India Is Negotiating the Future of AI Tax Sourcing at the UN

The arm's length principle, and the DEMPE test that operationalizes it for intangibles, was built on an assumption so basic that nobody bothered to write it down: that a human being somewhere is developing, enhancing, maintaining, protecting or exploiting the asset, and that you can find that human, interview them, and attribute value to their employer based on what they actually did. A recent industry analysis of AI's effect on TP disputes puts the resulting question bluntly - when risk is managed through algorithms and data centres spread across jurisdictions while a smaller, dispersed human team just sets parameters, the practical question becomes where exactly control over risk is anchored. Once AI genuinely performs the function rather than merely assisting a human who performs it, the entire evidentiary architecture of functional analysis has nothing to point to.

This isn't an abstract worry anymore; it's showing up in real guidance in at least two places practitioners should be tracking together. Australia's ATO has PCG 2024/1, its compliance guideline on intangibles migration, and a MinterEllison alert has flagged that its DEMPE evidence requirements assume human decision-makers : leaving a gap precisely where AI performs those functions, with the firm advising multinationals to map AI-related DEMPE functions and reassess their transfer pricing positions now. Separately, and on a longer institutional timeline, the UN Tax Committee's 32nd session mandated two things worth pairing: a subcommittee tasked with a Practical Guide to Implementing Artificial Intelligence for Tax Administrations (due no later than October 2027), and an update to the 2021 UN Transfer Pricing Manual's chapters on intragroup services, intangibles and financial transactions specifically to account for new business models. Meanwhile, at the treaty level, the Fifth Session of the UN Framework Convention on International Tax Cooperation negotiations, held in New York from August 3–13, 2026, saw nations explicitly debate whether AI should be covered under the draft protocol on taxing cross-border services - with live tracking of the session showing India engaged on a closely related scope question, backing further work on Article 2 while questioning how it was drafted.

India is currently playing both sides of this problem without anyone connecting the dots publicly. At the UN negotiating table, India is a rule-maker, shaping how cross-border AI-driven services income gets sourced and taxed under a protocol that will matter enormously given India's position as the world's largest hub for Global Capability Centres and IT-enabled services exports. At home, India is simultaneously a rule-enforcer, and the domestic playbook hasn't caught up. Mainstream GCC audit-defense advisory is already telling clients that if an Indian GCC is designing a core AI algorithm used globally, the arm's length price must reflect that creative contribution, and that authorities are using data-mining tools to compare GCC margins across the industry : in other words, Indian TPOs are already pricing AI-DEMPE contributions using the old human-centric functional analysis framework, years before the UN's own Practical Guide or protocol language is finalized. There's also a second, quieter version of this same problem sitting inside the OECD's plumbing: the OECD has just published the public comments on its own revision of Chapter VII (intra-group services guidance), with a consultation meeting set for November 2026 - the very guidance that ITAT benches are currently applying to decide intra-group services benefit-test disputes, using a chapter the OECD itself has decided needs a structural rewrite.

The open question worth raising is whether India should be trying to actively harmonize its emerging domestic AI-DEMPE case law with the position it's taking at the UN negotiating table - or whether it is, without quite intending to, building two separate and eventually incompatible bodies of doctrine: one forged in ITAT orders and CBDT safe harbour notifications that assume a human designed the algorithm, and another being drafted in a UN conference room that may define AI-driven service income sourcing on entirely different terms.