Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.3.8.2
6.3.8.2 The credit mechanism
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659470:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
L. Parada, Double Non-taxation and the Use of Hybrid Entities An Alternative Approach in the New Era of BEPS, Alphen aan den Rijn: Kluwer Law International 2018, par. 3.2.1.
If the residence state does not include the income in its taxable basis, no credit will be granted either.
M. Lang, ‘General Report’, in International Fiscal Association, Cahiers de Droit Fiscal International – Double Non-Taxation (vol. 89a), Amersfoort: SDU Fiscale & Financiële Uitgevers 2004, p. 104.
OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, Paris: OECD Publishing 2015, p. 147.
L. Parada, Double Non-taxation and the Use of Hybrid Entities An Alternative Approach in the New Era of BEPS, Alphen aan den Rijn: Kluwer Law International 2018, par. 3.2.1.
A. Scapa & L.A. Henie, ‘Avoidance of Double Non-Taxation under the OECD Model Tax Convention’, Intertax 2005, vol. 33, no. 6/7, p. 273.
See also par. 1.3.
Irrespective of the goals of the OECD MTC and as already indicated in par. 6.2.3.7, the credit method seems to have become the more popular method from an OECD perspective. The MLI includes three full or partial shifts to the credit method (see also par. 6.3.8.4). The Pillar Two developments also seem to indicate that the credit method is preferable in the view of the OECD, as that method is more suitable to combat tax avoidance. The Pillar One Blueprint leaves it up to the countries to choose for either the exemption method or the credit method.
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.
The most simple manner to eliminate unintended double non-taxation seems to require application of the credit method as the only method to eliminate double taxation: under the credit method, there would generally be no double non-taxation.1 As the credit mechanism focuses on the tax effectively paid in the country, it can be said to implicitly pursue that income relating to cross-border taxation is taxed at least once.2 In other words, if no income taxes are paid in the source country, the residence country will not grant a credit.3 However, the credit method will not provide a solution for the non-taxation if the residence state does not levy any taxes.4 The credit mechanism does not ensure single taxation. Double non-taxation in relation to the application of the credit mechanism may, for example, arise if the domestic law provisions allow a foreign tax credit relating to an item of income to be used against the tax payable in the state of residence on another item of income. Additionally, if an underlying foreign tax credit for dividends is provided in line with domestic law, this may lead to double non-taxation.5 Moreover, if income is not taxed in the source country and not repatriated to the residence country, a double non-taxation situation will be the result.6 Another downside of requiring application of the credit method is that the underlying reason different methods exist, is the different policy goals of countries (i.e., CIN and CEN). It does not seem possible to reach consensus on this topic. Apart from the aforementioned downsides of the credit method, it should be kept in mind that the credit method solely applies if the income ‘may be taxed’ in the state of source.7
Irrespective of the above, an issue with respect to requiring application of the credit mechanism assessed from the objectives of the OECD MTC is that for application of the credit method, it would not be relevant whether or not there is an abusive situation. As indicated, the OECD MTC aims to combat double non-taxation in abusive situations, while single taxation as such is not a policy goal.8 Therefore, to a certain extent the application of the credit mechanism can lead to overkill: it can also prevent intended double non-taxation.9 Consequently, the question arises whether other options are available. Avoiding double non-taxation at the level of tax treaties is, for example, done via a subject-to-tax clause or a switch-over clause.10 Below, both options are described consecutively.