ALTHOUGH the latest version of the United Nations Model Tax Convention was finalised in 2025, but the publication has been released only in 2026. The scope of the changes brought in by this latest UN model is quite exhaustive and breaks new ground in multiple areas and needs to be studied in detail in course of time. But the publication of the 2025 model gives us an opportunity to examine some of the main changes that have been made in this Model.

There was a time when the United Nations model Tax convention was considered a laggard as compared to the speed and agility of the OECD Model which represented the high and mighty of the capital exporting nations in particular the western nations and which used to update its model in line with the changing realities of the business quite regularly. By contrast, the first UN Model was out in 1980, the second version came after 20 years in 2001, the next version was again after a decade in 2011. In fact, there were efforts to converge the position of the two models. However, things started to change thereafter.

A Trust Fund for International Cooperation in Tax Matters was established in July 2006, in order to support the activities of the Committee of Experts on International Cooperation in Tax Matters and India was the first country to donate 100000 USD to support its activities on two occasions. Not much activism in this area is shown by others as yet.

The United Nations model was titled from the inception till now - the United Nations Model Double Taxation Convention between Developed and Developing Countries. A model for tax treaties between developed and developing countries, the United Nations model historically has been more source oriented and gives somewhat more taxing right to the source states. The UN also publishes a manual for negotiating tax treaties between developed and developing countries. The name of the manual remains the same. But it seems that after some lively debate and considering that many developed and middling countries also use the UN Model, it was decided that the name should change to the United Nations Model Tax Convention. This brings it at par with the OECD Model without the baggage of being exclusively for developed or developing countries. It seems that there was quite some resistance even for this innocuous change. Apparently, the same issue was earlier raised by Roy Rohatgi and was discussed in 2011 but not adopted. What's in a name? Md Ashfaq-TNI Considering the number of issues that the UN tax Committee is now dealing with, the name change indicates the growing confidence of the members of the expert committee.

As has been rightly pointed out, the Models are only starting points for negotiations and no country follows the exact OECD or the exact UN Model and in that sense the UN Model also serves an important purpose of helping finalise the tax treaties that ultimately are the instruments of the prevention of double taxation.

So far, while the UN model ceded a little more taxing right to the source countries, particularly in the matter of service taxation. But essentially the UN Model used to follow the OECD model with a little bit of tweaking here and there.

Then the OECD embarked on its Base Erosion and profit shifting project and tried to impose its costly and complicated solutions to the entire world in the name of an ' Inclusive framework' where many developing countries were admitted at a very late stage in the development of the OECD solutions and asked to sign on the dotted line though apparently working on the basis of an 'equal footing'.

The OECD BEPS project, for all its flaws, had one good outcome in that it allowed civil society organisations a platform to voice their concerns particularly in the matter of transparency and tax avoidance that naturally affect the developing countries more. Many such organisations like the Tax Justice Network etc., were critical of the OECD process in a number of areas.

Somewhere down the line, the United Nations tax committee also tried to take a more independent line in its work and ventured into area already trodden by the OECD particularly in the area of tax base erosion of the developing countries. Even though this move infuriated the rich nations who raised the bogey of duplication of work involving the same issue already considered by the OECD, the tax committee persisted and also allowed the civil society groups to air their views. This culminated in the United Nations framework convention, which is of course carrying on its work in in selected areas. The tax committee also carries on its work independently and perhaps feeds into the framework convention work.

The UN tax committee began charting a somewhat independent course from 2017 when despite strong objections, Article 12A relating to fees for technical services was introduced in the UN Model. In 2021, the process was taken even further with the introduction of Article 12B in respect of automated digital services with the same formula of gross basis of taxation at a negotiated rate although in this case, there were some nuances in that an option is available for taxation on net profit basis.

The process is taken further in the 2025 Model with a completely new article 12AA in respect of almost all the services barring automated digital services and giving up the recently introduced article 12A and the old Article 14 relating to Independent personal services that the Committee had earlier struggled hard to retain despite its deletion in the OECD Model in 2000. In fact, work was going on in two streams and one of the positions was that Article 14 will be strengthened by bringing back the base erosion criterion of the 1980 Model 14(1)(c). In the end though a view was taken to merge all the services provisions together in the new Article 12AA.

As per the usual UN Model formulation, a secondary taxation right is given to the source state in respect of fees for service to be taxed at a rate to be negotiated. The provision is subject to provisions of articles 8, 12B, 12C, 15, 17,18 and 19. Thus fees for automated digital services will not be covered by this provision and that to me seems to be the biggest drawback.

'Fees for services' has been defined to mean any payment in consideration for any service. The only condition for the fees to arise in a Contracting State is that the payer is a resident of that state. The usual exception for fees effectively connected with a PE when net basis of taxation is allowed, also applies.

At the same time, a new article relating to extractive industries where the Committee has been working for long has been introduced. Here, the UN Model expands the PE concept through a new Article 5A. When a resident of a Contracting State carries on activities in the other Contracting State for the exploration for, or exploitation of, natural resources in the source state, it will be deemed that the relevant activities are being carried on through a permanent establishment, unless such activities are for a period or periods not exceeding in the aggregate 30 days in any twelve-month period commencing or ending in the fiscal year concerned. And "natural resources" means natural assets that can be used for economic production or consumption, whether non-renewable or renewable, including fish, hydrocarbons, minerals and pearls, as well as solar power, wind power, hydropower, geothermal power and similar sources of renewable energy.

In respect of cross -border maritime transport, under the OECD Model and Alternative A of the UN Model, currently, the residence State has exclusive jurisdiction to tax the maritime income. Till now, alternative B of the UN Model gave source states some right to tax. However, Alternative A being the default regime, is mostly adopted in tax treaties. This is now changed and earlier Alternative B becomes the Alternative A in terms of which the residence State gets the primary right but the Source State also gets a right to tax subject to a ceiling on the following lines:

8(2) "However, income from the operation of ships or aircraft in international traffic arising in a Contracting State may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the income is a resident of the other Contracting State, the tax so charged in the State in which the income arises shall not exceed:

(a) if the taxation law of that State imposes tax on such income on a net basis, 50 per cent of the tax that would be imposed by that State on that income in the absence of this Convention; or

(b) per cent [the percentage is to be established through bilateral negotiations] of the gross amount of the payments underlying such income; whichever is lower."

Now, this is also a dramatic expansion of source country taxation right and it is to be seen if the same will be accepted by others.

Besides, another area where a lot of money goes out of the source countries relates to insurance. Although the UN Model always had an insurance PE provision in Article 5(6) and India also has the provision in many of its treaties, one drawback of that provision is that it does not include reinsurance where the amounts involved are humongous. In the latest version of the UN Model, a new Article 12 C has been introduced to deal with the cross-border insurance service. In terms of this provision, insurance premium arising in a Contracting State and paid to a resident of the other State can also be taxed in the source State at a rate to be negotiated bilaterally. In this article, insurance premiums specifically includes reinsurance but does not include amounts paid to acquire or maintain an annuity contract or an insurance contract that includes a substantial investment component.

That apart, a hotly contested area of royalties in the context of software taxation that has spawned hundreds of tax litigation, particularly in India culminating in the controversial Supreme Court decision in the Engineering Analysis = 2021-TII-02-SC-INTL-LB case is now clarified in Article 12 of the UN Model relating to Royalties. This is done by modifying paragraph 3 of Article 12 relating to the definition of "royalties" as follows:

3. The term "royalties" as used in this Article means payments of any kind:

(a) received as a consideration for the use of, or the right to use :

i) any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting;

ii) any patent, trademark, design or model, plan, or secret formula or process; or

iii) industrial, commercial or scientific equipment; or

(b) received as a consideration for information concerning industrial, commercial or scientific experience; or

(c) received as a consideration for the use of, or the right to use, any software, or paid as a consideration for the acquisition of any copy of software for the purposes of using it.

Under this new formulation, payment from the state is the sole basis of taxation. Of course, not everybody was on board in adopting the above solution. The technology exporting countries were against. In India's domestic law, after the 2012 amendment payment for software is royalty and India's position on the Commentary to the OECD Model Article 12 that India does not agree with the OECD Commentary was dismissed by the Supreme Court in the Engineering Analysis case. The real question will therefore be whether in any future tax treaty, the same language as recommended in the new Article 12(3)(c) is used or not.

The Subject to tax provision

In the context of preventing tax base erosion, we should also note an important change in Article 1 of the new UN Model (2025) that lays down the conditions for the enjoyment of the treaty benefits. In the treaty context, we should note that the purpose of a tax treaty is essentially to curtail source country taxation right. In the OECD Model, the subject to tax rule applies in the context of the Pillar 2 implementation and does not apply in the context of the treaty as a whole. The new UN Model however stipulates that the source country taxation right may be curtailed by a tax treaty but subject to the important condition that there is actual taxation by the residence State. This is achieved by amending Article 1 through introduction of a new paragraph 3 - as follows:

"3. (a) This Convention shall not affect the taxation by a Contracting State of any income arising in that State and derived by a resident of the other Contracting State if that income is subject to a low level of taxation in that other State within the meaning of subparagraph (b).

(b) Income is subject to a low level of taxation in that other State if:

(i) it is subject to a statutory tax rate of per cent [the percentage is to be established through bilateral negotiations] or less; or

(ii) it is subject to a statutory tax rate higher than the rate set out in subdivision (i) but the beneficial owner of the income is entitled to a special exemption, exclusion or reduction that is linked directly to the income or the entity receiving it so that the amount of tax paid in that other State with respect to such income is less than the amount of tax that would be imposed if the tax rate set out in (i) were applied to such income without regard to such exemption, exclusion or reduction.

(c) Subparagraph (a) will not apply to income that: [exemptions, if any, appropriate in the context of the bilateral relationship between the Contracting States]."

Some countries in the Middle East and some known tax havens keep the nominal statutory tax rate high to comply nominally with the pressure brought in by international organisations (like the OECD) and then give exemption/ deductions at times up to 90~95% or more of the income arising there in to preserve the attractiveness of the jurisdiction concerned. The Article as proposed in the new Convention will put paid to such schemes.

Here again, one has to see how many states actually negotiate tax treaties with the above template. As in the distributive articles, the actual rate is to be negotiated based on practical considerations and States also have the option to specifically exclude certain incomes again based on practical considerations.

In India, since courts have held that the taxpayer has a choice between domestic law provision and treaty provision, it is therefore important that the domestic law has an enabling provision for such switch over in appropriate cases.

The GATS provision and the extended provision

There is one provision in the 2025 UN Model that will surely be of interest to both developed and developing countries for differing reasons and this relates to relationship between the provisions of Bilateral Investment Treaties and domestic tax law and tax treaty law.

In the context of a tax treaty, the normal procedure for dispute resolution is through the domestic court process or through the Mutual Agreement Procedure in Article 25 of a tax treaty. But, taking recourse to the provisions of a Bilateral Investment Protection agreement that a state might have entered into, there have been many high-profile cases where through the provisions of the investor -state dispute settlement (ISDS) mechanism, awards and damages worth millions of dollars were awarded by some arbitral tribunals. Since investments typically flow from the developed countries to the developing ones, many such countries have been at the receiving end of such decisions rendered by the tribunals. India has been particularly affected by such decisions, most recently in the Cairn and Vodafone cases. Similar is the story of Russia and many Latam and African countries.

The situation worsened under the OECD BEPS project and initially the MLI was being subjected to the parties agreeing to compulsory binding arbitration. Although the rigid stance gave way to effective dispute resolution, binding arbitration became a red rag for the developing countries. That apart, as we mentioned earlier, MNCs started using investment protection agreements almost as another alternative route for dispute resolution. In that context, the new provisions in article 25 relating to Mutual Agreement Procedure becomes important.

Before the current provision in the UN Model 2025, there used to be in the Commentary of both the Models in relation to Article 25 the following:

"For purposes of paragraph 3 of Article XXII (Consultation) of the General Agreement on Trade in Services, the Contracting States agree that, notwithstanding that paragraph, any dispute between them as to whether a measure falls within the scope of this Convention may be brought before the Council for Trade in Services, as provided by that paragraph, only with the consent of both Contracting States. Any doubt as to the interpretation of this paragraph shall be resolved under paragraph 3 of Article 25 or, failing agreement under that procedure, pursuant to any other procedure agreed to by both Contracting States."

In the 2025 UN Model, there are two alternative provisions, depending on whether the states want to submit to compulsory binding arbitration or not- Alternative A and Alternative B.

Article 25

(…)

5/6. Notwithstanding paragraph 6/7, for the purposes of paragraph 3 of Article XXII (Consultation) of the General Agreement on Trade in Services, the Contracting States agree that, notwithstanding that paragraph 3, any dispute between them as to whether a measure falls within the scope of this Convention may be brought before the Council for Trade in Services, as provided by that paragraph, only with the consent of both Contracting States. Any doubt as to the interpretation of this paragraph shall be resolved under paragraph 3 of this Article or, failing agreement under that procedure, pursuant to any other procedure agreed to by both Contracting States.

Paragraph 6 of Alternative A and Paragraph 7 of Alternative B

6/7

A taxation measure, taken by a Contracting State, that is in accordance with this Convention shall be deemed not to breach any other treaty of which the Contracting States are parties, and any dispute over whether a taxation measure taken by a Contracting State is in accordance with this Convention, or whether the measure falls within the scope of the Convention, shall be settled only by reference to the provisions of the Convention and without recourse to dispute resolution arrangements under any other treaty of which the Contracting States are parties. As respects any other dispute over a taxation measure, or as to whether a measure is a taxation measure, the settlement of such dispute shall, unless the competent authorities of the Contracting States agree otherwise, be undertaken without recourse to any dispute resolution arrangements under [such treaties as are agreed to be covered].

This is indeed a landmark development. However, capital exporting countries are obviously not happy with the development and the subject needs to be studied separately. Again, it remains to be seen if any of such countries will enter into agreements based on the revised article 25 of the 2025 Un Model. Nevertheless, the concerns of the source states and some realistic solutions for the same have come to the fore.