Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.3.4
6.3.4 Dividends, interest and royalties
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659469:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
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. See also par. 3.3.3.6 and R.S. Avi-Yonah, ‘International Taxation of Electronic Commerce’, Tax Law Review 1997, vol. 52, no. 3 who describes the difficulties that revolve around the classification of income. The author proposes to solely distinguish between active and passive income.
See, e.g., par. 3.3.3.6 and R.J. Vann, ‘A Model Tax Treaty for the Asian-Pacific Region?’, Legal Studies Research Paper 2010, no. 10/122, p. 1, 9 and 10. E.g., if a payment is seen as a royalty payment instead of an interest payment, no withholding tax may be levied in line with the OECD MTC.
Additionally, it could be helpful in interpreting treaty terms (K. Vogel, ‘The Schedular Structure of Tax Treaties’, par. 1, 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).
The solution would be partial as it might still not be possible to benefit from a tax credit. This would, e.g., be the case if the taxpayer suffers a loss or if the tax is withheld contrary to the tax treaty.
I.e., align the basis on which withholding taxes are levied with the basis that is taken into account to determine the taxes payable at the level of the recipient of the income.
Art. 12 and art. 24, par. 4, OECD MTC.
R.J. Vann, ‘Chapter 5: Reflections on Business Profits and the Arm’s-Length Principle’, p. 155, in B.J. Arnold, J. Sasseville & E.M. Zolt (eds.), The Taxation of Business Profits Under Tax Treaties, Toronto: Canadian Tax Foundation 2003.
S. Leduc & G. Michielse, ‘Chapter 8: Are Tax Treaties Worth It for Developing Economies?’, p. 151, in R.A. de Mooij, A. Klemm & V. Perry (eds.), Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It Could Be Designed, Washington, DC: International Monetary Fund 2021.
R.J. Vann, ‘Taxing International Business Income: Hard-Boiled Wonderland and the End of the World’, World Tax Journal 2010, vol. 2, no. 3, par. 2.4.3.
With respect to royalties, developed countries generally argue that there should be no source taxation in the state of the payer as the state of the beneficial owner bears the research costs (normally as tax-deductible expenses). In their view it is logical to then also have the exclusive right to tax. Also, the infrastructure required for knowledge creation is normally provided by the state of the beneficial owner. In contrast, developing countries argue that the royalties are paid out of the profits generated by the entity in the source state (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1193).
Globalization, financial innovation, as well as the increased reliance on services and intangibles to generate business profits has provided taxpayers with opportunities to minimize their tax liability. As a result, the ‘cubbyhole approach’ for tax treaties – which provides a different treatment for different types of income – has become less successful over the last decades.1 Throughout this research it has been addressed multiple times that the different treatment of dividends, interest and royalties can lead to income recharacterization. This is most ‘acute’ within the corporate group.2 A more uniform treatment of the different income types could reduce the arbitrage opportunities that are possible currently.3 This could for example be achieved by treating passive income flows more along the same lines. For both dividends and interest payments juridical double taxation generally remains after application of the OECD MTC, as a result of the credit limitation in art. 23 A and 23 B OECD MTC in combination with the fact that the source state levies tax on the gross amount. Fully eliminating the juridical double taxation on dividend and interest payments can be achieved easily by allocating taxing jurisdiction on an exclusive basis to either the residence or the source state. Even though it would not be in line with current tax treaty law as the taxable basis is left to the domestic laws of the Contracting States, a partial4 solution could also be to make sure both states use the same taxable basis for withholding tax purposes.5
A disadvantage of fully eliminating juridical double taxation by assigning taxing rights to one of the two states, is that it may open possibilities for tax avoidance. The OECD MTC already prescribes zero source taxation for royalty payments. Additionally, it requires that deductions are given for royalty payments to associated enterprises, if the amount of the royalty is in accordance with the arm’s length principle.6 As a result, the OECD MTC ‘greatly assists in attributing profits to intangibles and stripping them from the source country.’7Levying withholding taxes can reduce intra-group base erosion incentives. In this regard it should be kept in mind that withholding taxes on dividends and withholding taxes on deductible expenses raise different challenges. As for the former, the risk of double or multiple taxation is more significant within a multinational group.8
Even though preventing juridical double taxation seems the main objective of the OECD MTC, it is clear that the model does not want to provide any tax avoidance possibilities. Perhaps the envisaged full elimination of the remaining juridical double taxation should thus not be pursued after all. Still, for non-deductible dividend payments it seems sensible to provide for an elimination of withholding taxes in an intra-group situation by allocating the income on an exclusive basis to either the residence or the source state. This would also mean the different treatment of capital gains (no source taxation) and dividends (5% or 15% source taxation) would no longer lead to tax avoidance possibilities.9
Additionally, it might be advisable to combat income recharacterization in the context of art. 11 and 12 OECD MTC by applying a similar withholding tax rate to interest and royalty payments. Determining which percentage would be desirable requires weighing the policy goals of the countries involved.10
In short, for dividend payments within groups of companies it seems in line with the objectives of the OECD MTC to eliminate double taxation. This could be done by allocating the income on an exclusive basis to one of the Contracting States. Fully abolishing withholding taxes on interest payments within a group would provide tax avoidance opportunities, which is not in line with the OECD MTC objectives. To counteract income recharacterization it could be considered to align the withholding tax rates for interest and royalty flows.