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Submission to United Nations on discussion draft on inclusion of software in definition of royalties

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During the 20th session of the United Nations (UN) Tax Committee (Committee) meeting held online from 22-26 June 2020, it was recommended by members that the Committee should focus its attention on amending the current definition of royalties included in Article 12 of the United Nations Model Double Taxation Convention Between Developed and Developing Countries (Article 12 of UN Model).

Accordingly, the term “computer software” is proposed to be added in the definition of term “royalties” in paragraph 3 of Article 12 of UN Model. In order to solicit views from stakeholders, UN has released a Discussion Paper inviting inputs.

Based on inputs received from our members, NASSCOM made a submission to the Sub-committee on United Nations Model Tax Convention between Developed and Developing Countries.

Summary of our response is provided below:

A) All software payments cannot be generalised and characterised as “royalty”.

B) Characterization of software:

If the consideration paid is for purchase of a standard software / shrink-wrapped product, i.e. a mere user right other than a right in the Intellectual Property (IP), then the payment made should not be treated as royalties, instead the same should be classified as business income. However, if the consideration is for right to commercially exploit the IP in the software, then the same would tantamount to royalty.

If the grant is of a copyright in computer program (i.e. an intangible or IP), then the source country can tax it as royalty on a source basis. If instead, it is a sale of a copyrighted article (i.e. a product), the source country can tax it only in the event the foreign company has a permanent establishment in the source country. This approach / jurisprudence has also been considered in multiple cases by various courts.

C) If we analyse the existing term ‘royalty’ as defined in the tax treaty, we find that the intent of royalty is to include the ‘copyright’ and not the ‘copyrighted article’. Accordingly, if the word” ‘computer software’ (which is a wider term) is added as proposed in the existing definition under Article 12 of UN Model, the intent of the term ‘royalty’ which includes “copyright’ and not the ‘copyrighted article’ will be defeated.

D) Interplay and need to address overlaps of proposed taxation of software payments: Interplay and overlaps of proposed taxation of software payments under Article 12 with taxation of digital economy under Organisation for Economic Co-operation and Development’s (OECD) Pillar 1 and 2 guidance and unilateral measures of some countries as well as proposed Article 12B by the UN Committee on Automated Digital Services need to be addressed.

E) Administrative difficulties: There would be difficulties to implement the proposal such as considering characterisation issues in case of software embedded in products or mixed contracts or administrative issues such as imposing withholding tax obligations in cases of individuals purchasing computer software for personal use. These would need to be addressed to maintain consistency.

Our detailed response is attached for your reference.

For any feedback, please reach out to Tejasvi at

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