The United Nations has released the Co-Leads’ Draft of the First Protocol to the United Nations Framework Convention on International Tax Cooperation, proposing a new international framework for taxing income from cross-border services, including digital services. Dated 20 July 2026, the draft seeks to establish uniform rules that would allow countries to tax income generated from cross-border service transactions while introducing mechanisms to prevent double taxation and resolve tax disputes. 

The proposed Protocol is intended to complement the broader United Nations Framework Convention on International Tax Cooperation and reflects growing international efforts to modernize tax rules in response to digitalization and cross-border service-based business models.

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Scope Covers Wide Range of Cross-Border Service Income

The draft Protocol applies to residents of one or more States Parties and covers taxes imposed on income arising from services. Unlike traditional tax treaties that focus primarily on income taxes, the Protocol expressly extends to taxes such as:

• Digital Services Taxes (DSTs),
• Equalization levies,
• Excise taxes having a similar economic effect on service income, and
• Other taxes imposed on cross-border services.

However, the Protocol specifically excludes Value Added Tax (VAT), Goods and Services Tax (GST), and other generally applicable consumption taxes from its scope. 

New Taxing Rights for Cross-Border Service Fees

One of the most significant proposals is contained in Article 5, which provides that fees for services paid to residents of another State Party may be taxed in both the residence State and the source State.

Under the proposal:

• the country where the service recipient or payer is located may levy tax on service fees;
• such taxation would be subject to a maximum withholding tax rate, which remains to be negotiated and is presently left blank in the draft; and
• countries may continue taxing service income under domestic law within the agreed limits.

The Protocol also lays down detailed rules for determining where service income arises, including situations where services are physically performed, consumed, or paid for in a particular jurisdiction. 

Dedicated Chapter for Automated Digital Services

The draft devotes an entire article to Automated Digital Services (ADS), reflecting the increasing importance of the digital economy.

The Protocol defines automated digital services as services provided through the internet or another electronic network requiring minimal human involvement from the service provider.

Illustrative examples include:

• online advertising,
• search engines,
• online marketplaces,
• social media platforms,
• cloud computing,
• digital content services,
• online gaming,
• supply of user data, and
• standardized online teaching services.

Income from such services may be taxed by both the residence State and the jurisdiction where the income is considered to arise, subject to an agreed cap on taxation. The source rules focus on factors such as the location of consumers, users, and user-generated data. 

Insurance Premiums Also Covered

The Protocol extends similar taxing rights to cross-border insurance premiums.

Insurance premiums paid to insurers resident in another State Party may be taxed by both jurisdictions, again subject to a maximum rate that will be finalized during negotiations.

The draft includes detailed definitions of insurance premiums and insurers and specifies the circumstances in which such income is deemed to arise in a State. 

Physical Presence Rule for Business Profits

Article 9 introduces a rule allowing taxation of profits where an enterprise provides services through employees or agents physically present in another State.

The draft also allows enterprises providing services without physical presence to elect taxation based on a reasonable allocation of profits linked to revenues generated within the source State.

The proposal further requires that taxation of foreign enterprises should not be less favourable than that imposed on domestic enterprises carrying on similar activities. 

Mechanism to Eliminate Double Taxation

To avoid multiple taxation of the same income, the Protocol requires the residence State to grant a tax credit for taxes paid in another State under the Protocol.

The credit is limited to the amount of domestic tax attributable to the relevant income, following principles commonly found in bilateral tax treaties. 

Dispute Resolution Through Mutual Agreement

The draft establishes a structured dispute resolution mechanism.

Where taxpayers believe taxation is inconsistent with the Protocol, they may approach the competent authority of their residence State within three years of the first notification of the disputed taxation.

Competent authorities are expected to resolve disputes through mutual agreement procedures, with an additional framework envisaged where States are also parties to the proposed Second Protocol. 

Exchange of Tax Information Strengthened

Article 12 provides for extensive exchange of information between tax authorities where such information is foreseeably relevant for administering the Protocol or preventing tax avoidance and tax evasion.

The draft includes confidentiality safeguards while permitting disclosure to courts and administrative authorities involved in tax administration and appeals. 

Draft Still Under Negotiation

Several key provisions remain open for negotiation. Notably, the draft leaves blank the maximum withholding tax rates applicable to service fees, automated digital services, and insurance premiums.

Similarly, institutional provisions relating to meetings of States Parties, the Secretariat, financial arrangements, and the precise entry-into-force thresholds remain to be finalized before adoption.

Once adopted and ratified by the required number of States, the Protocol will become a significant component of the emerging UN-led framework for international tax cooperation.

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