In early August, the UN considered the text of an early protocol on the taxation of cross-border services, with a focus on expanded source-based taxation. A group of IMF coauthors points in a different direction in a working paper released just weeks before the August session, concluding that broader reliance on destination-based taxation may address many of the problems raised by digitalized services trade more effectively than narrower alternatives. Will the IMF’s perspective inform UN discussions when they resume in November? Abstract and the paper’s recommendations, below the fold.
Shafik Hebous, Brendan Crowley, Rasmi Das, Tibor Hanappi, Cory Hillier, Adam Jakubik, Eric Robert & Christophe J Waerzeggers, Taxing Cross-Border Services, IMF Working Paper No. 2026/152 (July 16, 2026):
Faced with the limitations of existing tax frameworks for cross-border trade in services—particularly the lack of taxing rights over certain income from highly digital business models and the continuing scope for profit shifting through payments for cross-border services—countries and scholars have adopted or proposed a wide range of tax measures. This paper brings these measures together in a coherent framework and examines them from both an economic and a legal perspective. It documents how cross-border services trade has grown, become more digital in composition, and become increasingly concentrated across sectors, firms, and jurisdictions. It then develops a comparative synthesis covering destination-based consumption taxes such as VAT, gross-revenue taxes—notably digital services taxes—as well as income-based instruments such as nexus and withholding rules, and anti-avoidance rules aimed at limiting profit shifting through deductible cross-border payments. The paper argues that the economic incidence of each instrument is central to policy assessment and that evaluating these instruments in isolation obscures their interaction. Its main conclusion is that broader reliance on destination-based taxation can address many of the core problems raised by digitalized services trade more effectively than narrower, more distortionary alternatives.
From the conclusion:
What ties these developments together is that they are largely layered solutions. They patch, stretch, and rebalance the existing framework [for taxing cross-border services], but do not fundamentally replace it. More far-reaching reforms would address these tensions more fundamentally by introducing a new architecture of international business taxation. One such alternative is formulary apportionment of the globally consolidated profits of the multinational enterprise, in particular by reference to sales by destination. Pillar One can be understood as a more limited attempt to move in that direction while being layered onto the existing system. Another is a destination-based cash-flow tax, akin in some respects to a VAT but allowing deductions for payroll. Both systems have been studied extensively in the literature
(for example, Devereux et al., 2021), but they appear to be a remote possibility for now.
