handbook-tb

Protecting the tax base in the digital economyNations Model Convention allows a broader scope of withholding taxesthan the OECD Model Convention, especially in respect of royalties.Developing countries may find this option of great interest becausedematerialization has meant a conversion of traditional services intodigital services, including technical services that fall within the scopeof services giving rise to royalties. The base erosion occurs when paymentsfall outside the existing withholding tax system as well as whenthe payer of the service fees claims a tax deduction in computing itsincome (that is, B2B transactions). 104Deeming all B2B service fees as royalties would have severaladvantages. First, it is evolutionary and, thus, would be more easilyaccepted. The domestic law of some countries, such as China andIndia, treat payment of fees for ICT services as royalties. 105 The UnitedNations Committee of Experts has suggested adding a new provisionin the United Nations Model Convention on technical services. Second,it is consistent with the principle of neutrality, as services deliveredonline would be subject to the same rules (as an alternative, all digitalservices could be deemed to be “technical services” or royalty-generatingservices) as services delivered through various physical media.Third, it would be administratively feasible. The existing mechanismof withholding can be used. As discussed above, it is difficult to characterizetransactions in the digital economy in general and relatedpartyB2B transactions in particular. Thus a general deeming rule104As an alternative, to protect the tax base from B2B payment of servicefees where the provider has no PE in the market country, the source countrycould deny the deduction of payment to the resident company — a “draconian”method that could be used in limited circumstances.105In India, for example, the courts held that such payments do notgive rise to “royalty” for treaty purposes. See Asia Satellite CommunicationCo. Ltd. (332 ITR 340) (Del) and Skycell Communications Ltd. (251ITR 53) (Mad); China, State Administration of Taxation, Circular [1998] No.201, which was upheld by Chinese courts in PanAmSat International Systems,Inc. (2001). For further discussion of the PanAmSat case, see Ge Tan,“Tax Treaties’ Interpretation and Application under the Challenges of theDigital Economy — Issues Raised by the PANAMSAT v. Beijing Tax Bureau,”(2006), supra note 72; Jinyan Li, “The Great Fiscal Wall of China: Tax Treatiesand Their Role in Defining and Defending China’s Tax Base,” supra note72, at 463-4.447