Economic impact of Article 12AA: New UN tax model provision on cross-border services

The UN Model Tax Convention is a template treaty used by countries to negotiate tax agreements, aimed at avoiding double taxation and reducing tax avoidance. However, in 2025, the UN Committee of Experts on International Tax Cooperation introduced Article 12AA (formerly known as Article XX) – a new provision which significantly reshapes how cross-border services are taxed.

This independent Oxford Economics report finds that the estimated US$7 billion in withholding tax gains – taxes raised on services bought from abroad – would be fully offset by indirect losses caused by reduced services trade, less 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.

What is the impact of taxing cross-border services?

With an exceptionally broad scope covering all types of services, Article 12AA grants source countries a specific taxing right over service fees – even when the service provider has no physical presence in that jurisdiction.

Put simply, if a business in Country A pays a foreign company in Country B for a service (like consulting, IT support, digital services, human resources services, legal advice etc.), Country A can tax that payment even if the foreign company from Country B does not have a physical presence in Country A.

Despite its far-reaching implications, the Article was adopted without any accompanying economic impact analysis, leaving countries without a clear understanding of how this measure could affect their foreign direct investment and trade flows.

This report finds that Article 12AA would substantially raise the cost of cross-border services, leading to a sharp contraction in services trade –especially for developing economies, where imports of services could fall significantly and competitiveness would weaken.

These increased service trade frictions would spill across value chains, reducing goods trade, foreign direct investment and non-extractive GDP. Although the measure raises modest short- term revenue, indirect effects on growth and tax bases ultimately leave developing economy governments with a net fiscal loss of US$241 million per year, where these gains are entirely offset by a US$7 billion indirect revenue loss.

Policy discussions regarding Article 12AA must move beyond technical tax considerations.

Policymakers should weigh the immediate appeal of direct withholding tax revenues – revenues from taxing services bought from abroad – against the broader risk of reduced trade integration and investment. A multi-dimensional lens is required to ensure that international tax reforms do not inadvertently stifle the very growth they are intended to support.

Key findings of the report

1. A major hit to cross-border services trade – felt most acutely by developing economies – threatening diversification and competitiveness.

Widespread adoption of Article 12AA could significantly raise the cost of cross-border services, in particular technical and professional services, leading to a contraction of services trade. Developing economies will be hit hardest as Article 12AA would:

• Lead to a sharp drop in service imports. Higher tax‑induced trade costs could cut developing‑country imports of technical services by 4.1%, with domestic providers able to replace only a small share of the loss.
• Divert trade away from developing economies. The overall effect masks a major shift as service imports from developing economies fall far more sharply than those from advanced economies, with domestic firms unable to replace lost global expertise due to limited domestic capacity.
• Heighten vulnerability and weakens long‑term competitiveness. The new measure could deepen reliance on advanced economies, slow technology adoption and value‑chain integration, undermine diversification efforts (including in resource‑dependent economies like Nigeria), and erode the competitiveness of countries positioned as offshoring or outsourcing hubs.

2. Rising service‑trade frictions could ripple across value-chains, weighing on trade and investment.

Because technical and professional services are used intensively as intermediate inputs across several industries, higher cross‑border service costs spill over well beyond the tradable services sector, hitting non‑tradable services, goods trade and investment.

• FDI would take a hit: Annual inward foreign direct investment is projected to fall by 0.28% as tax frictions lower after‑tax returns on service‑intensive activities and influence location choices of multinational companies.
• Trade volumes would contract. Higher trade costs for cross-border services would reduce imports of non‑extractive goods and services by 0.75% and exports by 0.47% as shocks spread through value chains.
• Trade and investment shocks could cut growth, threatening economic diversification. The combined trade and investment effects would lead to a 0.08% contraction in non‑extractive GDP, driven by reduced capital accumulation, lower productivity spillovers, and weaker competitiveness –endangering economic diversification.

3. Modest fiscal gains outweighed by GDP losses

Article 12AA creates a sharp trade‑off between small, short‑term revenues and meaningful long‑term growth risks.

• The new provision would bring limited fiscal gains. Higher withholding tax rates are estimated to raise US$7 billion in new revenue annually (less than 0.1% of global GDP) – for developing economies.
• Trade responses would erode much of this gain. Import substitution would slightly raise corporate income tax collection, but trade destruction and diversion would erode withholding taxes revenues, while exporters face lower profits and higher foreign tax credits, further reducing corporate income tax.
• The overall fiscal impact will be negative once indirect effects are included: Weaker trade and investment shrink GDP and corporate profitability, eroding tax bases far beyond cross‑border services. Reduced economic activity alone lowers government revenues by US$7 billion, leaving a net fiscal loss of about US$241 million per year after accounting for all direct and indirect effects.

Methodology note: This analysis assumes a median domestic withholding taxes rate of 15% and renegotiated Double Tax Treaties (DTTs) capped at 3% for Global North partners and 10% for Global South partners, reflecting norms observed in recent treaty negotiations.