7.3.1 Changes to reflect the OECD MTC objectives

In addition to this overarching solution, there is also a somewhat more realistic variant of a group approach (with ad hoc solutions for some of the identified problems). The OECD MTC already provides for a partial group approach on several points. The variant of a group approach for determining treaty residence in specific cases, the test for the existence of a permanent establishment, as well as the partial group approach for dividends contribute to the objectives of the OECD MTC to a certain extent. This is also the case for the provision aimed at preventing tax avoidance with property companies and the approach that seems to underly the general anti-abuse provisions.

However, the lack of a group approach or a clear group approach in various provisions is unfavourable for achieving the OECD MTC objectives. The arm’s length principle fails to truly consider the group situation of an entity. Additionally, the bilateral scope of the various anti-abuse provisions in the permanent establishment article does not seem to effectively contribute to eliminating tax avoidance. The provisions aimed at eliminating double taxation on passive income can lead to remaining double taxation, also in group situations. Moreover, the capital gains article does not provide for a deferral of taxation in case of intra-group transfers, which may negatively influence international trade.

There are various other attention points for the OECD MTC in relation to groups of companies. To determine whether there is full tax liability a procedural approach is applied. This can easily be exploited in an intra-group context. Additionally, the question arises whether the prevention of economic double taxation resulting from intra-group profit distributions should be an objective of the OECD MTC. Also, the ‘cubbyhole approach’ for the articles on passive income encourages recharacterization of income in an intra-group context. Furthermore, groups of companies can exploit the fact that the OECD MTC does not have a subject-to-tax requirement.

Even though it is difficult for bilateral tax treaties to effectively take into account multinational corporate groups, various improvements can be made to the OECD MTC to better realize its objectives. The changes could be introduced relatively quickly in existing tax treaties via a second multilateral instrument. This second-best solution does not solve the challenges that arise with respect to the digitalisation of the economy or the fact that interest deduction can provide base erosion opportunities, nor does it provide a solution for triangular cases.