Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.2.2.4
6.2.2.4 Defining jurisdiction to tax (‘where to tax’ – part 1)
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659450:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
M. Kobetsky, ‘The Case for Unitary Taxation of International Enterprises’, Bulletin for International Taxation 2008, vol. 62, no. 5, par. 4.3.
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, par. 5.
The Canadian system and the CCCTB (for a discussion of those systems, please see chapter 5) also use the permanent establishment concept. For the system used in the United States it should be determined whether or not there is sufficient nexus via economic activities or physical presence.
M.J. McIntyre, ‘The Use of Combined Reporting by Nation States’, Tax Notes International 2004, vol. 35, no. 10, par. 2.
P. Baker, ‘Chapter 11: Some Thoughts on Jurisdiction and Nexus’, par. 11.6, in G. Maisto (ed.), Current Tax Treaty Issues: 50th Anniversary of the International Tax Group, Amsterdam: IBFD Publications 2020.
M.F. de Wilde, ‘Sharing the Pie’; Taxing Multinationals in a global market, Amsterdam: IBFD 2017, par. 6.3.3.2.1.
E.g., A.K. Singh, Exploring the Nexus Doctrine In International Tax Law, Alphen aan den Rijn: Kluwer Law International 2021, par. 1.3 and A.A. Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle, Alphen aan den Rijn: Kluwer Law International 2020, par. 37.1.1.
E.F. Dantas Lourenço Guedes, ‘Tax Challenges of the Digital Economy: An Evaluation of the New OECD Nexus Rule Based on Revenue Thresholds’, Bulletin for International Taxation 2022, vol. 76, no. 4, par. 2.1.
OECD, Tax Challenges Arising from Digitalisation - Report on Pillar One Blueprint: Inclusive Framework on BEPS, Paris: OECD Publishing 2020. In this report different rules were provided for automated digital services and consumer-facing businesses. For the former, a market revenue threshold could be the only test to establish nexus. For the latter, next to a revenue threshold a ‘plus factor’ would be required. The plus factor could be a subsidiary or a traditional permanent establishment. This seems to have been abandoned later on in the process (OECD, Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, Paris: OECD Publishing 2021, p. 6).
M.F. de Wilde, ‘Sharing the Pie’; Taxing Multinationals in a global market, Amsterdam: IBFD 2017, par. 6.4.4.2.2.
This idea is conceptually derived from the use of the sales factor in the United States (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. 2.2).
OECD, Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, Paris: OECD Publishing 2021, p. 6. For jurisdictions with a Gross Domestic Product lower than EUR 40 billion, the nexus will be set at EUR 250,000. In addition to being significant, the engagement should be sustained (i.e., it should last for a specific period, see also E.F. Dantas Lourenço Guedes, ‘Tax Challenges of the Digital Economy: An Evaluation of the New OECD Nexus Rule Based on Revenue Thresholds’, Bulletin for International Taxation 2022, vol. 76, no. 4, par. 3.2.3). See also OECD, Pillar One – Amount A: Draft Model Rules for Nexus and Revenue Sourcing, Paris: OECD Publishing 2022.
E.F. Dantas Lourenço Guedes, ‘Tax Challenges of the Digital Economy: An Evaluation of the New OECD Nexus Rule Based on Revenue Thresholds’, Bulletin for International Taxation 2022, vol. 76, no. 4, par. 3.2.1.
A company must have a certain connection with a jurisdiction before it becomes subject to taxation in that jurisdiction. In this regard, consensus on a rule that gives jurisdiction to tax for application of a unitary taxation system is required.1 In the current international tax domain the separate existence of legal entities for tax purposes is important to determine the taxable income on a country-by-country basis.2 Moreover, to determine whether there is jurisdiction to tax the permanent establishment concept is key. The business profits of a foreign company are taxable in a jurisdiction if the company has a permanent establishment in the jurisdiction to which the profits are attributable.3
The question is: what should be the parameters to allocate profits under a unitary taxation system? This question is even more relevant than under the current system, as the legal form of the subsidiary entities would no longer be leading. It seems fair to assume that an economic nexus with a state is required to have jurisdiction to tax in that state.4 However, the central question is: when is there ‘sufficient/adequate/genuine/substantial’ nexus?5 Would the permanent establishment concept be a good parameter to determine whether there is sufficient nexus? The permanent establishment concept has been highly criticized, because it is based on the idea of having physical presence in a country. A qualitative threshold standard is used ‘referring to legal and physical-geographical connecting factors’.6 This does not seem to match with the globalized and digitalised economy.7 The underlying idea of the current division of taxing rights is the benefits theory. However, non-resident companies will also benefit from the ‘legal system, the enforcement of payment by customers, the protection of intellectual property (IP) rights, the maintenance of the digital environment, the supply of energy, waste recycling and the general infrastructure that support a connection with the market jurisdiction’ if they have no physical presence in a country.8 So, if the permanent establishment concept would be taken as a starting point to define jurisdiction to tax in a unitary taxation system, this concept should be updated to take into account the digital economy.
Under Pillar One (the unified approach), a new profit allocation is proposed, under which profit will be allocated to the market countries. Additionally, a nexus concept is introduced in addition to the existing permanent establishment concept.9 The nexus concept as proposed in the OECD work will be based on a market revenue threshold (a factor presence test). On application of a factor presence test, there is tax nexus in a jurisdiction if any of the factors (property, payroll, sales or a combination thereof) is sufficiently present in the jurisdiction. A factor presence test is a quantitative alternative to the permanent establishment concept and links directly to the geographic location of inputs and outputs for tax purposes. Under such an approach it is thus no longer relevant whether there is any physical business presence in the jurisdiction. In essence, a factor presence test determines whether there is a sufficient economic nexus.
A factor presence test can align nexus and allocation with the inputs and outputs of a firm.10 Therefore, the Pillar One proposal leads to a shift in tax profits from residence and source states to market jurisdictions.11 Even though the new nexus concept as included in Pillar One is not specifically meant for a worldwide unitary taxation system, it could very well be used for that purpose. In the Pillar One proposal sufficient nexus exist when a multinational enterprise that is in-scope of the rules derives at least EUR 1 million revenues from the respective jurisdiction.12 Thus, a turnover threshold test at destination has been chosen. This is a practical (i.e., simple to apply) choice, which aligns with value creation. It ensures that there will be a certain engagement in the state. After all, it will be very unlikely that a company is able to generate a considerable amount of income in a given state, if no investment is made in, e.g., marketing, staff and tailoring the used webpages.13
All in all, a quantitative factor presence test would contribute to the neutrality of the tax system as there would be more legal form neutrality. Hence, it would be in line with the goals of the OECD MTC. Therefore, the factor presence test should be important to determine the jurisdiction to tax for the activities conducted in the various subsidiary countries. From the perspective of these countries the new jurisdiction to tax would mean that legal entities that are part of a unitary business would no longer be included in the levy as such. They would be considered as liable to tax solely for the activities that have a sufficient economic nexus with the relevant state. Practically this could be designed by considering them as foreign taxpayers that conduct their activities via a – using the current terminology – permanent establishment.