The UN Intergovernmental Negotiating Committee that is currently engaged in the unenviable task of negotiating and drafting a UN Framework Convention on International Tax Cooperation recently completed its fifth substantive negotiating session on 13 August 2026 in New York. The Committee is mandated to finalise the text of the Framework Convention, along with two early Protocols on the taxation of cross-border services and on dispute prevention and resolution and open them for signature by the end of 2027. India is a major stakeholder and active participant in these discussions, which can potentially lead to a major reform of the existing international tax architecture through a re-allocation of taxing rights, more efficient dispute resolution mechanisms and by codifying a commitment to effective and inclusive international tax cooperation. As a broader objective, this transformational change is expected to help countries, particularly developing countries, in making substantial progress towards achieving their sustainable development goals.

The August session marked an important milestone for the Committee as it began discussions on the first drafts, written in treaty language, of the Convention and Protocols. The draft Convention requires a commitment to mutual administrative and technical assistance, cooperation in capacity building as well as in addressing issues like the taxation of high-net-worth individuals and checking tax evasion through illicit financial flows. In particular, Article 5 of the draft Convention emphasizes the need to cooperate in supporting a fairer system of allocation of taxing rights that reflects the real economic contribution made by each jurisdiction through factors like value-creation, location of markets, user contribution and data and the place where revenue is generated, irrespective of physical presence in a jurisdiction.  Article 21 of the draft Convention further calls upon State Parties to commit to progressively align their existing tax treaties and related instruments with the principles of the Convention and the Protocols adopted to implement the Convention, including through re-negotiation of bilateral or multilateral treaties where necessary.

Of the two draft Protocols under discussion, Protocol I on taxation of cross-border services has critical importance in achieving the aims of the Convention. This Protocol seeks to establish source-country taxing rights in respect of fees for all services, including automated digital services, irrespective of whether the services are physically performed in that jurisdiction. According to the draft, the nexus that would enable source taxation could be the fact of physical performance, tax residence of the payer, deductibility of the fees under domestic law taxation or the existence of end-users or user data in that jurisdiction. The taxation itself would be primarily on gross basis, unless the services are actually performed in the source jurisdiction or the taxpayer otherwise elects to be taxed under domestic law, in which case the income to be taxed would be the profits derived in that jurisdiction from the services or computed on the basis of a reasonable proportion of global profits, having regard to the revenues generated. 

The adoption of such a Protocol along with the Framework Convention by a significant majority of countries will have substantial implications for India, considering the billions of dollars flowing out of the country every year as payments for digital services, including software, cloud and AI-generated services. Under the existing rules governing nexus and jurisdiction, income of the non-resident service providers cannot be taxed in India, as these services are not rendered or performed by people in India even though they largely derive their value from the deep Indian market and the massive amounts of data shared by Indian users and customers. These payments also cannot be taxed as royalties in view of the Supreme Court ruling in Engineering Excellence, which has laid down that payments for the use of intellectual property can be characterized as royalty only if the payer is granted the right to commercially exploit the IP. Further, the government has recently considered it appropriate to abolish the equalization levy on digital advertising services. While Indian capabilities in producing digital services are growing, Indian businesses rendering digital and AI-driven services are still a long way from offering credible competition to the digital giants of the USA, China and other parts of the world. The massive outflow of untaxed and tax-deductible digital service payments is therefore likely to continue for several years to come, causing a substantial erosion of the Indian tax base. The need to forge an international consensus on a fresh approach to taxing cross-border digital services that ensures a more fair and equitable allocation of taxing rights is thus of critical importance for India.  

As expected, however, the August discussions brought out marked differences and disagreement between the developed and developing economies. Many countries were of the view that the Framework Convention should only complement the existing rules and architecture. Others (largely the developing countries) wanted it to be more transformative and providing a mechanism to set right the imbalance in the existing rules that are viewed as clearly biased towards the economically stronger countries. On Protocol I, major differences were voiced regarding the proposed source rule that is a combination of performance and consumption-based factors and could potentially lead to double or multiple taxation. There were major concerns that taxation on gross basis could result in excessive taxation. Allocation of profits on the basis of proportionate revenues was considered by many to be too hazy a concept in the absence of detailed sourcing rules. All these differences led to a demand by several countries including China of flexibility in adopting the Protocol, so that countries could record reservations to determine which existing treaty relationships are modified by the Protocol. It should be evident, however that allowing flexibility to countries to make such reservations will make the Protocol ineffective in achieving its objective of establishing a standard that denotes a fairer and more equitable international tax system.

Although the August session of the negotiating committee could be said to have brought clarity on the specific issues and areas of disagreement and differing perceptions, the content of the draft Convention and the Protocols as well as the flow of discussions indicate that the Committee will have to make far greater efforts and stimulate a much higher level of collaboration to achieve a significant level of consensus. The discussion drafts presently before the Committee do not appear to be focused towards finding common ground between the developed and developing countries. In particular, the draft Protocol-I on taxation of services, a subject that is the primary reason for continuing differences, is essentially a re-hash of clauses already existing in different Articles of the UN Model Tax Convention. Differences in respect of these clauses were already evident during discussions at the UN Tax Committee where they were approved by the majority for inclusion in the UN Model Convention, despite strong reservations raised by a significant minority of committee members. Incorporating the same or similar clauses into the draft Protocol, without a detailed analysis of the issues involved and without adopting a systematic approach in building consensus on different aspects of the proposed new system of taxation of cross-border services, does not appear to be conducive to reaching a solution that would be acceptable to a significantly large majority of member countries.

Evidently, the committee is severely hamstrung by the lack of a sufficiently well-staffed and adequately equipped Secretariat that could provide the much-needed level of technical expertise and coordinating ability. In complex negotiations that involve resolution of legacy differences in views, beliefs and perceptions, such a coordinating force is essential for shaping and guiding the discussions towards reaching agreement on critical issues. It is gathered, however, that establishing such a Secretariat is taking considerable time due to a lack of resources, both human and financial, and by the traditionally bureaucratic processes involved in the functioning of the UN. Considering the tight timelines, the committee could request the UN General Assembly to make interim arrangements like ad-hoc appointments of tax experts from different countries to the Secretariat. Another option could be the setting up of several sub-committees of Member States that could delve deeper into the identified issues and design workable solutions, which could then be coalesced into broadly acceptable agreements by the Secretariat. 

The Secretariat or the sub-committees could, for instance, analyse different options that could help in reaching agreement on the following issues in relation to Protocol-I, which could then form the building blocks of the proposed new tax system: 

Scoping - whether the new tax system should extend to all cross-border services or be restricted to taxation of automated digital services, including services generated from AI driven platforms and models? Stakeholders generally agree that the existing principles of nexus and characterization are not adequate in effective taxation of highly digitalized and AI-driven services. At the same time, several policy experts are of the view that it is no longer possible to ringfence the digital economy and therefore, it may not be feasible to design a separate tax system only for digital and AI-driven services.

Nexus – what are the factors that could define an appropriate nexus in the context of services, which could be used to modify existing definitions that rely primarily ,on a fixed place of business and physical presence? Broad agreement already exists across countries that definitions of nexus based on forms of physical presence need to be supplemented with a new definition, based on objective parameters that indicate a sufficiently high level of economic activity and value-creation in the source jurisdiction, irrespective of physical presence in that jurisdiction. Even the Pillar-I framework designed by the OECD to meet the challenges of the digitalized economy had conceived of such a nexus.

Sourcing – whether income from services in a digitalized and globalized world should be taxed only in the jurisdiction where they are produced or performed, or also in the jurisdiction where they are consumed, or in both? There is a growing realization among all stakeholders that it often becomes extremely difficult to specify the place of performance of services, particularly highly digitalized or AI-generated services. There are also views gaining ground that taxing services in the place of consumption represents a more efficient model of taxation, not only because this would be more practical but also because customers and users contribute significantly to the value of these services.

Tax base – is there a need to move away from arm’s length transfer pricing and find new ways of allocating income from services in a digitalized world, possibly under a formulaic or fractional apportionment approach? There exists a broad agreement again that traditional transfer pricing poses very difficult challenges when applied to transactions involving hard-to-value intangibles and where significant value is created by markets, data networks and user participation. Fundamental problems also arise where people functions are replaced by algorithm driven and intelligent machine functions. Even the Pillar-I framework had adopted a formulaic approach in allocating super profits for taxation in market jurisdictions.

Considering the level of agreement already existing on these issues, it should be possible to arrive at a common minimum understanding on all the building blocks, which could then form the basis of a viable and largely acceptable Protocol on the taxation of cross-border services. Even if some countries continue to hold out on account of their sectarian or national interests, the Protocol will enjoy a high level of legitimacy and the capacity to constitute an international standard that would, sooner than later, become the norm.

India can and must play a leading role in shaping these discussions at the UN Intergovernmental Committee. The recent setting up of a Working Group of BRICS member countries on cooperation in international taxation is a very welcome step in this regard. As recently stated by the Finance Minister, BRICS economies as source jurisdictions and as large developing economies have a perspective that must inform the ongoing negotiations and ensure durable and fair outcomes. It is hoped that this new BRICS forum for tax cooperation takes charge and proactively engages in the discussions to effectively salvage the prospects of achieving agreement on a fair, equitable and sustainable new international standard for taxing cross-border services in a digitalized world.