Treaty Application for Companies in a Group (FM nr. 178) 2022/5.3.6:5.3.6 Interim conclusion: group taxation 2.0

Treaty Application for Companies in a Group (FM nr. 178) 2022/5.3.6

5.3.6 Interim conclusion: group taxation 2.0

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The table below gives an overview of the various group taxation 2.0 regimes discussed in this section:

Scope

Worldwide or water's edge

Variant group approach?

Requirement

The formula

Consequences group approach (or the lack of it) with a view to prevent double taxation/tax avoidance?

Uniform?

Formulary allocation in Canada

Distribute the income of a single entity

Water's edge

No group approach, as it solely concerns the income of a single entity

The existence of permanent establishments within Canada

Gross revenue (sales) and payroll

Negative, both double taxation and tax avoidance are not 'solved'

Uniformity within Canada

CCCTB

Distribute the income of a related group of EU corporations

Water's edge for a bloc group

No full group approach, as solely the EU part of the group of related corporations is included

(i) control (more than 50% of voting rights) and (ii) ownership (more than 75% of equity) or rights to profits (more than 75% of rights giving entitlement to profit)

Labour, assets and sales

Negative, as only the EU part of the group of related corporations is included

Uniformity within the EU

Formulary apportionment in the United States (Multistate Tax Compact)

Distribute the income of a related group of corporations (either domestic or worldwide)

Both worldwide and water's edge

Either a full or a partial group approach

Unitary business (a certain connection between the entities as well as a central management is required)

Property (assets), payroll and receipts (sales)

Negative, diverging approaches can lead to double taxation and tax avoidance

Lack of uniformity within the United States

More and more comments are being made on the arm's length principle, which raises the question of whether this profit allocation method still fits in with today's society. The application of the arm’s length principle can lead to double taxation as well as provide opportunities for tax avoidance. Therefore, it does not contribute to the neutrality of the tax system. The system that applies in certain parts of Canada, the proposed Directive for the CCCTB and the system as applied in the United States use a profit-sharing formula. Formulary apportionment seems to fit well in an internal market with a single currency and a – to a large extent – single set of rules and regulations.

Under a unitary business approach, all transactions within the consolidated business would be non-visible for tax purposes. Thus, there are no intra-group dividend, interest and royalty flows including the corresponding withholding taxes. If a worldwide global consolidation is used, this would lead to a more neutral tax system. This would thus fit within the OECD MTC objectives. However, if there would be no global unitary taxation with a harmonized system, double taxation and tax avoidance opportunities remain an issue.

Harmonization and applying a worldwide approach are key in eliminating double taxation and eliminating opportunities for tax avoidance. Though, harmonization does not seem a reasonable option from a practical perspective. Applying a unitary business approach and subsequently allocating the profits via formulary apportionment on a worldwide basis would eliminate double taxation and would eliminate tax avoidance opportunities. However, this would also be the case for the arm’s length principle. Without full harmonization, formulary apportionment could provide new tax avoidance opportunities. Even though these tax avoidance opportunities seem less – depending on the chosen factors – than under the arm’s length principle, formulary apportionment does not seem to be the answer, or the only answer, to solving the allocation puzzle.

The goal of this chapter is definitely not to design a new and improved profit allocation system as such. Developing a ‘perfect’ allocation method, which first requires to define what perfect allocation looks like – which seems impossible – is beyond the scope of this research. However, the following should be kept in mind for policy makers striving for the elimination of double taxation, while not providing opportunities for tax avoidance in respect of the taxation of companies in a group:

–

to best reflect economic reality, the worldwide group should be taken as the starting point;

–

harmonization is key to eliminate double taxation without providing opportunities for tax avoidance;

–

the digitalisation of the economy should be reflected in the elements that define jurisdiction to tax;

–

a profit allocation method based on the arm’s length method does not take into account that a group can be a single integrated enterprise; and

–

if a formulary apportionment method would be used, factor shifting possibilities should be minimized. Additionally, the digitalisation of the economy should be reflected in the chosen factors.

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