditional services, user allocation and significant economic interaction for digital services reflecting the African Group's focus on market engagement, payment remittance triggers for government payments and market engagement. Then question three Are there other proposed nexus rules Ghana supports Considering payment source as per government payment and then user allocation and significant economic interaction aligning with African Group's proposal.

Thank you Madam colleague.


IAHWG · Co-Chair [20:43]:

Thank you very much for that input Ghana. We come back to stakeholders and I have icc. Please go ahead ICC


ICC · Stakeholder [20:53]:

thank you Madam Kholid and good morning delegates.

As it's the first time that I'm taking the floor in this session, let me congratulate on the efforts of you and the delegates that have participated in the work of Work Stream 2 on behalf of ICC and its global membership. I. I would like to agree with the numerous contributions from delegates yesterday in the room on the continued importance of physical presence and the permanent establishment rules as a relevant nexus for services.

Any adds on on nexus as was stated by some delegates will need to be economically assessed. We continue to encourage the economic impact of any proposed solution under this protocol including gross basis revolving taxes should be carefully analyzed. The solution risk otherwise having detrimental effect on trade and investment.

In this regard I would like to highlight a recent independent study that ICC has commissioned to Oxford Economics which shows that the revenues expected to be raised by, for instance Article 12 in the Global south, whether applied through treaties or as a domestic measure in the absence of treaties, would be entirely offset by the negative effects on trade and investment. The result is a net fiscal loss of 241 US million dollar per year by the Global South.

This study was shared with all permanent missions last week as well as with the INC email address, together with an invitation to attend a side event last week where the Associate Director of Oxford Economics, who led the team of economists working on this study, has presented the findings here at the un. The event was web streamed and the recording is available to ensure full access to the analysis to everyone here in New York or backing capital. We hope this study can help inform the discussions on this protocol and that

any solutions developed will be accompanied by a thorough economic assessment. Finally, we agree with the importance of addressing multiple taxation issues as also raised by delegates yesterday.


Co-Lead · Lisa [22:44]:

Thank you, thank you very much icc. I don't have any other hands raised for the moment. I would invite those who want to come back on the issue of Nexus in general.

You're very welcome to do that now. In particular, I would like perhaps to also open the floor to those of you who yesterday said that they wanted to come back to taxes covered once we had discussed the access and if they have any comments now, they'd be very welcome to do that.

The idea was that having reflected on inputs, if there are any changes that you want to address, you want to comment on, you're very welcome to do that.

Wait a little bit to see if anyone feels Nexus rules of course is fundamental to the work and we need to take advantage of being here together to listen to each other. So hopefully you can make some comments. Thank you India. Please go ahead India.


India [24:09]:

Thank you Madam Kholid and I would like to thank all the delegates of the member states and as also of the the civil society who have contributed to this discussion.

Yesterday we heard a lot of discussions around the room saying that we should have different Nexus rules and in general it appeared that there was agreement around that. Now, while that is that's something that is acceptable to all, the question is that how many kinds of classification or classes of cases do we see in this scenario right now in the slide that is displayed on the screen there seem to be two buckets of cases, one in which there is a possibility of a physical, physical presence. This is the more traditional PE style concept. And then there is the others which do not fall within the physical concept, physical presence concept. Yesterday, I think it was the distinguished delegate from Jamaica who mentioned that this issue is largely connected to the matter of fair allocation of taxing rights.

And there was also a discussion around value creation. And I think it was the distinguished delegate of Kenya who said that value creation is something that is driven both by demand and supply. And we agree with all this. And in that light, this is a thought that we have, which we open to discussion. We believe that there are four tiers, four classes of cases that live in this world of service providers.

One is the tier one or the first categories, where physical presence, the nexus of physical presence is very clear. Services that involve construction, installation, maintenance. This is the traditional physical services that physically deployed services that we have all known for there the physical nexus has been tested over time. It has served its purpose.

And then we go on to the other classes of cases which do not always, which are not served by the physical presence nexus. Now these are cases where the second class of cases are where services are delivered remotely. But in the jurisdiction from which they are delivered, there is a very strong human intervention. A simple example is of a software development entity residing in India and providing services to either its affiliate or a customer in Chile. And in the.

And the company in India would be a resident Indian company. It would have a large workforce, a physically present workforce. It would be subject to corporate tax in India. And I can say, at least from an Indian experience and experience of countries like India, Many, at least 3/4 of these entities, or even more, would even be subject to transfer pricing rules. So when there were these concerns regarding profit shifting and base erosion, many of these entities actually maintain documentation.

They answer questions and they answer those standards. We may have issues around that standard, but the point is that these entities are subject to transfer pricing rules. So that's one class of cases. Now, at this stage, what we are trying to do is just to list out the kind of classes of cases. We are not getting into the discussion as to what should be the taxation model.

That is something that we will come to later. The next class of cases are those where the services are delivered remotely. And actually there is very little human intervention. It could be streaming services, cloud computing services, online advertising, social media, search engines. These are the cases where services are delivered remotely and they don't have a very strong physical presence in the country from which it is delivered.

These are absolutely automated services. And finally, the fourth tier of cases are the digital platforms, the intermediaries. They could be your cab services, your food ordering services, the other GIG services. Now we believe that each of these tiers, or they could be more, there could be less, there could be a combination of these, they deserve attention. Some of these are B2C services, some of these are B2B services.

They have different levels of different kinds of remuneration. And in the context of value creation, maybe when we think of how do we tax the services that these entities are rendering in the jurisdiction in which these services are consumed, it would also be useful as to examine as to what is the appropriate remuneration model for these services. There are service providers in this value chain who are market facing and there are some others who are not market facing. So are we going to treat them just the same or are we going to treat them differently? So these are some of the thoughts that came to our mind and we admit that it's not fully, it's probably not thought out as much as it should have been, but it's something that came to our minds from the discussion that came yesterday.

But we believe that these are important matters and we invite suggestions and discussion on this matter. Thank you.


Co-Lead · Lisa [30:25]:

Thank you very much. India. Yes, absolutely.

I agree with you that that was very helpful and I think.

The little gray cell starts to work. It's early and we can use and move on these ideas that you've of mentioned and that's very helpful. Italy, please go ahead.


Italy [30:55]:

Thank you Chair. I would like to thank also our esteemed colleagues from India that really gave us a very interesting perspective for reasoning more on this issue.

I also followed with a lot of interest this consideration on the value creation and value change that yesterday has been expressed by example from Rami, by our colleagues from France, by our colleague from Kenya. And I think that this is a very promising avenue to investigate more in the direction that Indiana suggested. Because as also France yesterday said in the value chain we have to consider how this plus value is is created at a different level. So there are the value creation also on the side of the residence country that develops intangibles, for instance that could be remunerated because the resident country also have a deduction for those payment in constructing the tax base for the corporate tax in the country. Then of course there is a value creation driven by the source country because we have user and we admit that for some business of model the physical presence is not valid anymore.

So it's not a problem. So I really thank the Indian delegates to have highlighted these four categories because in this avenue we really can find a way to remunerate them correctly and find A combination on nexus that we need in order to have a stable legal framework for the future. And I do think that Article 5 in our framework convention is broad enough to allow us to construct different nexus in that respect. Unfortunately, it's a complex, it's a very hard task for you. But we are here to contribute as much as we can and we think that it's the good avenue to pursue.


Co-Lead · Lisa [33:03]:

Thank you. Thank you very much, Italy. And yes, I agree this is a very promising road forward and you know, it helps us to focus on the steps and the way that we could think about this. I think, you know, even our delegate from India mentioned that it's, you know, it's a food for thought and we need to build on it and see if it's structurally good to solve the issues that we need to solve. I have Singapore.

Please go ahead.


Singapore [33:50]:

Good morning to everyone and thank you. Chair. I think yesterday during our intervention we did share that Singapore's view is that we think it is useful to have different nexus, taking into account the diverse range of services that are provided in a cross border context. Our distinguished colleague from India this morning has also shared with us that because of the different nature of services, it doesn't seem to be appropriate to have only one single nexus. And in our view, having only one nexus is really too blunt and it does not take into account the value that has been created by different types of services.

We have also heard from some stakeholders as well as delegates on the difficulty associated with having different nexus. We think that the mentioned difficulties are not insurmountable and we can always find mitigating measures to deal with them. For instance, having very clear ordering or coordination rule will help us to decide which nexus is most appropriate for which kind of services. In our view. We think that the current physical presence nexus continues to remain relevant for most services they are provided in person.

But we acknowledge that when new business models emerge, for instance, those that are relating to services that could be fully provided over automated means, we think that the current physical nexus may not have catered for such scenario and therefore we are open to explore other nexus relating to digital services or remote services. The Slide has provided a few examples of possible nexus. We are certainly open to explore them. But at this point I think we do have some concerns if we decide on solely one particular nexus. We have heard call to use the identity of the payer as the single nexus for digital services.

We think that this may not always be appropriate. For example, it is very common in a multinational group that HQ or one particular entity may be appointed to be the payment entity and they could actually pay for services that are enjoyed by other related entities in other jurisdictions or even in different markets as well. And therefore if we are going to just look at the jurisdiction that makes the payment to be the nexus for determining the taxability of such digital services, I think it would actually provide outcomes which are disconnected from where economic activities takes place. Then moving on to the second possible nexus which is to look at the use of user location, using IP data or even some other proxies. I think this is a possible nexus, but it also raises some concerns regarding data privacy accuracy as well as the potential for inconsistent results where the users could be mobile or they could use VPN or actually operate even through intermediaries as well.

So our preliminary view is that I think while we continue to think deeper on some of these issues, it may be too premature at this point to land on a particular option and therefore we should take more time to better understand the implications of each of the suggested nexus to help us to find the most ideal or appropriate one. Thank you.


Co-Lead · Lisa [37:58]:

Thank you Singapore. I think from what I heard yesterday, one of the approaches that we heard and it'd be interesting to see see if I understood that correctly, is that we are in agreement that we should have different nexus rules to different groups. We've heard a very interesting explanation.

So what those criteria could be in four tiers now for each type of service there could also be and this is what what I wanted to hear from you if I understood you correct from yesterday, they could be different types of nexus rules one after the other so that there's not only one rule that fixes a nexus to that type of service. Because we just realize, we're realizing that there are so many technical changes that we need to be giving more different type of nexus rules in levels. Basically I hope I explained myself correctly. That's what I understood from yesterday and I stand to be corrected again. If anyone has any other views Egypt, please go ahead.


Egypt [39:24]:

Thank you Chair and thank you Khalid for giving me the floor to present IG Egypt position. I want to highlight that from the transfer pricing perspective with respect to the cross border services, especially when we yesterday raised the concept of the value creation and the value chain, we need to highlight that it is essential to ensure that all the service provided meet the benefit tests and the companies was really in need to pay in order to obtain such services. In other words, in case of absence of the related party service provider, whether the company is going to search for an independent third Party to perform these services or not. So we believe that the protocol should include these related services analysis, including the benefit tests, the identification of the shareholder activities and also the assessment of the duplicate and incidential services. These elements are very critical in order to ensure the accurate delineation of the service transaction.

Thank you, Khalid.


Co-Lead · Lisa [40:33]:

Thank you Egypt. That input.

I don't have any other member asking for the floor now, but I do have. Oh, sorry. Uganda. Please go ahead, Uganda.


Uganda [40:48]:

Thank you, Khalid, for the opportunity to speak. Just a quick comment. If we are to fully address question one and question three, we are of the opinion that we need to elaborate a little bit more on the types of services we are talking about.

Otherwise we cannot exhaustively address that issue. At the moment, I can only see two broad categories, services which are provided through a physical presence and others which are provided remotely, including the digital services.

So I think we need to spend a little bit more time on these different types of services so that we can address that issue exhaustively. Thank you.


Co-Lead · Lisa [41:45]:

Thank you very much. Uganda. Yes, I agree with you and we were very fortunate this morning to hear hear from our Indian delegate to expand a little bit more and in fact gave us four tiers of services which I thought was very interesting and very helpful in to progress on exactly what you're saying.

So I hope we can hear others on the, I wouldn't say the Indian proposal, but this, the comments that, you know, give us food for thought. I don't have. Okay, Colombia. Please go ahead, Colombia. Gracias.


Colombia [42:32]:

Thank you. I did want to talk about the issue of the nexus in relation to this. We believe that the current rules are insufficient in view of business models without a physical presence and that leads to a loss of tax collection and the erosion of the tax base potentially in the source state, which is where the revenue originates. Colombia, for example, in its domestic legislation has included a rule of significant economic presence and that is producing positive results. As such, Colombia supports this alternative as a possible solution.

With that in mind, Colombia is of the view that the state, the right of the source state to tax certain economic activities is important. With, with. If we look at this criterion of significant economic presence and we underscore the need to recognize tax rate taxing rights in market jurisdictions where users are found as well as consumers or clients or customers. Moreover, and similarly, Colombia sees this issue as something that makes it clear that the continuation of significant presence as the only indication of economic activity in a jurisdiction is not the most appropriate or may not be the most appropriate criterion to use. This is an indicator that could coexist with others.

Given the complex nature of of this issue and the administrative burden posed in terms of proving the existence of this presence. I wanted to add that to the discussion from Colombia's side. Thank you.


Co-Lead · Lisa [44:43]:

Muchas gracias, Colombia. Thank you.

Colombia. Norway. Please go ahead.


Norway [44:50]:

Thank you, Madam Kholid and good morning to everyone. We just wanted to thank the delegate from from India for the issues he's raised here today. And also yesterday he mentioned something really important, that it is one thing to allocate taxing rights in a bilateral setting and it's quite another to try to do so in a multilateral setting. And in particular when we try to address the issue of new business business models and new types of nexuses and perhaps even scope here, we think that he has presented some very important issues that we should investigate further before drafting specific rules. So in the same way, we would also agree with Italy and Singapore in their interventions.

With respect to the first question, I guess our answer at this point would be maybe there seems to be a need for different nexuses for different types of services, but what they would be specifically we need to investigate further and look into different business model for different services. With respect to the second question, well, the approaches suggested in the section 3B at this moment seems to need a little bit more work and we think that there may be other proposed nexus rules that should be considered, but that will become clearer as we work further on this. I think we would say that from our point of view, like Singapore, physical presence remains valid and appropriate in many business models and many types of services. With respect to new business models and in the more digital space, we think it would be very important to make sure that more nexuses do not apply to the same income at the same time, because it is important to avoid multiple taxation of the same income. But we look forward to the work to come and the discussions that we will have going forward.

Thank you.


Co-Lead · Lisa [47:35]:

Thank you very much. Norway Switzerland Please go ahead.


Switzerland [47:40]:

Good morning. Many thanks, Madam Kolid. And many thanks also to the preceding speakers that have expressed their views. Our thoughts they go in a same way as the ideas of the distinguished colleague from India. The not that elaborated.

We see mainly two different types of services. One are indeed the traditional services where physical presence in the form of a P concept seems the appropriate nexus. That concept was tested over time and it delivered. However, we also recognize that business model models have changed and we see that there are nowadays highly scalable business models that make revenues from such business models to be comparable to sort of passive income where taxing rights of a source state without any physical presence there is not out of our imagination and is widely accepted that such taxing rights are justified. So one factor for us could be scalability of business models.

Now scalability is difficult to recognize in advance. If we knew which models are highly scalable, we would probably do that and not be here. But one proxy for scalability is profit margin. A high profit margin is an indicator of a highly scalable business where someone made use successfully of that scalability. So this could be an idea to investigate in our view.

Thank you.


Co-Lead · Lisa [49:37]:

Thank you Switzerland. That was interesting and helpful to get another basically an access rule or this has been mentioned and I've heard in earlier discussions the difficulty with profitability margins because they are might be different in different countries. So you know, one of the difficulties with that is obviously in a multilateral setting could be very, very difficult to sort of have a certainty on that nexus and it could be different for different relationships between different countries. So I'm erasing it because I don't know if you've had any more thoughts about it or anyone else because that would be sort of an interesting input.

So I'll think about that. I do have a stakeholder which is Children and Youth International. Now yesterday you took up an awful lot of time and I'm not going to allow you to speak that long today. And please speak on what we have on the agenda. So please go ahead, but you will only have a maximum of three minutes and after that I will break your intervention.


Children and Youth International · Major Group for Children and Youth · Stakeholder · Alexa Dominique [51:03]:

Go ahead please. Thank you. Chair, my name is Alexa Dominique and I have the honor to speak on behalf of Children Youth International and the major group for Children Youth. Existing international tax frameworks were developed in different economic contexts and have faced challenges in keeping pace with the rapid expansion of the digital economy.

In this regard, we welcome the committee's consideration of digital servitus taxation as a constructive and timely effort to address the evolving disconnect between traditional tax rules and increasingly digitalized business models. Traditional concepts of physical presence were developed prior to the rapid expansion of digitalization and do not always fully reflect contemporary forms of economic activity. In this context, we encourage consideration of approaches that recognize income derived from cross border services as within the scope of taxation.

The careful collaboration of quantity quantitative criteria including diminished levels will be essential to ensure that such approaches are sustainable, proportionate and administratable across different national contexts. While higher revenue their solds have often been used to focus on largest operators, they have also raised concerns regarding uneven application across jurisdictions. In contrast lower or diminished their solds adopt in some contexts seek to broaden coverage while maintaining proportionality. From a youth perspective, revenue their souls should be carefully calibrated to ensure fairness and administrative feasibility while safeguarding young entrepreneurs and early stage startups from disproportionate compliance burdens and allowing innovation to grow in line with national capacities.

We also underscore the importance of collaboration within this process, recognizing the diversity of existing tax treaty frameworks among Member States representation represented we see value in the protocol supporting cooperation that facilitates the development alignment and effective implementation of bilateral tax treaty arrangements in a manner consistent with national priorities. In closing, children and youth encourage a committee to advance cooperative development oriented solutions for digital service taxation that reflect digital value creation and support equitable and sustainable development for present and future generations. Thank you Chair.


Co-Lead · Lisa [53:11]:

Thank you. We're well within limits so thank you very much for that. Very helpful. I have Kenya, please go ahead.


Kenya [53:22]:

Good morning. Thank you Khalid I think we'll have a second bite at the cherry one Start by tracing the position that we had yesterday in relation to the position that was presented by the African group by Nigeria on behalf of the African group. There are three categories that were put out yesterday. One was on payment or remittance based triggers. The second one was on market engagement which we clearly said it's measured through revenue or user interaction.

And then the third one was physical presence or permanent establishment where relevant and I put emphasis on the where relevant. If we look at the position that has been put across by the Indian delegate, the first category or the class as it were is nexus of physical presence and that addresses to what or speaks to what has been put on the slide there. First one would be would say any presence is sufficient when it comes to that. Then on the other issue would be a reduced time threshold would suffice and if the two that have mentioned are correct, then the PE style that exists or the concept around it then should be revisited and redrafted. On the second class we are speaking to services are delivered remotely with human involvement.

There is one big category that will still feature within the nexus factors that we had indicated. One is payment and identity of the pair within that particular class. The other one would be location of user and recipient of the service which falls within market engagement which is measured through revenue or user interaction. Then when we go to the third class which is services are delivered remotely with minimal human intervention, we again see payment and identity of the pair will feature fully which brings in the category that we actually mentioned which is on payment or remittance Based triggers. Then the other one would be location of the user for this kind of class and recipient of the services which actually brings in the market a market engagement to that effect.

Then when we go to the third class that was presented is on payment on digital platform. Sorry, we have the first category again that we presented featuring payment and identity of the payer which brings in payment or remittances based triggers. Then we have location of the user which brings in the market engagement measured through revenue or user interaction. Then we have utilization of now these on digital platforms utilization of data generated from a state which again brings in the category of market engagement and falls within that category that we presented. Then finally recipient of the service which again brings the market engagement through revenue user interaction I submit.


Speaker 34 [57:06]:

Thank you. Thank you very much Kenya. That was very helpful as well because we got you know the mix with Nexus and the tiers and the different categories that also a very good helpful input to make us consider these the way forward on this. I don't have anyone on the list for speaking so I'm thinking actually we could have a coffee break and you could ponder a little bit over coffee break. Now if I give you 20 minutes you'll probably be back in half an hour.


Co-Lead · Lisa [57:42]:

So that's fine. Let's give 20 minutes and we'll see you in half an hour.


Speaker 36 [1:15:54]:

How are you.

Sam.

Put.


Co-Lead · Rami [1:37:27]:

Welcome back everyone. So we are going to continue the discussions. Very generous coffee break from the Khalid. So that's good. But now I'm handing over the floor to the colleague so to continue the discussion and the presentation over to you.


Co-Lead · Lisa [1:37:45]:

Thank you very much Rami and welcome back. I think we've had some really important interesting input into the discussion and I was thinking of leaving a couple of minutes now to see if anyone wants to have some comments now on Nexus after that coffee break and then we could always come back tomorrow as well if there is some input because this is very important that you know we're reflecting and thinking and the input you give us today and tomorrow will be the food for which we are going to carry on the work in the next session and that is very important that we get started in the right way. So it's been very good so far and therefore I would just like to mention to you that you will have an opportunity if you want it tomorrow as well to give us your input on these things. So I got too interested members please go ahead. France and then Nigeria.


France [1:38:57]:

Merci Madame la Presidente. Thank you very much indeed. Madam co lead. Thank you very much for these discussions, I find them very concrete and enable me at least to think more specifically and more concretely. So I have a few questions following what was said by the different speakers.

Now, I'd like to perhaps reopen some of the discussions, but I think it's very important for us to have a text that is operational in nature and that will help us in to implement it in each of the countries. So regarding the nexus and physical presence, I heard several states indicate that this physical presence was sufficient without establishing a time threshold. And that is what I would like to submit my questions to you on. I would like to elaborate on our text a very concrete way. During the coffee break, I thought of very two specific examples and I have three types of questions.

I'm going to put them to you. The first example is as follows. We're talking about services, so I wanted to get some appropriate examples. So a transport provider for France, for example, we provide transport for a country, country C. For that transport provision to get to country C, I have to get through country B and it takes me three days to cross that country.

I can't do anything else but cross that country, country B.

It sounds like GDP in French. Sorry about the joke there.

So.

The only way that I can cross get there is to cross the country. That's the only way I can do it. So that's my first example. My second example is a consultation services. An architect, for example, a French architect who goes for two weeks to another country.

Let's imagine that we are building a building in a country and apart from the building itself, there is a French business, let's take that as an example, with an architect who is in charge of providing a service and who does that in France? 100%. But the person has to go for two weeks to that other country.

So those are my two examples. Now, based on these two examples, I have three types of questions. My first is detecting physical presence.

When we ask for physical presence without a time threshold, so to speak, do we need to take into consideration the time the lorry takes to get there or the time the architect takes? How should businesses declare to the country that was crossed by the lorry, by the truck, or to the country that received the architect?

These are real operational questions. It means that if it starts on day one, well, the administrations in that case need to be able to receive many more declarations than if we establish thresholds, for example, in line with the UN tax model. So detection of physical presence or identification thereof. Now the declarative question now, so does that mean that the businesses are going to have to make declarations each and every time. Are we able to deal with all of that administrative burden?

Can we put it upon both our administrations and our businesses? Would they be able to cope? And thirdly, once we've detected the presence, once we have suggested the declaration, what share of revenue are the businesses going to be responsible for? So we have France, its truck went across the third country for three days.

How are we going to calculate the revenue, the income? And in the transport system example, rather I'm just like to explain that it's just crossing the country. So what share are we going to stipulate in that declaration for the architect who came for a two week visit just to check the building site? So what share of that needs to be reflected in the declaration? Income or revenue?

So I'm raising all these issues because we can give principles of commitments but behind that it's our administrations who are going to have to implement this convention. I for example on this issue of physical presence, I don't want us to get into.


Co-Lead · Lisa [1:45:36]:

Not be aware of the operational impact that it might have for each and every one of us. Thank you very much indeed. Thank you very much Frans. Personally I like examples because it illustrates the way forward, the difficulty and the way forward. So I thank you for those examples and that will be part of the discussions that we will have.

I don't know if anyone wants to answer them but at least they will be part of our deliberations. I actually don't have the names of whose.

Thank you. There you are. So I've got Nigeria please first please go ahead.


Nigeria [1:46:27]:

Thank you. Madam Kohli, like you Nigeria, we like the questions that were raised by France and by the way I will be speaking for Nigeria now, not African growth. So we in Nigeria, we like the questions that were raised by the French delegates and not just him, all the questions and inputs that have been provided here today it shows that we are discussing and we moving towards resolution and developing the rules that works because they said a a journey of thousand miles starts with a step. So the fact that we are discussing now it means we are moving closer though we may not be there yet, but we are moving closer to having a rule that we can all live with. We want to provide some inputs or reaction to some of the discussions we've had here today.

We note that in the issue that was raised about the possibility of whether this what we have here might not have covered all the nexus. Of course we agree that we might not have cover all the nexus here but we need to start from somewhere. We start from the known to the unknown. So for the ones we have here, we've provided our input yesterday. Then for whether there will be more as we go into the details rules, especially when we begin to identify the different types and classes of services that we may have, there will likely be need to identify more nexus rule or to even change what we have identified.

So they said the devil is in the details. So as we go towards developing the details, we agree that there may be more nexus rules. So we are open to continuing the discussion and seeing, reviewing and being able to discuss all these rules as we identify them. Then on the comments from Singapore with respect to identity of the payer, whether it may not give, in some instances it may not give accurate or the correct outcome. Especially Singapore provided an example which we also can relate with and we also agree with.

So for us we understand that when we are developing, yes, we agree that this should be one of the nexus, but as we develop the rules, there will be some areas the rule will not fit in and we may need to incorporate some other rules to be able to support it. For instance, we may need to include when we discourage the payer so that we don't give taxing right to a duration where we have the intermediary or an agent or just a bank or a conduit, we may need to develop some rules. For instance, we may need to marry such identity of the payer with the rule that says the expense is booked or deducted in that jurisdiction before that jurisdiction can have taxing right. So I'm not prescribing now, but those are some of the rules we can use to support such identity of the payer. Another one is we may be thinking in respect of B2C to also join it with billing address of the billing address.

So those are. But all this doesn't mean the identity of the payer may not be a good nexus rule. It's just that when we are developing the details, we may need to take care of all the nuances to ensure that we have a rule that is foolproof. Then in respect of the view expressed that in respect of especially the one expressed by India, the view by India in respect of some activities that are labor intensive, our view is that this may not be an issue for nexus, but it may likely be an issue for profit allocation after we have identified the nexus. For instance, where the service is performed will likely be a nexus.

The location of the user of that service will also likely be a user and it's also possible the identity of the payer may also be a nexus. But in that instance we need to now go into profit allocation rules. For instance, are we going to be looking at hierarchy of rules or are we looking at sharing the taxing right between those jurisdictions that have been identified as nexus? And in that instance, when we are sharing the profit among those jurisdictions, we may not need to who take the higher share of the allocation. And that's when we now be considering where we have labor intensive or some other criteria, we may need to allocate more profit to those jurisdictions.

But our view is that that discussion is not now when we are discussing nexus. We think what we should focus on at this stage is identify all the nexus rules. And when we get to profit allocation we can take care of those jurisdictions where more value is generated than others. And lastly, Madam Ko, we also can relate with the issue raised by Norway in respect of the possibility of multiple nexus. And we agree that based on what we're doing presently, we understand and we know that there will likely be multiple nexus.

But the focus is not to identify those nexus. But the focus should be when we get to profit allocation, how do we ensure that we don't overtax the taxpayer? And I think we can now take care of that, as I said earlier, whether to apply hierarchy of rule or whether to share the right to ensure that each of them take a bite. But we don't over tax taxpayer. But at this stage, Madam Kohlid, we think we should identify all the nexus and we can take care of others when we get to other rules in respect of profit allocation.

Thank you Madam Chair. Thank you very much.


Co-Lead · Lisa [1:53:26]:

Nigeria. That brings our understanding a little bit further.

And I have the Russian Federation. Thank you.


Russian Federation [1:53:45]:

Good day distinguished colleagues. Thank you very much Madam Kohleed for giving me the floor.

Much has been said, much has been expressed during this time. We too would like to share our comments with you

now. Of course, this issue is a multifactorial one. It requires consideration of many different issues. We believe it would be easier perhaps to start with our further work or continue our further work that is based on the provisions and the outcomes that we have already achieved to date. Now what do I mean?

In the UN model convention there are two articles, 12B and 12A.

The simple services services linked with the digital economy presented on a digital basis. They have the self same nexus. And apart from the differences that there are contained there, the fundamental difference in our opinion is in the method of the tax collection. So we would not propose taking these two Articles as a final option, final solution for these, responding to what has been said in particular by our distinguished colleague from India. But perhaps we could use these two articles as a basis to develop these two articles from the standpoint of the issues that have been outlined in the statements of my previous colleagues.

So perhaps that is the easiest option, the easiest approach with which to start. Thank you.


Co-Lead · Lisa [1:56:12]:

Thank you very much. Russian Federation. I have Kenya.

Please go ahead.


Kenya [1:56:23]:

Thank you. Thank you. Khalid. I would wish to pick it up from where my Nigerian counterpart left on the issue of identifying nexus. And we are in that process, quite a number of good examples are coming up and we are realizing we need to actually widen the nexus factors taking us back to where taxation came from.

A very simple example. There was a point where you would collect taxes and I think it's historical, you'd collect taxes to pay off Vikings from entering into specific kingdoms or regions.

Taking it back to the example that we've gotten from the flow, there is an element of public good and it is something that. Or public goods. And it's something that we really need to have a discussion around it because it was the genesis of why we even decided to move away from the traditional way of.

Or traditional way of having. Identifying the nexus. If you look at the public goods that would be utilized in a situation where a truck is crossing a particular territory, there would be questions of infrastructure, there would be questions of security, there would be quite a number of things that would be brought into the equation. Then we start asking ourselves, for example, if that particular territory was at war, would the truck go through that territory?

So there is an environment that is being provided by that particular territory so that this transport can actually take place. And that speaks to provision of public goods which is provided by our territory. So and it clearly gravitates towards what we were looking at initially on the question of physical presence and the period that it takes. And then also the second example is the one on an architect. It speaks directly to the market engagement and how the two are interacting.

So I think as initially indicated, we are saying as we continue having these examples, we are going to sit back and come up with nexus rules that actually speak to what we are trying to address. Thank you.


Co-Lead · Lisa [1:59:24]:

Thank you very much. Kenya. I have Malaysia. Please go ahead.


Malaysia [1:59:31]:

Good morning and thank you. Madam Kohlid. Malaysia echoes the views of India, Singapore, Kenya and Uganda and notes the issues raised by some member states. Malaysia recognizes the landscape of cross border services is evolving rapidly.

Given the diverse nature of services, it is important to have different nexus rules. That balance traditional physical presence with emerging digital and remote service models. In classifying the types of services, careful consideration is needed to reduce future classification disputes.

For example, companies may argue that a digital service is actually a technical service to obtain a different tax rate. Lastly, taxation should align with value creation, ensuring a fair allocation of taxing rights while maintaining legal certainty and administrative feasibility. Thank you.


Co-Lead · Lisa [2:00:20]:

Thank you very much.


Chair [2:00:21]:

Malaysia, I have India, please.


India [2:00:25]:

Thank you, Madam Kholid. And thank you for giving me the chair the second time. The floor a second time. In fact, some of the questions that were placed before all of us by the distinguished delegate from France, it kind of sets one thinking.

Now, if one looks at the slide, there are four nexus rules written under the heading of remote and digital services. It says identity of pair, location of users, revenue thresholds and significant economic interaction. Now the point is that if we have managed to locate the first the identity of the payer, does it mean that the that's the end of the journey? Is that enough? Because in the discussions around the room there was a lot of mention of significant economic interaction.

Now for example, in Indian domestic law, we call it significant economic presence. Significant economic presence is counted in two ways. One is by a revenue threshold and the other is by the number of users that interact. Now by itself, this has the potential to wipe out the remaining portions of what we know as Article 5. But is that what we are looking for?

Now, going back, I mean, as we said in the morning, that it's not as if the four classes of cases that we put forward before this, before all of you, is the final answer, but it's just a thought that comes to mind. Now let's. Now we'll not get into the issue of the ones which are covered by the physical presence. I think a lot has been said that has been tested over time. Let's go to the second class of cases where services are rendered remotely, but it is by a of substantial human interaction in the country from which the services are being rendered.

Now, which is the nexus rule that we want to adopt over here? Is it that the identity of the peer is enough or is it, is it necessary that we need to have revenue threshold, that the revenue earned by this entity in the source jurisdiction must cross a certain, a certain threshold? Maybe we can think of that. Do we want to have another nexus that the services that it provides in the source country are customized for the client in that country, specifically customized? Do we want to have a threshold that technology should actually have been transferred and so on and so forth?

Do we want to have exclusions. Do we want to have exclusions that these are ancillary services? Do we want to have exclusions that these services are between related parties? These are questions that we can think of. And when we are talking about different nexus rules, maybe it's something that we can think about.

The next class of services are where services are provided remotely with very little human interface or human effort. Identity of the payer. Once again, maybe is it enough? Maybe it's enough. Or do we want to have revenue thresholds again that.

Because. If the, if the. Because we must keep in mind that there is something known as significant economic interaction that is there in terms of all digital services. So the point that I'm trying to make here that having just one catch all, I mean what we believe to be a catch all nexus rule and if that is satisfied, then everything else loses significance. That is something we need to think about whether that is that what we want to do or probably there is something more to look at when we decide nexus rules on different types of business models.

I get the point that profitability, someone was mentioning that profitability is an issue that may or may not be a consideration. But I believe that business model is definitely a consideration and that's something that maybe we can all think about. Thank you.


Co-Lead · Lisa [2:04:51]:

Thank you, India. Yes, absolutely.

Food for thought. And the staged or you know, cumulative nexus rules will obviously will have to be a part of the thinking process. So thank you. Senegal. Please go ahead.


Senegal [2:05:18]:

Thank you. Madam Kohlid. Good afternoon, ladies and gentlemen. I wanted to take the floor to touch on a number of issues that have been raised, issues which touch on various nexuses. We have various business models, so we have various opinions and nexus methods are underpinned by various different nexuses are underpinned by different methods.

What's crucial is that we ensure that there is complementarity between the nexus so that there is a hierarchy. At the same time, we need alternatives that can be found in this hierarchy. The first criterion that needs to be emphasized is where the economic substance exists. If you have a service provider that or service provisions seen in pay X, but then there's services going to country Y. But the important thing is that the service is being provided from country X.

If we need to prioritize the payment that's going to country Y, we need to then think about what we need to do and then we need to therefore take into account economic impact. Something else I wanted to emphasize is that we mustn't take examples that are too complex. So complex that we ultimately stymie our operations and upset any work on the protocols that we need to have. If we look at the example that was put forward by France on the transport servicing, the delegate underscored that all the transport provider did was cross country X. But was value created in country X?

Of course not. No value was created in country X. Was there an interaction in country X? No. Is there a client that benefited from this transport that was in country X?

No. That's not the case either. So in principle there isn't a taxing right that should be there or there isn't a source of income that arises from country X. So I think that needs to be borne in mind and we need to be very cautious our approach. Even if France did or does have a convention with country X, the mere fact of crossing country X does not mean there's a taxing right.

If we look at the OECD convention, the taxing right is on the resident country, which is France. So that's something we need to think about. We need to adopt a pragmatic approach to find solutions. Something else that was raised this morning was the value created value creation. You can have several types of value created within service provision, but everything also depends on the approach we want to use.

If we use a transactional approach, that means that every transaction will create its own value and that means that tax will be done on the basis of the transaction. If we want to adopt a proportional approach, that could have an impact and the impact would be felt even in deliveries, deliveries of parts, for example, that would be one source of value. But impact in terms of services isn't necessarily very important. So these were just the few thoughts I wanted to share. Thank you.


Co-Lead · Lisa [2:08:53]:

Yes, thank you very much Senegal, for sharing those thoughts. That's very helpful and useful for us. Egypt. Sorry, have only Egypt on. Sorry,


Egypt [2:09:07]:

please go ahead. Okay, thank you Khalid for giving me the floor for the second time. I would like to highlight that from the transfer pricing perspective it is important that. It is important that any attribution of profits arising from the intra group services is to be supported by a clear nexus between the service performed and the value created in the jurisdiction concerned. This requires to be demonstrated by the benefit tests and other related tests that I mentioned today in the early morning and also accordingly, we believe that these protocols should reflect this service nexus in the value creation analysis to ensure the appropriate alignment between the value creation and the profit allocation.


Speaker 55 [2:09:54]:

Thank you Colind. Thank you very much Egypt. I don't have any other hands up now we have.


Co-Lead · Lisa [2:10:09]:

I'm not closing the nexus discussion down. I think we have some time tomorrow if you want to add something. It's always good to have an overnight thinking and we've had lots of input coming from many of you that perhaps raise issues that you want to talk about again. And that will be a possibility tomorrow. We are going to move on now to method and I'm going to put up a slide which is from the other presentation which you saw.

So let me have a look. So this is the discussion that we had basically on, you know, the different rates and the format form of taxing when we have obtained the right to tax. So we've had quite a lot of discussion on gross and net and here. So the idea is to open up that discussion and hear if you have any views today to move forward on this issue of the method of taxation.

We've sort of separated the nexus from the method and that's because of obvious reasons because there are different issues there. The idea to hear your views on what is the appropriate method, it could be differentiated as well, of course. And that's also something that would be interesting to hear your views on.

Give you a couple of minutes to see if anyone wants to break the ice.

No one feel very enthusiastic you about the idea apparently.

Okay. We can open up the floor for tomorrow as well. So should we move on to implementation? Oh, sorry, Nigeria. Thank you.


Nigeria · Africa Group [2:12:47]:

Thank you, Madam Chair. And in this instance I'll be speaking on behalf of the African group.

We the African group is of the view that when we're talking of method number one is we need to have to enable us achieve the coherence and the completion we seek in international taxation. We need to align the method of taxation so that we have common practice, however, in determining whether we want to whether it should be gross or gross basis or withholding or net basis. We are of the view that the discussion may be premature now and the reason is that we need to first discuss what are the nexus rules that we have because the methods may not choose, may not be suitable in all instances or may not be suitable for a particular nexus. For instance, we are of the view that gross basis withholding basis, gross basis through withholding may be suitable for payments, but it may not be suitable for other for some other nexus. For instance, where a user data is generated from there's no payment that will originate from such location or from such place.

And in that instance it will be difficult or impossible for such jurisdiction to be able to implement or use that method, that is gross withholding method. So in that instance we have the view that we should first look at the nexus rules and after then we can now go through each of the rules and choose the method that is suitable for each particular one. Also, we also note that the, the base, I mean what's the base is also important. For instance, when we are determining what should be taxed or how it should be taxed, we also need to know what are we actually taxing first as determined by the nexus. For instance, is only when we have payment that we are taxing or a judiciary has other forms of nexus to which it may tax.

And in that instance payment alone, of course we have narrower base, but if we have payment plus other nexus, the base of course will be wider. In that instance, the method of taxation that we may be thinking of, that we may agree on, may depend on such, whether it's narrow or wider scope. So in that instance, the African group, we prefer to discuss the nexus rules first. And then when we have idea of what the nexus rule will be and what the taxing rights will likely be, we can now be able to clearly be able to discuss the rates. Thank you.


Co-Lead · Lisa [2:16:27]:

Thank you, Nigeria. The rate or the method? Just to understand clearly, because I mean, you're right, the rate might be on a net or, you know, whatever, but, but the method and the rate, I suppose, just to clarify, Nigeria, please.


Nigeria · Africa Group [2:16:48]:

Both, Madam Chair. However, it doesn't stop us from having a pre, I mean, to join others in having preliminary discussions. But, but for us it's. We prefer for both the rates, I mean, the method and the rate. We prefer to have good discussion about them when we have idea of the nexus.

Thank you, Madam Chair.


Co-Lead · Lisa [2:17:09]:

Thank you very much. Nigeria, France, please.


France [2:17:15]:

Thank you, Chair Kohlid. Rather just to touch briefly upon the method.

If I've understood you were thinking about moving to another issue, but I've now had the time to read your PowerPoint. I just wanted to add something to the discussion because in terms of method, I'm looking where we're looking at net versus gross. I was wondering if we might put into the discussion a possible bridge between gross and net, because in the Framework Convention I recall that we'll have this reference to fair allocation. And this fair allocation, this term brings to mind questions regarding the fact that we need to ensure there is equitable treatment between businesses and the business that will be businesses that will be taxed on gross income so that ultimately, according to the criteria that we agree upon, well, we need to bear that in mind and these businesses might have the right to tax on the gross amount and go from that to then have their costs reduced and then there would be a reduction in what was paid when they use this net method. So I just wanted to add that to the discussion on the method.


Co-Lead · Lisa [2:18:33]:

Thank you. Thank you. France, just a question. When you talk about bridge, you were. You're thinking of the two systems working parallel, Is that what you meant?


France [2:18:44]:

Yeah. Thank you. If you could clarify. Thank you.

I'll just take a specific example yet again, in conditions to be defined, but that we do, we do intend in one case or another to tax gross income. This might be one example. But ultimately, following an audit, we might note that either following an audit or at the request of a business, that business might be of the view that it is in the same situation as a national business, for example, and therefore would have the right to be taxed on net income.

I'd just like to say, I don't know where the method is concerned if we should be choosing between gross or net. I'm wondering, in some cases, perhaps you might have to go from gross to net. That's one scenario. But might there not also be cases where tax has been taken from a gross income and that in order to comply with this notion of equity fair allocation, either at the request of a business, either following an audit, there might not be a movement towards net taxation? Would that not be a possible scenario?


Co-Lead · Lisa [2:20:11]:

Thank you.

Thank you, France. I think, if I may, I think the UN model actually works parallel with gross and net. So just to clarify if we're on the same understanding or thinking so, if I could give that example, we have Article 12 AA, which says you can grow, you can withhold, or you should. You're able to withhold tax at source with a certain percentage on gross. However, that business might have a PE under 5.3B, for instance, under the UN model, and therefore be taxed or could be taxed on net.

So I think that's actually how it works today. So it's like sort of the business, depending on, you know, if it has a PE in that country, would be taxed on net, or if it's not, it will be taxed on, on 12 AA. So they are working parallel, if that's what you mean. That's something that we know that's working today and of course it should be taken into account of how we see our solutions here. Thank you.

And India, please go ahead.


India [2:21:40]:

Thank you. Chair.

I tend to agree with the distinguished delegate of Nigeria that probably deciding on the nexus rules is important, but probably it would also be useful to share some thoughts on what is a more suitable method of taxation, whether it is gross based or net based. Because at some point we will have to confront this question. Question. Now a gross gross base of taxation is it's certain, it's immediate, it's popular, it's simple. But I assume it should be adopted when it's the only way out.

If there is a possibility of net based taxation, maybe it's more fair and equitable if it reflects a a correct result then probably it is worthwhile taking a shot at having a net based taxation because experience has shown or the possibility always arises that withholding tax could create a situation where the amount of tax withheld may actually exceed the profits that are earned in the in the rest country and the company would not have the the possibility of claiming the normal deductions. So that apart and also the comments that you made and also the distinguished delegate of France, maybe we can at some point think of offering something like a safe harbor that if the company or the entity operating in the source countries prepared to offer a certain amount of net income then it would have that option. It would not. Tax would not be withheld on gross basis. That is an option that's a possibility that just comes to mind that we can think of which can work around the concerns that members may have around having a guillotine kind of withholding tax.


Co-Lead · Lisa [2:23:48]:

Thank you. Thank you very much India. Yeah, and I think in the meetings we had quite a lot of discussions on this and I think I heard as well as what you've mentioned now quite a large part of members taking part in discussions were quite open to that possibility of a net taxation. Of course that taxpayer would have to comply with all the administrative requirements needed in order to file a tax return in that country and to make sure that, you know, deductibilities are properly audited, etc. Etc.

So it's not sort of a simple, simple thing, but it's something that I think many of us thought could be perfectly well working gross taxation. And the rate is of course also set. Sometimes it's set as a sort of deemed net taxation so that you have a gross payment but you sort of consider it as a certain percentage of costs against it and then you take a corporate rate on that net. So it's sort of an equivalent of a nap next tax station, but as a safe harbor. And that's something that we've discussed and I think it seems to me that something it's no one really was against.

And so that would be one of the ways Forward in this area I have Canada. Please go ahead.


Canada [2:25:37]:

Thank you. Madam Koh Lead I would like to make my comments on the issue of a gross and net income. I think that's absolutely crucial for informing our discussion on the appropriate nexus for taxing cross border services. My delegation in the past has called several times for an analysis to be carried out to inform our thinking about the pros and cons of the two approaches. And so two ideas have been shared.

This is great. Before the beginning of this session, UN Wider and Oxford Economic on the request of the International Chamber of Commerce. So I just wanted to share a few comments on the contents of these studies. I feel they're very beneficial for our current discussions.

So the UN Wider study that provides a very useful presentation of the pros and cons of the two taxation models, gross or net. So it expresses some concerns regarding net, namely the risks of the transfer of profits abroad and the taxing businesses there. I don't think anybody here would question these two aspects and the impact on businesses because we don't want to erode the tax system.

So I think these are crucial issues.

However, in terms of this risk of erosion, we have to see that these businesses are an important source of income for many countries despite this risk of erosion. And this is why some.

So there is this risk of erosion of tax income. There's also a long list of issues pertaining to extortion.

We are talking about gross income and if there is agreement that the measure should be to have a comparison, a pertinent comparison, we could try and compare the impact on economic well being of the two forms of taxation over and beyond income, marginal, marginal, cause of public finance. I think that's the relevant measure to bring together the various different impacts there. Now apart from that, I think that most economies would agree that yes, if we use the net option that is the most effective source of income when we look at income tax or real estate tax or value added tax. But I think that a corporate tax is going to be more effective.

So it's already been mentioned repeatedly. But I think the second study, the Oxford Economic Study, really illustrates this well.

The diversity that is how a gross income can impact business transactions, various different transactions. So I think this is an excellent illustration of the way that for even modest amounts there can be significant economic impacts that need to take need to be taken into consideration by countries.

So we have these two taxation models and this is why we've seen that most countries in the world have got rid of general value added tax or rather got rid of consumer tax and replaced it with vat because we see that income that come from tariffs have decreased since the 1950s. The underpinning question is the tax

impact. Because if a country really does want to meet its aims in terms of additional income and equity, the study from Oxford Economics shows that substantial income can come through direct taxation, but there is also intermediate and intermediary taxation.

So the economic impact means that the country experiences a negative impact and the net benefits for that country can be significantly reduced.

I think that is one of the major outcomes of that study.

So when we're looking at the different models of taxation and the different types of nexus that can be established. Thank you.


Co-Lead · Lisa [2:32:47]:

Thank you very much, Canada. Yeah, we're very happy to have got some studies to give us a little bit more, you know, economics behind analysis, behind our. The work we're doing.

I don't want to be too.

But, you know, from a Chilean point of view, we actually had a unilateral investment regime that in fact, it sort of gave. Our tax system couldn't be changed for a certain period when we had a foreign investment and we didn't have any tax treaties, but we were the highest receiver of foreign investment in Latin America. So all these aspects of what is important for a certain period, in the end of the day, it has to be looked in a very comprehensive way for each country. I would perhaps think that why we had received so much foreign investment is because we're an extractive industry, we have copper. But, you know, these are things that are different and different countries, and it's very difficult to take and make, you know, very general views on all this because countries have to look at their own situation, and I think they do.

And we're trying to give them an instrument here that would work for all of us. But I think, you know, happy to have all this, you know, input that we having. But in the end of the day, we, you know, each country would have to take a bit of a solution and thinking from its perspective, because we are different type of countries.

What I think is we are. Is that, you know, the net and the growth is sort of something that we sort of. We're okay with it the way we're thinking of doing. We're doing the bridge, as our French delegates said, we're doing a bridge that you can in fact do a net taxation. And, you know, and at least we're thinking of that solution.

And a growth would be a sort of backup or the other way around, whatever you want to call that. But I think from our experience as well. And I think there are quite a few from developing countries who have that experience. When you have a gross taxation as an option in your country, many, many foreign investors choose that because it's simpler. And you know, someone said, you know, we have gross tax claims because as simple as administration easier, it's easier for everyone.

And it's not only easier for the administration but also for the taxpayer. So just wanted to give that input because I do think, you know, from the perspective of developing. Many developing countries have extractive industries same situation as my country and therefore, you know, some of the conclusions that you, you get to are slightly different and all these issues, you know, each. Each country has its own and it has to make its own views out of its basis. Basically what I'm saying, just an input for thoughts.

I have quite a lot of countries now so we will go colleagues. The coffee break was good apparently. Let's hear from Uganda please.


Uganda [2:36:58]:

Thank you, Khalid. We share the views of Nigeria which were presented on behalf of the Africa Group. But we would also like to add that.

We need to clarify the reference to gross basis taxation not only restricted to withholding tax but also to taxation through self reporting in order to provide for both business to business and business to consumer transactions. It may not always be the case that there is a withholding agent who can be found. Then we also share the view that

it's useful to have an interaction rule of gross basis and net basis taxation as was articulated by the delegate from France. I thank you.


Co-Lead · Lisa [2:38:07]:

Thank you very much. Uganda, Switzerland Please go ahead.


Switzerland [2:38:12]:

Thank you. Madam Kohlid, I would like to support what our distinguished colleague from Canada explained in his reference to the report commissioned by the icc. His intervention showed that the matter is. Is very complex and that various factors have to be taken into account.

We would like to focus also taking note of the fact that soon there will be a lunch break we would like to focus a bit on the matters. On simpler matters of administratability and also fairness. And in that respect we see the merits of gross base taxation. For service fees it is easy to handle for businesses also for authorities and as a default mode this seems to us a possibility and to some extent it is also possible to take note of. To take into account that there are different types of services and also different service in terms of profitability.

For example, for transfer pricing purposes there were lists produced of services that are presumably low value adding and that could even be taken into account in gross base taxation when the rate is adjusted accordingly. However, whether in the end there Is also some tax left in the state of residence and also after maybe having given a credit for the tax of the source state depends on further factors such as general overhead expenses, financing costs or also a loss carry forward and to. And these issues should be taken into account in our view too the fairness of the taxation for the enterprise and also for the fairness of the balance of taxing rights between the involved states. That should be considered. And one way to consider that or in fact the only way would be taxation on a net base.

And we would advocate for that for significant cases to have the option to request a taxation on a net base. How do we determine significance? It could be made through a threshold of minimum revenue. When the revenue exceeds that threshold, then a net based taxation could be requested. Thank you.


Co-Lead · Lisa [2:41:16]:

Thank you, Switzerland. And just to clarify, when you know the optionality I think is important when we talk that the taxpayer would have as an option the net taxation having the. The backup of the gross tax rate. That's the way I think I understood the majority and it'd be nice to hear if that's how you all understand it. Thank you.

I actually think perhaps it's better to break now. We have quite a lot of members asking for the floor. So that's good. Perhaps would get even more after lunch. But I suggest that we perhaps if.

Belgium. Where is Belgium? There is Belgium. So would you like to make an intervention? And then we break after lunch.

After you. Thank you. Okay. Okay, thanks. It will be some food for thought, I think.


Belgium [2:42:14]:

First of all I would like to align myself with Canada and Switzerland and according to what they already said, the distinguished delegates, that they refer to the study requested by ICC that we should take that into account here too. Then a different point I wanted to bring up here with the method of taxation is that I think there is an issue when it comes to international traffic and the services related to international traffic. As we all know, it would be our preference to exempt these from the scope or keep these out of the scope of the proposed protocol on Services. From a European point of view, most European states apply tonnage tax regimes. They are long standing, transparent and internationally accepted systems specifically designed for this sector.

And these regimes tax shipping activities on basis of net fleet, on basis of the fleet capacity, the tonnage and not on the not so on the profit. So introducing source tax through this services protocol on these services that would mean a clash with these existing regimes leading to unavoidable double taxation, legal uncertainty for the sector. And the sector is specifically characterized by long term investment and global mobility. Secondly, on the international air transport here the challenge will not only be double taxation but administrability. We've all seen the various and long discussions we had on Article 8 in the past for the UN model.

So the aviation operates through highly integrated multinational structures so attempting to apply these source based taxation to air transport services would result also in multiple taxation, significant compliance burdens, high risk of disputes for the MNEs in question and as we've seen from the previous discussions within the UN Tax Committee on this issue it doesn't seem that these concerns are mere theoretical. So that is also why in the past for these specific sectors we've always seen this as special cases subject to dedicated rules and not in a general matter to be approached. So that's something that I would bring to the table also and food for thought for everyone. Thank you.


Co-Lead · Lisa [2:44:43]:

Thank you Belgium and we see you for after lunch.

Have a good lunch and we'll see you at 3:00 clock back here. Thank you.