Treaty Application for Companies in a Group (FM nr. 178) 2022/6.3.8.1:6.3.8.1 Introduction

Treaty Application for Companies in a Group (FM nr. 178) 2022/6.3.8.1

6.3.8.1 Introduction

Documentgegevens:

L.C. van Hulten, datum 06-07-2022

Datum: 06-07-2022
Auteur: L.C. van Hulten
JCDI: JCDI:ADS659492:1
Vakgebied(en): Omzetbelasting / Plaats van levering en dienst

In a situation of double non-taxation, the income of a taxpayer is not subject to tax in both the residence and the source state. Throughout chapter 3, it has often been mentioned that the application of tax treaties can lead to double non-taxation.1 This is especially the case under the application of an exemption system.2 Double non-taxation may be the outcome if a state receives the taxing rights under a tax treaty but does not have the possibility under its domestic law to tax the income. Moreover, double non-taxation may arise as a result of characterization conflicts: if both states apply a different distributive rule and conclude they do not have taxing rights.

As discussed, a distinction can be made between intended and unintended double non-taxation. Double non-taxation can be the result of the tax policy of one or both of the Contracting States.3 In that situation the outcome is intended: there is no abuse.4 The OECD MTC specifically aims to combat double non-taxation in the case of abuse.5 A causal link is required between tax avoidance and non-taxation or reduced taxation in order for it to be contrary to the objective of a tax treaty.6 In light of the developments regarding Pillar Two, it can be said that all double non-taxation is unwanted from a political perspective.7 The Pillar Two proposal in essence aims to subject all profits of a multinational company that falls within its scope to a minimum tax rate of 15%. In this regard, no difference is made between intended or unintended double non-taxation. The project is therefore based on the single tax principle.8

Regardless of the above, only unintended or unaccepted double non-taxation should be a reason for concern from the current perspective of the OECD MTC.9 It is difficult to determine when double non-taxation is unintended, as the meaning of ‘unintended’is far from clear. In this regard it is required to know the intentions of the states involved in the cross-border situation.10 It will differ from state to state what is considered unintended.11 For the remainder of this section, unintended double non-taxation is defined as a conflict of interpretation leading to different views on the facts of the case or the treaty provisions between the state of residence and the state of source. Any double non-taxation resulting from a mismatch between a tax treaty and the domestic law of the source state (i.e., taxing rights are allocated to the source state, but the source state does not include the income in its taxable basis) is not considered to be unintended as it will likely be the result of the tax policy of the state.

Unintended double non-taxation possibilities are definitely not limited to groups of companies. However, such possibilities can be exploited more easily within groups of companies, than for third parties.12 Therefore, in this section some potential solutions for this topic will be discussed.13

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Additionally, double non-taxation may be the result if the state of source does not tax the income, e.g., because of a mistake or the expiration of the statutory time limit (Commentary on art. 23 A and 23 B OECD MTC, par. 35). If a taxpayer does not declare income or other relevant facts, this could lead to double non-taxation as well. Such cases of non-taxation do not follow from the application of a tax treaty (E. Burgstaller & M. Schilcher, ‘Austria: Subject-to-Tax Clauses in Tax Treaties’, European Taxation 2004, vol. 44, no. 6, par. 1).

J. Sasseville, ‘The Role of Tax Treaties in the 21st Century’, par. 3, appendix to B. Arnold, J. Sasseville & E. Zolt, ‘Summary of the Proceedings of an Invitational Seminar on Tax Treaties in the 21st Century’, Bulletin for International Taxation 2002, vol. 56, no. 6.

E.g., tax sparing and matching credit clauses (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).

J. Gooijer, Tax Treaty Residence of Entities, Deventer: Wolters Kluwer 2019, par. 7.3.

Preamble OECD MTC. ‘No or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it.’ (OECD, Action Plan on Base Erosion and Profit Shifting, Paris: OECD Publishing 2013, p. 10).

P.F. Kaka, ‘From the Avoidance of Double Taxation to the Avoidance of Double Non-Taxation: The Changing Objectives of Tax Treaties’, Bulletin for International Taxation 2021, vol 75, no. 11/12, par. 1.

E.g., OECD, Tax Challenges Arising from Digitalisation - Report on Pillar Two Blueprint: Inclusive Framework on BEPS, Paris: OECD Publishing 2020 and OECD, Tax Challenges Arising from the Digitalisation of the Economy - Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS, Paris: OECD Publishing 2021.

R.S. Avi-Yonah, ‘The International Tax Regime at 100: Reflections on the OECD’s BEPS Project’, Bulletin for International Taxation 2021, vol. 75, no. 11/12, par. 3.2.

E. Gil García, ‘The Single Tax Principle: Fiction or Reality in a Non-Comprehensive International Tax Regime?’, World Tax Journal 2019, vol. 11, no. 3, par. 3.2.1.3.

10.

B. Ferreira Liotti, ‘Limits of International Cooperation: The Concept of “Jurisdiction Not to Tax” from the BEPS Project to GloBE’, Bulletin for International Taxation 2022, vol. 76, no. 2, par. 3.1. The various potential underlying motives to adopt a rule (e.g., policy, regulatory, economic, and social motives), will need to be assessed. Moreover, the question is when should those intentions be established?

11.

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. 1.

12.

Examples include hybrid mismatches of entities and hybrid mismatches with respect to financials arrangements (see par. 4.3.5.6).

13.

Wheeler identified a structural flaw, a ‘missing keystone’ in the OECD MTC: the ownership of an item of income does not necessarily match the tax liability in respect of that item of income. Treaties accept the attribution of income that is done by domestic law (J.C. Wheeler, The Missing Keystone of Income Tax Treaties, Amsterdam: IBFD 2012, par. 2.4). Ownership and tax liability may differ, for example, because of the application of anti-abuse provisions or as a result of a group taxation regime (J.C. Wheeler, The Missing Keystone of Income Tax Treaties, Amsterdam: IBFD 2012, par. 3.3.3). The focus on the person to determine treaty entitlement creates problems in the current tax treaty framework. If reference is made to a liability to tax on certain income, it could be made sure that treaty benefits are granted only if income is taxed twice. As this would cover both intended and unintended double non-taxation and as it would require a fundamental change to the OECD MTC, the method is not further discussed here.