While much of the focus has remained on the efforts of the Organisation for Economic Cooperation and Development (OECD) with respect to digital taxation, the United Nations (UN) has finalized revisions to the UN Model Double Taxation Convention (UN Tax Treaty) that would specifically address the taxation of “automated digital services.” On April 20, 2021, the UN approved the final version of new Article 12B of the UN Tax Treaty, Income from Automated Digital Services. Generally, the approach taken by Article 12B is to permit a withholding tax on gross payments for “automated digital services” made by a resident of one treaty country to a resident of the other treaty country. In order to eliminate the withholding, the recipient can declare a permanent establishment in the payor jurisdiction and instead be subject to tax on its net income from automated digital services. This approach represents a departure from traditional international tax principles applicable to income from the performance of services, which allocate taxing rights to the jurisdiction where the services are performed, rather than the jurisdiction where the recipient of such services is resident. Although Article 12B is not self-executing, it serves as a model for countries to consider in determining their approach to taxation of automated digital services, and may be considered in the context of future treaty negotiations.


As the question of the taxation of digital services has been debated within various countries and at the OECD, the UN Committee of Experts on International Cooperation in Tax Matters (UN Tax Committee) took up consideration of a digital services article in the UN Tax Treaty in 2018, releasing the first draft Article 12B in August 2020. The guiding principles of the UN Tax Committee’s work included avoiding both double taxation and non-taxation, with a preference for taxation of digital services income on a net basis where practicable. The UN Tax Committee also was focused on simplicity and administrability.

In preparing the final Article 12B, the UN Tax Committee consulted the work of the OECD, EU, and African Tax Administration Forum, among others.

Final Article 12B

Under Article 12B, “[i]ncome from automated digital services arising in a Contracting State, underlying payments for which are made to a resident of the other Contracting State, may be taxed in that other State;” however, the rate of tax that may be imposed on such income is generally limited to an agreed percentage of the gross amount of the payment.1 In other words, Article 12B contemplates that a Contracting State may subject income from automated digital services paid to a non-resident of such Contracting State to a withholding tax, subject to a rate limitation to be agreed between Contracting States. The UN Tax Committee recommended a “modest” rate of between 3 and 4 percent for income from such services.2

Article 12B contemplates that, in lieu of withholding, the beneficial owner of income from automated digital services can request that its “qualified profits” from automated digital services be taxed at the rate provided under the domestic laws of the Contracting State.3 In effect, this is designed to permit the beneficial owner of the automated digital services income to declare a limited permanent establishment in the jurisdiction where the payer is located in order to be subject to tax on such income at a net income basis.4 Specific rules are provided for determining the amount of “qualified profits” from automated digital services income by applying the overall (or ADS segment where available) profitability ratio of the beneficial owner (or its group where relevant) to the gross amounts.5

Eversheds Sutherland Observation: This alternative provides relief for taxpayers that may be subject to a lower tax liability on a net basis, but does not provide any mechanisms for a more localized calculation of profit or loss. This is conceptually similar to the discussions occurring in the OECD with respect to pillar one profit allocation.

“Automated digital services” is broadly defined as “any service provided on the internet or another electronic network, in either case requiring minimal human involvement from the service provider”;6 and, it specifically includes online advertising services; supply of user data; online search engines; online intermediation platform services; social media platforms; digital content services; online gaming; cloud computing services; and standardized online teaching services.7

Eversheds Sutherland Observation: The approach taken in Article 12B is significant in that it is a model that countries may consider adopting in domestic law to address concerns with respect to the taxation of automated digital services. In jurisdictions where there is an existing income tax treaty, the adoption of the Article 12B approach in domestic law generally would not be expected to affect the application of the existing treaty unless and until the treaty is renegotiated to include Article 12B. But, in non-treaty jurisdictions such laws would have immediate implications for the provision of cross-border automated digital services.

Income from automated digital services is deemed to arise in a Contracting State if the underlying payments for the automated digital services income are made by a resident of that State or are attributable to a permanent establishment of a non-resident in such state.8 Correspondingly, if the expenses of the automated digital services are attributable to a permanent establishment of the payer in the Contracting State in which the recipient is resident, Article 12B would not apply.9 In other words, payments for automated digital services are sourced to the jurisdiction in which the services are used.

Eversheds Sutherland Observation: For US tax purposes, services generally are sourced to the place of performance of such services, not to the recipient jurisdiction in keeping with historic international tax norms that are being upended here and in the OECD proposals. The difference in source treatment under section Article 12B could impact the ability of US taxpayers to claim US foreign tax credits with respect to taxes on automated digital services.

Interaction with OECD efforts

Article 12B is directed specifically at tax considerations related to the digital economy, which is also the focus of the OECD’s Inclusive Framework efforts. The OECD’s two pillar approach has focused on new profit allocation rules for digital and potentially all consumer facing businesses (pillar one), as well as agreement on a global minimum tax (pillar two). An objective of the OECD’s efforts is to eliminate the proliferation of unilateral digital services taxes, which present a risk for double taxation. It is unclear whether the approach taken by Article 12B can be reconciled with the OECD approach.

Eversheds Sutherland Observation: The approach in Article 12B is intended to simplify administration allowing greater adoption, particularly by developing countries. A frequent criticism of the OECD’s proposals is that they are complicated to apply, and that the global minimum tax rules disadvantage developing jurisdictions. If the approaches taken by the OECD and the UN ultimately cannot be reconciled, it increases the risk for double taxation.