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UN Releases 2021 Update of the Model Tax Convention
On April 4, the 2021 version of the United Nations Model Tax Convention between Developed and Developing Countries was released ahead of the 24th Session of the Committee of Experts on International Cooperation in Tax Matters. This is the fifth edition of the Model Convention. The most important changes included in the 2021 version address concerns expressed by developing countries regarding tax treaty obstacles to the taxation of foreign enterprises on income from automated digital services and on gains on offshore indirect transfers, as well as recommendations on the application and interpretation of the definition of certain key terms.
Main Features of the Revision
This latest revision of the United Nations Model Tax Convention is the result of an ongoing review process intended to ensure that the contents of the Model keep up with developments in tax sphere. The review proved the necessity to address concerns expressed by developing and developed countries with respect to the tax treaty treatment of digitalized services.
To this aim, the Committee established the Subcommittee on Tax Challenges Related to the Digitalization of the Economy, which drafted a new Article on Income from Automated Digital Services. This Article 12B in the updated Tax Convention were adopted by the Committee in April 2021 and constitute a main part of the changes.
Another change is the new paragraphs 6 and 7 that were added to Article 13 (Capital Gains) in order to address concerns expressed by developing countries with respect to tax treaty obstacles to the taxation of gains on the direct transfer of some types of property that are inextricably linked to their territory as well as gains on so-called “offshore indirect transfers” in situations where other provisions of Article 13 would allow the taxation of gains from the direct transfers of such property.
Other Significant Changes
– Changes reflecting the results of the application of the Model to collective investment vehicles and pension funds.
– Changes to Articles 10, 11 and 12 addressing the situation where an intermediary that receives payments covered by these Articles is a resident of a different State.
– The removal of the exception for partnerships previously included in Article 10.
– Changes in connection with the addition of Article 12B (Income from Automated Digital Services).
A number of changes were also made to the Commentaries on the Articles of the Model, in particular, those concerning the definition of permanent establishment in Article 5, the concept of beneficial owner in Articles 10, 11, 12, 12A and 12B, and the application of the provisions of the Model to collective investment vehicles, pensions funds and real estate investment trusts.
In the future, by the decision of the Committee, any conclusions on changes to the United Nations Model Tax Convention may be presented as a Committee’s report, which in turn may be used for the next revision of the Model.