Taxation of Income from Cross-Border Services: A Global Normative and Enforcement Approach to Legal Issues and Policy Options

Abstract

The harmful effect of international juridical double taxation on cross-border services has been acknowledged since the early days of the modern history of tax treaties. However, the complexity of the applicable allocation rules in tax treaties leads to uncertainty and arbitrage by global players, which might deprive countries of the ability to effectively exercise their taxing rights. These issues are particularly visible in the case of business services, which countries either address through transfer pricing or dedicated services clauses.

Both options might work in several scenarios, but each has some drawbacks.

From a global tax governance perspective, transfer pricing might achieve a more refined outcome without increasing the complexity (and proliferation) of the tax treaty clauses related to services. However, this approach presupposes mobilising significant human and financial resources to operate with the technical capacity that secures its proper functioning. Accordingly, the transfer pricing approach may be proportionate for some countries, but questionable or unsustainable for others, which might bear an excessive cost if compared with the potential returns in terms of tax revenue. Therefore, a policy dilemma arises as to whether the correct approach to resolve such issues should be addressed at the normative or enforcement level or involve a combination of both. Should transfer pricing be the better solution, its consideration as a solution is further complicated by the issue of (i) whether taxation of income from cross-border services might just demand capacity-building in developing countries, and at their expense, to enhance the collection of the tax in line with the global transfer pricing standards, or (ii) whether global tax governance goals in this field ought to be pursued with a stronger financial contribution by developed countries.

Keywords: Cross-border services, International Tax, United Nations Model Convention, OECD Model Convention, Business income, Income Tax, Tax Policy, Transfer Pricing, Withholding Tax