Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.3.8.3
6.3.8.3 A subject-to-tax clause
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659371:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
L. Parada, Double Non-taxation and the Use of Hybrid Entities An Alternative Approach in the New Era of BEPS, Alphen aan den Rijn: Kluwer Law International 2018, par. 4.2.1.
F.D. Martínez Laguna, ‘Abuse and Aggressive Tax Planning: Between OECD and EU Initiatives – The Dividing Line Between Intended and Unintended Double Non-Taxation’, World Tax Journal 2017, vol. 9, no. 2, par. 2.3.
Commentary on art. 23 A and 23 B OECD MTC, par. 35.
G. Kofler & F.P.G. Pötgens, ‘Article 23: Methods for Elimination of Double Taxation - Global Tax Treaty Commentaries - Global Topics (Last Reviewed: 1 February 2020)’, IBFD, par. 2.13.3.
In 2012 the EU Commission recommended its Member States to include subject-to-tax clauses in their tax treaties in accordance with this first variant. In the view of the EU Commission an item of item is subject to tax if it is ‘treated as taxable by the jurisdiction concerned and is not exempt from tax, nor benefits from a full tax credit or zero-rate taxation.’ (Commission Recommendation on aggressive tax planning, (2012/772/EU), par. 3.1-3.4). For a critical discussion of this proposal see C. Marchgraber, ‘The Avoidance of Double Non-taxation in Double Tax Treaty Law: A Critical Analysis of the Subject-To-Tax Clause Recommended by the European Commission’, EC Tax Review 2014, vol. 23, no. 5.
A person is considered liable to tax if the person’s connecting factors with a state are the same as those of a person who is fully liable and subject to tax, while it is not subject to tax on all or part of its income as a result of a special provision in its residence state.
E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1847.
L. Olivier & M. Honibalt, International Tax A South African Perspective, Cape Town: Creda Communications 2011, par. 1.17.2.
J. Lüdicke, ‘Chapter 16: Subject-to-Tax Clauses in Tax Treaties – A German Experience’, par. 16.5, in H. Jochum et al., (eds.), Practical Problems in European and International Tax Law, Amsterdam: IBFD 2016.
Commentary on art. 1 OECD MTC (version as it read between 2003 and 2017), par. 16 (between 1992 and 2003 the paragraph was numbered as par. 18).
G. Kofler & F.P.G. Pötgens, ‘Article 23: Methods for Elimination of Double Taxation - Global Tax Treaty Commentaries - Global Topics (Last Reviewed: 1 February 2020)’, IBFD, par. 2.13.3.
L. Parada, Double Non-taxation and the Use of Hybrid Entities An Alternative Approach in the New Era of BEPS, Alphen aan den Rijn: Kluwer Law International 2018, par. 4.2.1.
A relatively simple solution to combat double non-taxation seems to be the introduction of a subject-to-tax clause. Subject-to-tax clauses are bilateral provisions that aim to avoid double non-taxation, i.e., to ensure single taxation in the residence or in the source state.1 Under such a clause, a Contracting State can reclaim its taxing right if the other state does not use the taxing right that is allocated to that state. A subject-to-tax clause identifies a specific outcome of double non-taxation under a certain situation as unintended.2 According to the OECD Commentary, negotiating states may find such a clause reasonable in certain circumstances.3
There are broadly two different types of subject-to-tax clauses.4 Under the first variant, the residence state grants an exemption if the income is subject to tax in the other Contracting State.5 This means the taxpayer should not be generally exempted from taxation. Additionally, the income should fall within the tax code and not be exempt from the taxable basis due to an objective exemption. Therefore, the requirement exceeds the liable to tax requirement as imposed by art. 4, par. 1, OECD MTC.6 However, it is not required that the income is actually subjected to taxation. This could, e.g., be the case due to loss compensation. According to the second variant of subject-to-tax clauses, income should be subjected to taxation in the other state. Under this approach the income is required to be included in the tax base. If a taxpayer does not declare its income, the income is not included in the tax base. Again, actual payment of taxes is not required.7
A subject-to-tax clause seems a simple and easy to implement solution to make sure double non-taxation is prevented. However, subject-to-tax clauses can be seen as a somewhat ‘blunt instrument’ as it means an ‘all or nothing’ policy.8 The clauses do not distinguish between intended and unintended double non-taxation. They are not able to reflect the details of, as well as the correlation with, autonomous rules of the tax systems of the Contracting States.9 If an item of income is subject to a very low tax rate in the residence country, this can be sufficient to qualify for a large exemption in the source country. If the income is not taxed in the residence country, a high rate of tax may be levied by the source country. Additionally, subject-to-tax clauses are not considered an appropriate tool to fight against sophisticated tax planning.10 A reason for this is that a subject-to-tax clause does not lead to non-application of the exemption method if the income is included in the tax base of the source state, but is effectively not taxed as expenses are deducted from the tax base. Therefore, these clauses are not always able to solve double non-taxation.11 Also, subject-to-tax clauses can lead to interpretation issues.12 Moreover, it should be kept in mind that subject-to-tax clauses increase the administrative burden of applying the exemption method.
The aforementioned shortcomings of subject-to-tax clauses could be solved by redrafting the provisions and, e.g., making sure they only apply if there is unintended double non-taxation. However, subject-to-tax clauses as they are currently used in practice do not seem to be an appropriate tool to combat double non-taxation in abusive situations.