Taxing Swiss services abroad? The UN has chosen the wrong path.

The UN already has plenty to do, from keeping the peace to fighting pandemics and protecting the climate, and faces multiple challenges in view of current events around the world. Not content with all that, however, it is now fighting the OECD’s tax policy as well. Its latest idea is taxing income from services at its source.

What has happened?

Since its remarkable resolution of 30 December 2022, the United Nations (UN) has been working hard to wrest sovereignty over international tax law from the Organisation for Economic Co-operation and Development (OECD). While criticism of the OECD’s politicisation in recent years is unquestionably justified, the organisation has at least managed to retain some sense of economic perspective. The UN, on the other hand, has launched headlong into an activist approach to tax policy that has no basis whatsoever in economic reality. According to its latest plan, cross-border services should be taxed in the customer’s country. This would not only be a problem for exporting nations with a strong tertiary sector such as Switzerland. It would in fact turn the way services are treated on its head.

What has applied up to now?

At present, when services are provided across national borders, the resulting income is in principle taxed in the service provider’s country (Country A in the diagram below) – the service recipient’s country (Country B) gets nothing:

This way of slicing up the tax pie follows a long-established international standard, the OECD Model Tax Convention. Ironically, this was first thought up by the League of Nations, the precursor to the UN, around 100 years ago. The OECD has continued to develop the Model Convention ever since it was founded, making it a bigger success than could ever have been imagined. The standard for allocating entitlements to tax income from cross-border business has never been arbitrary. On the contrary, it reflects value creation.

The service recipient’s country receives nothing under this system because the recipient creates no value in connection with the finished service but merely “consumes” it. Even the use of value creation as a yardstick is far from arbitrary. The Model Convention applies to taxes on income, the entire purpose of which is to tax value creation.

What changes are planned?

The UN introduced its own parallel Model Double Taxation Convention back in the 1980s. This was largely overshadowed by the OECD’s Model Convention in the past, but it is now openly competing with the latter. The UN now wants it to cover all services and give the service recipient’s country a uniform right to tax them. Under this regime, a bank with cross-border operations would have to pay tax on income from its foreign customers directly in their countries, even if these operations are based exclusively in Switzerland. This means that the income tax it pays would no longer benefit Switzerland – the country in which it innovates, produces its services and bears costs and risks. Instead, practically any country in the world could get a share of it. The same would apply to other industries, many of which already make more money from services than they do from their products.

The OECD Model Convention itself already gives Country B the right to tax certain other income (e.g. dividends and royalties). However, income from services cannot be compared to these examples, in which the recipient is by definition the source of value creation. To make such a comparison would be to confuse sales markets with procurement markets.


If a company in Switzerland (Country A) sells services in another country (Country B, the sales market), that company alone is acting as the service provider. Switzerland is thus the sole place of value creation, and the customer is the service recipient. If the same company is financed with equity capital from a foreign investor (procurement market), then the company itself is the recipient of this financing, making Switzerland Country B! However, the financing only has value when the company invests it, which of course happens in Switzerland. This is the only reason why the Model Convention provides for the recipient’s country (Country B) to have the right to tax dividends – in this case, the recipient is the source of value creation. This is the sole exception to the economic rule, and it is clearly distinct from finished services.

The argument that value creation would not be possible without customers does not justify the UN’s approach. It is of course essentially correct, but the taxation of value creation via income taxes has always been kept strictly separate from the taxation of value consumption via consumption taxes such as value-added tax – and for good reason, since they are based on completely different economic principles. Intentionally or not, the UN is threatening to conflate the two.

What would this mean?

The path on which the UN has embarked is fundamentally wrong.

In the short term, its Model Double Taxation Convention threatens to stray from taxing value creation. In its bid to include source countries, the UN will do more harm than good by introducing export hurdles and encouraging the renationalisation of value chains. Over the long term, the intermingling of two utterly different forms of tax would lead to international chaos. It would probably become unclear, for instance, exactly which criteria each country is allowed to apply to each tax, a good example being when a service is resold in a third country (Country C).

Furthermore, the UN is weakening what has been the very purpose of its Model Double Taxation Convention from the outset, namely to limit taxation by Country B! Since it is the recipient that makes the payment, Country B can always tax it before and at the expense of Country A, usually via a withholding tax. Giving Country B the right to tax income from services allows it – and indeed encourages it – to tax almost everything, especially as services are much harder to circumscribe than products.

On top of this, there are countless other problems, particularly for countries such as Switzerland. These include reduced room for manoeuvre on tax policy, the erosion of fiscal competitiveness, tax disadvantages for innovation and local value creation, the risk of multiple taxation and the bureaucracy that Swiss companies will face as a result of global tax liabilities, which is impossible to predict.

What happens now?

At its most recent meeting in mid-March, the UN’s Committee of Experts on International Cooperation in Tax Matters voted by a small margin to postpone the vote on the proposal until October 2024. There can be little doubt that the proposal will be adopted. If this happens, the source state taxation of income from services will be incorporated into the UN Model Double Taxation Convention. Many countries are already negotiating with Switzerland on this basis. The proposal’s adoption would thus set in motion a trend that would cost Switzerland dearly over the long term.

The OECD’s Model Convention has proven so successful in accounting for economic reality for the past 100 years that any attempt like this one to deviate from its principles is ultimately doomed to fail. Meddling in international tax policy could thus become a stumbling block for the UN, which should be focusing on other priorities, and is unlikely to be expedient to its actual mission.



Jan Weissbrodt
Head of Tax, Head of Financial Markets & Regulation, Member of the Executive Board ad interim
+41 58 330 63 02

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