6.2.3.7 Elimination of double taxation (art. 23 A and 23 B OECD MTC)

Under a unitary business approach, the country of the ultimate parent company would in principle be able to include all foreign profits of the unitary business in the levy of its domestic tax law. Subsequently, the OECD MTC would restrict the application of the domestic tax law. In this regard a proper method to allocate the profits to the various countries would have to be included in the model. For the country of the ultimate parent company of the unitary business it should be ensured that solely the profits allocable to that entity are taxed in the end. This would require a method to eliminate double taxation. The manner to eliminate double taxation is currently chosen in line with the tax policy goals of the country: it can either be the exemption method (CIN) or the credit method (CEN). As the intra-unitary business income would be consolidated and intra-group transactions would be eliminated, the risk of double taxation or abusive double non-taxation seems limited within the group. However, the method to avoid double taxation would also be relevant for transactions with for example associated non-group entities.

In recent years, the credit method seems to have gained popularity at the OECD level. The reason for this is the aim to avoid double non-taxation. For example, the MLI contains three options for states to deal with the elimination of double taxation, which are essentially aimed at making sure no double non-taxation can exist.1 All options included in the MLI entail either a partial or full switch to the credit method. From the Pillar Two developments it also follows that the OECD sees the application of the credit method as a manner to combat tax avoidance.2 The Pillar One Blueprint does not seem to contain a preference for either method.3 As countries have their own policy goals, it is left up to the various countries to choose which of the two methods they prefer.4

As indicated in par. 6.2.3.5, some amendments to the articles on the elimination of double taxation would be required to specifically deal with dividends received from an associated non-unitary business entity, interest and royalties received by the unitary business from a third party or a non-unitary business entity, and interest paid by the unitary business to a third party or an associated non-unitary business entity.