Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.2.2.2
6.2.2.2 Defining the unitary business (‘who to tax’)
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659339:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
In the Pillar One and Pillar Two proposals to address the tax challenges arising from the digitalisation of the economy the consolidated financial statements are an essential element. Control based on consolidation combines in essence legal, economic and de facto control and thus seems to be in line with economic reality (see also par. 2.3.2.2 and par. 2.4.3.6).
In my view this should be a ‘updated’ variant of the concept, see par. 6.2.2.4.
This would mean that all parts of the group would in essence be treated as one global company.
E.g., the difference in treatment with respect to losses, the fact that a permanent establishment is in principle not a treaty resident and the fact that deemed dividends, deemed interest and deemed royalties between the permanent establishment and the head office will generally not trigger any withholding taxes.
Though, there are also reasons to treat permanent establishments different. For example, Vann mentions that ‘A PE disaster will generally take down the head office, while a subsidiary disaster will not have the same effect on a parent.’ (R.J. Vann, ‘Chapter 5: Reflections on Business Profits and the Arm’s-Length Principle’, p. 164, in B.J. Arnold, J. Sasseville & E.M. Zolt (eds.), The Taxation of Business Profits Under Tax Treaties, Toronto: Canadian Tax Foundation 2003). This is a legal rather than an economic difference.
If a tax is levied on the basis of a group concept, the unitary business should be the mandatory starting point. As described in chapter 2, a group definition should be based on economic parameters: effective control as well as economic integration. The group definition should thus be established in an economic rather than a legal manner: there should be a single entity from an economic perspective. In short, a unitary business is an economic unit that is composed of separate parts of a single business unit or of a jointly controlled group of business entities that are sufficiently interdependent, integrated and interconnected through their activities, in order to provide synergy and mutual benefit that creates an exchange of value between them as well as a significant flow of value to the individual parts.
A unitary business includes all entities which are commonly controlled and which are related as a single economically integrated business. To be part of the unitary business, the entity must be controlled – directly or indirectly – by the ultimate parent company of the unitary business. In this regard there should be de facto control (i.e., all facts and circumstances should be taken into account). The parent company should be able to influence the affiliates to reach its own objectives, which means effective control would be required. Minority shareholders which do not have effective control would not be part of the unitary business.
Apart from that, the corporations (the ultimate parent company and its subsidiaries) that together form the unitary business should be integrated economically.1 Shareholdings should be held as a capital asset, with a view to employing them for the benefit of the company in the long run. The group definition should include legal entities and unincorporated legal entities. This would also include permanent establishments.2 Moreover, the group concept should apply on a worldwide basis. If only the domestic part of the group would fall within the scope of the group concept, this would not do justice to the increasingly internationalizing and digitalising world. A tax consolidation of the worldwide parts of a group of companies is in line with economic reality and leads to legal form neutrality.3 It would end the different treatment of subsidiaries and permanent establishments.4 This seems logical, as substance, not form, should determine the tax consequences.5 By applying consolidation by operation of law and applying an open standard to the group concept, abuse can be prevented.