Towards a New Solution for Taxing Cross-border Services? Trade-offs in Designing UN Tax Convention Protocol 1

This brief analyses the institutional trade-offs facing negotiators of Protocol 1 on cross-border services in a digitalised and globalised economy under the proposed United Nations (UN) Framework Convention on International Tax Cooperation. It examines design choices across legal form, nexus, tax base, thresholds, and treaty interaction, and situates them within broader administrative and political constraints. Drawing on national practices and existing models, it shows how fiscal interests, legal infrastructure, and strategic alignments may shape countries’ negotiating positions. Rather than offering a singular blueprint, the brief maps the range of institutional pathways available, and the trade-offs they entail. It argues that the success of Protocol 1 will depend not just on technical feasibility, but on aligning legal design with political incentives and uneven capacities. Even if outcomes remain partial or uneven, the process may still shift expectations and institutional norms.

Key Messages

1. Protocol 1 brings unresolved distributional tensions to the surface. By tackling the taxation of cross-border services, the negotiations around Protocol 1 will need to confront long-standing tensions over how taxing rights are allocated in an increasingly digitalised global economy.
2. Tax design and institutional choices are deeply political. Countries can draw from a broad menu of options – nexus rules, thresholds, allocation formulas, treaty linkages, and legal forms. These are not merely technical preferences – they reflect different fiscal interests, administrative capacities, and political strategies, particularly for countries in the global South.
3. The global South is driving the process – but unifying the bloc may be challenging. Developing countries have brought source-based taxation to the centre of the UN agenda. Yet differences in treaty exposure, administrative infrastructure, and strategic aims make cohesive bargaining difficult – even among countries with aligned redistributive goals.
4. US withdrawal reshapes the process – but narrows its reach. The US exit removes a powerful blocker from earlier Organisation for Economic Co-operation and Development (OECD) negotiations, creating space for new coalitions. However, it also limits the potential for a globally comprehensive outcome, especially if key firms and jurisdictions remain outside the Protocol’s scope.