7.2.1 The rationale behind a group approach (unitary taxation)

In national tax laws different variants of group approaches exist. Group taxation regimes normally make it possible for companies to compensate losses within a group. Also, they generally provide for a mechanism to defer the recognition of gains that arise from intra-group asset transfers. Both elements contribute to a more legal form neutral treatment for tax purposes and would thus match with the OECD MTC objectives. However, most group taxation regimes only apply on a domestic level, which means that their contribution to legal form neutrality within the tax system is limited. The comprehensive group approach that is taken for the application of worldwide unitary taxation systems contributes to legal form neutrality within the tax system to a larger extent. Under such an approach all intra-group transactions would not be visible for tax purposes. Applying a unitary taxation system globally in a harmonized manner would mean there would be no double taxation, nor would there be possibilities for tax avoidance in an intra-group context. This would be fully in line with the objectives of the OECD MTC.

To truly solve the problem, it must be tackled at its roots. The separate entity approach should be abolished, and a worldwide unitary taxation system should be introduced for which the group is the mandatory starting point. A full group approach would mean that:

A group approach at the level of tax treaties as such will not solve the issue; any proposed changes should be reflected in national law. This would require a multilateral approach. Uniformity is a key element (e.g., the group definition should be truly global). A downside of such an overarching group approach would be that it requires international consensus. Additionally, it could lead to manipulation with respect to being considered part of the unitary business. Also, it could negatively influence legal certainty and poses administrative issues both in the transitional phase and in the long run. Next to changes at a domestic level, a multilateral tax treaty would have to be initiated by the OECD to implement a full group approach.

Putting more emphasis on the group situation of an entity also seems logical from an EU perspective. In both primary and secondary EU law variants of a group approach are applied, with a view to positively contribute to the internal market. In line with primary EU law it is for example required in certain situations to take into account losses of a foreign subsidiary. Furthermore, domestic benefits of a group taxation regime need to be extended to cross-border situations in certain circumstances. Both difficulties would no longer be an issue under application of a unitary taxation system. Also, the various EU directives would no longer be of relevance in an intra-unitary business context.

A unitary taxation concept for domestic tax purposes and for tax treaties would mean that taxation would take place as much as possible in line with the economic reality that an entity is usually part of a bigger enterprise with a shared profit motive. As for tax treaties based on the OECD MTC a separate entity approach is applied, recognizing a group for tax treaty purposes does not seem to fit within the current framework. Thus, a comprehensive change to tax treaties is required. Tax treaties solely allocate taxing rights. Therefore, a change in the tax treaty system would solely influence ‘who to tax’ and ‘where to tax’. The taxable basis as such (‘what to tax’) and the tax rate (‘how much tax’) are in principle governed by domestic law rather than by tax treaties.