Submission to UN Call for Inputs Workstream II

The Co-Leads’ Draft of the First Protocol constitutes a useful basis for further discussion but raises significant questions and issues. In particular, the introduction of new, vague and undefined terms as well as the establishment of multiple different nexuses for taxation, without an immediate link to fundamental principles of tax allocation, may significantly increase legal uncertainty, complexity and administrative burdens for both taxpayers and tax administrations. Moreover, an articulated policy rationale for the allocation of taxing rights under the Protocol is currently absent. It is unclear which principles justify the various nexus rules and the differentiation between different kinds of services. The Protocol should therefore articulate the goals and principles underlying its allocation of taxing rights, preferably in the Protocol itself or in an accompanying commentary. A fair allocation should not simply grant every jurisdiction with an economic connection some taxing right, as this risks excessive complexity and uncertainty. Instead, the nexus rules should be principle-based, simplified and streamlined, with appropriate thresholds and a clear hierarchy that limits the number of simultaneously taxing source states. Where multiple source states may tax, the Protocol should clearly define the basis for allocating taxable profits among them and ensure full relief from double taxation. It is hoped that the observations and recommendations in this submission will contribute constructively to further develop the Protocol. The Maastricht Centre for Taxation and its members would be pleased to continue the dialogue and to provide further academic input as the negotiations progress and future work is developed.