Article 12AA of the UN Model: Breakthrough or New Burden?

THE United Nations Tax Committee has finally released the UN Model Tax Convention 2025, which contains significant changes resulting from discussions over recent years.

More than a year after it was agreed in March 2025, the update includes changes to the title, the introduction of a subject-to-tax rule, provisions on natural resource exploration activities, an expansion of royalties covering software and new rules on services and insurance premiums (IBFD, 2026).

Amongst these changes, Article 12AA on the taxation of services or fees for services deserves particular attention. This provision replaces Article 12A (fees for technical services) and Article 14 (independent personal services) in the UN Model 2021.

These changes simultaneously confer the jurisdiction for a source country to tax payments for services at a rate agreed bilaterally with a treaty partner. The question is whether this new taxing right will ultimately be adopted into tax treaty clauses between countries.

In this context, the emergence of Article 12AA and other updates in the UN Model 2025 represents more than a mere textual change; it is a paradigm shift that significantly reduces reliance on physical presence as the enabler for taxation in the source country.

Although the full UN Model 2025 document has not yet been released, the discussions underpinning these changes are nonetheless worth examining closely.

Expanded Scope

Previously, Article 12A of the UN Model 2021 covered only managerial, technical or consultancy services. Article 14, meanwhile, required a fixed base or a certain presence threshold before a source country could tax income from independent personal services. This separation frequently gave rise to classification disputes and left routine services, certain professional services, and remotely delivered services outside the scope of source-country taxation (Michel, 2025).

Based on documents released by the Committee on the UN Framework Convention on International Tax Cooperation in January 2026, under the UN Model 2025, the country in which payment is made is permitted to impose tax on the gross amount of payments for services.

Meanwhile, still within that document, taxation on a net basis is an exclusion that applies where the services are provided physically in the source country, typically in connection with the formation of a permanent establishment (PE).

Article 12AA breaks down this barrier through an exceptionally broad definition. The draft of Article 12AA paragraph (3) set out in Annex A of the Committee of Experts on International Cooperation in Tax Matters — Thirtieth Session states that the term ‘fees for services’ means ‘any payment in consideration for any service’. This means a source country may impose tax on the gross amount without requiring that the services be physically performed in its territory.

Where the beneficial owner has a PE and the services income is connected to that PE, Article 7 (business profits) will apply instead. Accordingly, Article 12AA is in substance more closely aligned with tax base protection logic, namely payments that constitute a deductible expense in the payer country. It should be noted that the payer country may simultaneously be the market country, though the two are not always identical (Collier, Devereu, and Vella, 2021).

Administrative Simplicity vs. Fiscal Equity

The appeal of Article 12AA to developing countries is fairly straightforward. Taxation on a gross basis is relatively simple and does not require the tax authority to establish the existence and profits of a PE. In a services-based economy, this approach transforms cross-border payments into a visible nexus that is immediately collectible (UN, 2026).

However, administrative simplicity does not always produce an equitable tax burden. Gross-basis taxation disregards the calculation of cost components, such that collection at an apparently low rate may in fact exceed the tax that would be due were it imposed on net profit.

This is particularly likely for businesses with low profit margins or those operating at a loss. Furthermore, even where a contract contains a gross-up clause, that burden may ultimately be passed back to the consumer importing the services, ultimately raising costs (Oguttu, 2026).

Oxford Economics (2026) estimates that this provision could generate additional gross revenue of USD7 billion. However, after accounting for the decline in trade and economic growth, fiscal revenue is projected to fall by USD241 million.

Conversely, Schultz, Michel and Lorenzo (2026) consider that the calculation employs insufficiently precise rate assumptions and fails to account for additional revenue arising from reduced profit-shifting practices.

The foregoing report demonstrates that the impact of Article 12AA depends heavily on how it is implemented. Source countries may choose options including net taxation, lower rates for thin-margin services and effective credit and refund mechanisms, all of which are necessary to ensure that the expansion of source-country taxing rights does not result in overpayment and future disputes.

Challenges and Obstacles

In response to this dynamic, efforts by countries, particularly developing countries, to implement Article 12AA will face numerous challenges.

First, jurisdictional and procedural obstacles. Arnold, Sassevill, and Zolt (2002) state that adopting treaty clauses requires a source country to first establish a domestic legal basis for taxation before embarking on the renegotiation process for existing tax treaties.

In this context, it is not unreasonable to assume that many developing countries will apply domestic withholding tax (WHT) provisions on cross-border services in line with Article 12AA. This is consistent with the ambition of developing countries to expand their taxing rights as source countries. Nevertheless, it cannot be guaranteed that all developing countries will adopt the provisions of the UN Model 2025.

On the other hand, Bird (1992) notes that however sound a tax policy may be on paper, its implementation will always be constrained by weak institutional capacity, limited human resources, and domestic political obstacles. This view may be used to assess the extent of the impact of adopting Article 12AA in practice.

Second, bilateral diplomacy challenges. It must be borne in mind that the UN Model is not automatically binding, thus, the success of its implementation depends on political bargaining power and the extent to which treaty partners are willing to share the jurisdiction to tax (Hearson, 2018).

This imbalance in bargaining power causes the distribution of tax collection rights to become increasingly uneven, to the detriment of developing countries. Hearson and Kangave (2016) also note that WHT rates are frequently pressed down to lower levels during negotiations where there is an imbalance in bargaining power.

Third, sceptical historical trends. This is evidenced by the minimal adoption of Article 12A of the UN Model 2021 by OECD member countries (IBFD, 2024). Conversely, increased application of Article 12A has occurred amongst non-OECD countries.

In practice, however, developing countries are frequently compelled to relinquish taxing rights over cross-border service transactions to maintain their attractiveness to foreign investment. This is attributable to the complex interaction of political, economic and bilateral negotiation factors, which vary considerably from country to country (Mpoha, 2023).

Weighing a Middle-Ground Policy

At its core, the introduction of Article 12AA in the UN Model 2025 provides a strong justification for source countries, including Indonesia, to secure their tax base. However, an ideal tax policy framework must not rest solely on the desire for short-term revenue. Gross-basis taxation applied uniformly across all categories of cross-border services risks becoming counterproductive.

Amidst concerns about regulatory gaps and deadlocks in bilateral and multilateral renegotiations, unilateral measures such as digital services taxes (DST) may in fact be viewed as the best interim instrument to bridge the taxation gap.

Such unilateral steps reflect a pragmatic effort by countries to protect their tax base whilst awaiting global or bilateral agreements that can be genuinely implemented (DDTC FRA, 2026).

Ultimately, the essence of the evolving international tax landscape is not merely a race to claim the jurisdiction to tax to the greatest extent possible for source countries.

Any expansion of taxing rights must always be weighed against its impact on a conducive investment climate. If this is overlooked, a fiscal sovereignty victory in the form of the ‘jurisdiction to tax’ on paper will be nothing more than an illusion paid for dearly through a slowdown in capital flows and the domestic economy.