SouthViews No. 305, 23 February 2026

Taxation of digital services – A Domestic Law Solution for Overcoming Tax Treaty Barriers

By Radhakishan Rawal

Tax treaty treatment of source taxation of cross-border services continues to be an unresolved issue even fifteen years after it was recognized as a major issue within the Base Erosion and Profit Shifting (BEPS) Project. While the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework’s Amount A of Pillar One does not seem to be getting finalised, at the United Nations (UN) an Intergovernmental Negotiating Committee (INC) is working on a UN Framework Convention on International Tax Cooperation which will offer a solution to the issue. The success of the UN’s initiative will depend on how many developed countries sign the Framework Convention and relevant Protocols.

This article evaluates a Domestic Law Solution to the issue which was presented at the February 2026 session of INC at New York. As per this solution, the domestic law of the source country can define the term “profits of an enterprise” to exclude consideration for digital services and thus bypass treaty restrictions on source taxation. As a result of this, the source country will be able to levy tax on such income in terms of Article 21(3) of the tax treaties signed by it provided the wording of Article 21(3) is identical to that in the UN Model Tax Convention.

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Tax Cooperation Policy Brief No. 40, 19 December 2024

Towards a UN Protocol for Taxing Cross-Border Services in a Digitalized Economy

By Abdul Muheet Chowdhary, Anne Wanyagathi Maina and Kolawole Omole

This Policy Brief offers a way forward on the United Nations Framework Convention on International Tax Cooperation’s (UNFCITC) protocol for taxing cross-border services in a digitalized economy. Such a protocol can provide a way to standardize and harmonize the existing plethora of widely varying Digital Services Taxes (DSTs), which can reduce political tension between the Global North and South, ease compliance costs and uncertainties for business, while providing a basis for the elimination of double taxation. The revenue generated can help bridge the Sustainable Development Goals (SDGs) financing gap and for the realization of human rights in the Global South. The Group of Twenty (G20) can act as a forum where key countries in the North and South can hammer out the architecture of the protocol for taxing cross-border services.

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