United Nations: Draft Protocol on the Taxation of Income from Cross-Border Services

Summary 

• On 20 July 2026, the UN released the Co-Leads’ Draft of the First Protocol to the Framework Convention on International Tax Cooperation, allowing source (market) jurisdictions to tax income from cross-border services — including automated digital services — even where the provider has no physical presence. 

• The draft identifies online advertising, online intermediation and social-media platforms, digital content, online gaming, cloud computing and standardised online teaching as “automated digital services,” and sets sourcing rules based on the location of consumers, end-users or user data; maximum withholding rates remain blank pending negotiation. 

• Crucially for indirect-tax teams, the Protocol expressly excludes VAT/GST and other general consumption taxes from its scope — it targets income taxes, digital services taxes and equalisation levies — but it signals the direction of global digital-economy taxation; negotiations run in New York from 3–13 August 2026, with finalisation targeted for 2027. 

Extended article 

On 20 July 2026, the United Nations released the Co-Leads’ Draft of the First Protocol to the UN Framework Convention on International Tax Cooperation, addressing the taxation of income from cross-border services. Developed by the Intergovernmental Negotiating Committee, the draft is the first complete negotiating text on this topic and forms part of a broader shift toward a UN-centred model of international tax governance, driven by developing countries seeking a greater voice in rule-setting. 

The Protocol would establish a shared taxing right, permitting source or market jurisdictions to tax income from cross-border services with certain limitations. It covers three categories: fees for services, automated digital services (ADS) and insurance/reinsurance premiums. For ADS — services requiring minimal human involvement — the draft lists online advertising, supply of user data, search engines, online intermediation platforms, social-media platforms, digital content, online gaming, cloud computing and standardised online teaching. Sourcing rules would look to where consumers, end-users or user data are located, allowing taxation without physical presence. A revenue-based method is proposed for allocating profits to market jurisdictions, alongside separate rules for services provided through a physical presence. 

The draft also contains provisions on relief from double taxation (a credit in the residence State), dispute resolution through mutual agreement, and exchange of information. Several key parameters — notably the maximum withholding tax rates and entry-into-force thresholds — remain open and are presently left blank in the text. Importantly, the Protocol’s scope expressly extends to digital services taxes (DSTs), equalisation levies and excise taxes with a similar economic effect on service income, but specifically excludes VAT, GST and other generally applicable consumption taxes. 

For VAT and indirect-tax professionals, the immediate compliance impact is limited because consumption taxes are carved out. Nevertheless, the Protocol is strategically significant: it reflects the same policy logic — taxation at the place of consumption / market — that already underpins destination-based VAT on digital services, and it may reshape how multinationals structure and price cross-border digital supplies. The draft was discussed at the fifth substantive session of the negotiating committee in New York from 3 to 13 August 2026, with further revisions expected as the UN targets finalisation of the Framework Convention and its first protocols in 2027. 

Sources: UN DESA – Draft Protocol (PDF)  ·  EY Global Tax News  ·  Deloitte tax@hand

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