Updates from the the Second Session of the historic Intergovernmental Negotiating Committee (INC) on the United Nations Framework Convention on International Tax Cooperation

Day 7: 12 August 2025

The discussion on Protocol 1 on the taxation of income derived from the provision of cross-border services in an increasingly digitalised and globalised economy continued at the Second Session of the United Nations Framework Convention on International Tax Cooperation Negotiations.

The session was informal and was led by Ms. Liselott Kana.

She highlighted the following issues for discussion:

• Possible new nexus rules?
• Continued use of physical presence
• Net versus gross based taxation?
• Possibility of different rules for different types of services?
• Taxes covered

The discussion during this session was informal with countries making submissions on what they considered were key issues as guided by points (a) to (e) above.

Taxes Covered: Are Digital Services Taxes, Indirect or Direct Taxes?

France earlier on had made submissions in support of Jamaica for the need to look into indirect taxes as a way of taxing the digital economy. In response, Ghana made submissions firmly submitting that the taxes covered under the Protocol should be taxes on the income derived from cross-border services, therefore the discussions should be limited to income taxes.

Nigeria commented on the discussion on DST vs VAT. They indicated that the two taxes are not the same even though they might have a uniform tax base on their application. On DST they stated that the MNEs, the service provider, were being taxed, whilst on VAT, it was the consumer who was paying the tax. Thus, due to this, the protocol should be limited to income from services. Morocco supported the position of Ghana and Nigeria that the discussion should be on income tax and that the discussion on indirect taxes can be reserved for the Nairobi session in November 2025, if necessary.

Ms. Liselott Kana the co-lead of Workstream 1, chairing the session and considering the input from African countries and European members, indicated that there is a need to define indirect taxes and direct taxes because there could be a definition problem. She stated that what could be a direct tax for one member state could be an indirect tax for another state. However, at the end of the day, the cost should be to the MNEs. Thus, the use of words such as 'direct' and 'indirect taxes' should be defined or translated in the protocol.

Clarification was sought by the Chair on the operation of DSTs in France.

Senegal submitted that there is a conceptual problem in the discussion, that is, there ought to be clarity on whether the discussion is on direct taxes and indirect taxes or how to tax income that were made by MNEs not physically present. Senegal highlighted that there is VAT on digital services in Senegal; hence, the intermediary services provided to consumers in Senegal are taxed therein. They highlighted that a tax on digital services that works as an income tax is preferred. That they will continue applying the VAT on digital services.

The Chair commented that VAT on non-resident taxes in Senegal is different from the system described by France. He redirected the discussion to what the issues were, which is how to tax revenue made in another country where the MNE is not physically present. He stated that there were no gaps in indirect tax rules applicable to MNEs with digital services, but the income generated by MNEs with no physical presence was the focus of the discussion.

Cameroon aligning itself with Senegal, Morocco and Nigeria, stated that the rules are established on indirect taxes, but the current need is for rules to amend tax conventions/treaties to allow for taxation of MNEs with no physical presence. They indicated the need for an international tax mechanism which bypasses the current tax mechanisms which hinder the taxation of income from MNEs without physical presence.

Ghana made further submissions. They stated that direct and indirect taxes should be defined in the protocol. For one, it indicated that what is under discussion is a transaction tax and income tax. An example was provided that in Ghana the excise on local production is on the ex-factory price, and on import it is on the import value by the manufacturer, who charges it basically to the consumer. For them, the trap of withholding taxes is that it is a collection mechanism and not a tax. There is also a withholding tax on VAT.

Liberia highlighted that the peculiarity with the tax systems makes the discussion difficult. Their position was that the nexus should be redefined with focus on income derived from remote economic activities.

The African Tax Administration Forum (ATAF) stated that there have been scenarios whereby some designs of DSTs enable entities to move income to the parent company jurisdiction while claiming expenses in the source jurisdiction. In the context of the protocol, Member States should define income and include what qualifies as income taxation.

Significant Economic Presence, Physical Presence and Low Margin Services/Entities

Kenya’s proposal was still on the need for the formulation of new nexus rules. They indicated that both resident and source jurisdictions have been affected by the new way of doing business. Kenya adapted a digital service tax (DST) which has evolved into SEP (significant economic presence). SEP imposes a tax on the income of a non-resident which is derived from the jurisdiction; having a user and if the entity meets a certain turnover threshold.

Kenya insisted that physical presence should have no role in whether market jurisdictions should impose taxes or not. Further, they submitted that the gross based taxation for some services worked and formulary apportionment for others worked. They further argued that low-margin services were hard to define and that a lower rate could be taken advantage of through redefinition. With regard to several submissions that an impact analysis should be carried out so that approaches can be discussed, Kenya’s submissions were that an economic analysis is already a role given to the secretariat.

Kenya made an intervention on low-margin services. They stated that depending on how developed an economy was, a service could be categorised as slow margin. Issues such as high competition, pricing or high operating costs could lead to the categorisation of a service as low margin.

Nigeria submitted that physical presence is an outdated rule due to new ways of doing business. The physical presence rule was developed at a time when it was impossible to do business without significant physical presence e.g 183 days requirement for employment tax. With the digital way of doing business, then significant economic presence tax may be suitable. They were still in support of gross-based taxation.

African Union (AU) aligned with the African Group. It stated that Para. 13 of ToR recognised that the current tax rules do not work for the current business environment and that paragraph 8 further acknowledges the need for broader nexus rules.

Kenya responded to an enquiry on whether physical presence should be completely done away with. Their position was that physical presence should not be a limiting factor for the taxation of MNEs. In the instance of SEP tax, it does not apply where there is a permanent establishment. Further, they stated that physical presence is not the only factor that has to be met by MNEs to operate in market jurisdictions to derive income and as such physical presence should not be the only factor that should be met by jurisdictions when taxing. They also stated that presence is linked to fair allocation of rights.

Nigeria also provided clarification on its position, stating that physical presence rules should not be done away with but rather they are advocating for the development of additional rules which cannot be captured by physical presence rules. They are advocating that in addition to physical presence rules, there should be SEP tax or other DSTs.

African Union (AU) aligned with the African Group. It stated that paragraph 13 of Terms of Reference recognised that the current tax rules do not work for the current business environment and that paragraph 8 further acknowledges the need for broader nexus rules.

Value Creation and Nexus Proxies: Users vs Payments

The discussion turned to the elements of value creation, users and payments.

Kenya referred Member States back to the discussion on the elements of the commitment towards fair allocation of taxing rights and equitable taxation. The elements that were discussed included taxation taking place where economic activity takes place, value is created and where revenue is generated. Therefore, the issue of whether nexus arises depends on whether any of these categories are satisfied. . For example, if Country A uses information from Country B and sells it to Country C, the question would be, 'Is information for Country B being used by Country A to generate revenue that is being received from Country C?' The question then is how Country B (holding information) is being remunerated, and this is a question of the data being part of one of the economic activities within that cycle of transaction. How then are we going to fairly allocate taxing rights in that scenario? Dwelling on the user makes us realise there are other services which do not have allocation. One country might fall within a bracket of users, but the payment is coming from another country; hence, where a country falls within the value chain. Another example: if a service does not find a market, then it would be valueless. There is another concept around it, and if data is being collected from the source or market and is being used to develop and is being customised to a certain market, then remuneration has to be done in relation to that particular economic activity. Kenya emphasised that we cannot say payment or user will cover everything. Value creation includes inception of and creation of a concept, whether there is research and development (R&D) or not. Until that service is disposed of, then we can say value has been created, and we can then apportion it.

The Chair further questioned who should share taxing rights between the two jurisdictions or if it should be more than 2 jurisdictions.

Kenya responded that is there is a third jurisdiction which is adding to value creation. They emphasised that when they refer to gross taxation, they are not implying this should be one-sided. They recognise that value is created by a number of jurisdictions.

Zambia sought clarification from the jurisdictions which use ‘user’ as the nexus rule for taxation, what qualifies or determines the user? Zambia posited that users are able to move through jurisdictions and there is also the use of VPNs that can distort the point of taxation. For these reasons, Zambia believed that payments as a nexus rule may be better.

In response, the Chair stated that Zambia stated that payments can be used as an identifier of users as well and this was another dimension that could be considered.

Ghana stated that somewhere in 1992, there was an interesting definition for source in telecommunications, in 2015, the definition was broadened to include electronic communication. The definition of apparatus was widened to include digital. Payment or value is about what recipient sees the service. Definitions should include some of the issues under discussion.

Senegal echoed comments of meaningful economic presence as a complimentary criterion in addition to physical presence. The nature of services requires that several nexus rules be used. Addressing whether Member States should focus on payments or the location of users as the nexus rule, Senegal emphasized the need for a broad approach. When looking at digital platforms, a user is an individual that consults, uses or interacts within a digital interface. Therefore, Senegal suggested using a cascading approach. The localization of the user should be determined by several criteria. These include if the user is a business, then the commercial address of the business can be used and the billing address for individuals. Geolocation or IP address can also be used in other situations.

Relationship between Significant Economic Presence and Permanent Establishment

Kenya was asked to clarify whether, when there is no PE, SEP rules apply so as to establish, whether PE rules should continue to exist alongside PE rules or whether SEP rules should subsume PE rules.

Kenya began by pointing out the limitations of treaties. In a scenario whereby, a service provider of technical services does not meet the PE requirements i.e. stays within the source jurisdiction for less than 183 days for instance, then a service PE does not arise, and the service provider cannot be taxed on their profits. However, if the treaty does not provide for the taxation of technical services. It submitted that a PE will not be established because of the duration of the employees, and based on the PE rule, it was introduced before an understanding of what PEs were. First, the PE would not exist, and second, the SEP rule gravitates towards digital services such as digital marketing. Based on payment such as professional fees, the only restrictions come when you have entered into a tax treaty which is restrictive. Concluded it is on payment.

Nigeria stated that significant digital presence law is not targeting withholding tax as first option, it is a nexus rule just like PE rules. Whether there is a taxable nexus, starting point is whether there is physical presence, then other options can be considered through process of elimination. It is an income tax provision.

The Chair asked Nigeria if Nigeria will not be applying withholding tax and Nigeria responded that the rule is not targeting withholding tax, but it is to determine taxable nexus.

Different rules for different services

Members and stakeholders responded as follows to the co-chair's earlier query about countries proposing different rules for different services:

ATAF stated that there is a possibility of different rules for different types of services. Their position was that the treatment of intra-group and automated digital services will have different rules and that the rate which will apply to low margin will likely be different. This, of course, will bring a lot of complexity. Should balance simplicity with fairness. Fairness means that those low-margin businesses will not be taxed at the same rate as intra-group services.

Ghana commented on different rules for different services, meaning that it is not possible to have rules which are a one-size-fits-all. They indicated that going into particulars such as rates diverts the discussion. Nigeria supported Ghana and stated that determination rates cannot be done during the current ongoing meetings. Zambia re-echoed Kenya’s position on simplicity, easy administration and future-proof rules. Kenya supported that there are different rules for different services. Kenya does not foresee a differentiation in the tax rates but does see different rules for different services.

Meeting Adjourned.

Video links:

1:38:56 - 1:41:39 Kenya. Morning Session. https://webtv.un.org/en/asset/k1o/k1oymar8eg

1:33:12 – 1:35:20 Zambia. Afternoon Session. https://webtv.un.org/en/asset/k1t/k1txvvcwpm

2:38:33- 2:40:33 Ghana Afternoon session https://webtv.un.org/en/asset/k1t/k1txvvcwpm