UN tax proposal on cross-border services risks backfiring on developing economies, new study finds

The analysis finds that a proposed expansion of source-country taxing rights over cross-border services – Article 12AA of the UN Model Tax Convention – risks triggering an estimated US$241 million annual loss in government revenues in developing economies.

The provision allows countries to impose withholding taxes on any cross-border services even where the supplier has no physical presence in the market, and was adopted without any accompanying economic impact assessment, despite its potentially far-reaching implications applying to all industries.

Andrew Wilson, ICC Deputy Secretary General – Policy, said: “Article 12AA was adopted without any serious assessment of its impact on trade, investment or growth. Our analysis suggests that for developing economies in particular, the wider economic costs could significantly outweigh the revenues raised.

“Cross-border services are not a peripheral activity – they are a core input into modern production, exports and value-chain integration. Policies that raise their cost risk weakening competitiveness and slowing diversification.”

The study, conducted by Oxford Economics, finds that while the measure could generate up to US$7 billion in gross withholding tax revenue, those gains are fully offset by indirect losses caused by reduced services trade, lower foreign direct investment and weaker economic growth. Once these effects are taken into account, developing economies face a net fiscal loss of around US$241 million per year.

Higher tax-induced trade costs are projected to cut developing-country imports of technical and professional services by more than 4%, with limited scope for domestic providers to replace lost foreign expertise. The resulting shock would ripple through value chains, reducing goods trade, investment and productivity, and increasing reliance on a narrower set of advanced-economy suppliers.

Luisa Scarcella, ICC Tax Policy Lead, said: “The issue is not whether source countries should have taxing rights, but whether these new tax policies effectively support sustainable growth. Broad measures like Article 12AA risk shrinking the tax base they are intended to expand.”

“By discouraging services trade and investment, gross-based withholding taxes erode corporate profitability and corporate income tax revenues over time, along with other negative spillovers from lower trade and diminished investment The result is a policy that looks attractive in isolation and in the short term but weakens public finances in practice.”

ICC is urging governments to approach the adoption of Article 12AA with caution and to subject the provision to robust economic impact analysis before incorporating it into bilateral tax treaties or adopting similar provisions domestically, warning that poorly designed tax measures risk undermining development objectives rather than advancing them.