6.2.5.1 Elimination of double taxation without creating tax avoidance opportunities

Elimination of double taxation and tax avoidance, but international consensus required

A unitary business approach from a domestic perspective and a tax treaty perspective would eliminate double taxation without providing possibilities for tax avoidance. It would fix the fundamental flaws in the international tax system. It would better reflect economic reality as it would recognize that an entity usually is part of a bigger enterprise with a shared profit motive. Additionally, it would, e.g., provide the possibility to compensate losses across the border. By applying a unitary approach instead of the separate entity approach, the main flaw of art. 7 and art. 9 OECD MTC (the application of the arm’s length principle) is no longer an issue in an intra-unitary business context. The changes would lead to a more neutral system from a tax perspective and would thus be in line with the objectives of the OECD MTC. As the approach would be implemented in domestic legislation, to a certain extent it would also solve the issues in non-treaty situations.

A main disadvantage of the unitary taxation regime is the fact that international consensus – at least on certain aspects of the system – would be required.1 Also, international cooperation is required to implement a properly functioning system.2 If one country introduces a system based on unitary taxation and renegotiates its tax treaties, this would not solve the international tax puzzle. The elements of the unitary taxation system should be designed on an international level. Additionally, it requires a multilateral approach for tax treaty purposes.

Uniformity seems to be a key element for a successful unitary taxation system. A non-uniform system, either with respect to the definition of a unitary business or the consolidation manner, increases the likelihood of exploitation of tax avoidance opportunities. Uniform rules promote efficiency and neutrality from a tax perspective.3 As such, the group definition should be truly global: it would have to be a national and an international concept.

The question would also be whether a common tax rate would have to be applied, or for example a minimum tax rate similar to the approach that follows from the Pillar Two project.4 More harmonization with respect to the tax rate would infringe the sovereignty of states. However, it would also lead to less possibilities of tax avoidance by influencing the outcome of the profit allocation.

Manipulating being considered part of the unitary business

The introduction of a unitary business approach could lead to the manipulation of grouping rules by multinational enterprises. Depending on the facts and circumstances of a group, it might be beneficial (or not) to be part of a unitary business. Multinationals could try to influence their activities, so the outcome is most beneficial for them. They could for example try to make sure that certain parts of the business are no longer integrated economically, which would mean the scope of the unitary business would change. As this would require a change in their business activities, the risk that this will happen seems limited. However, as the definition of a unitary business is not unambiguous, it can lead to discussions.

Remaining issues

It should again be emphasised that the introduction of a unitary business approach as such does not solve the puzzle of designing an OECD MTC that is suitable for companies in a group. It still requires establishing the details of a profit allocation method that is in line with the OECD MTC and that takes into account the digitalisation of the economy.5 As such, this method does not ensure that profits are taxed in the ‘right’ place. Also, the issues that exist within the tax treaty framework would only be solved within the context of the unitary business. For transactions between the unitary business and associated non-unitary business entities, the existing issues with respect to double taxation and tax avoidance opportunities will remain. The number of intra-group transactions will decrease significantly, as all intra-unitary business transactions will no longer be visible. Additionally, if a multilateral approach would indeed be taken on a tax treaty level, those issues could also be solved by making specific amendments.6