3.6 Conclusion

This chapter provides an overview of the existing OECD MTC provisions and OECD Commentary that take account of the possibility of entities being part of a group of companies. The existing provisions have been assessed against the OECD MTC’s objectives of avoiding double taxation so as to encourage cross-border activities, without providing opportunities for tax avoidance.

The OECD MTC provides for a partial group approach on several points. The lack of consistent rules in this area may lead to ambiguity in applying these rules. The provisions that do or do not contribute to achieving the OECD MTC objectives have been identified. In principle, the applicable variant of a group approach contributes to achieving the OECD objectives in respect of the determination of treaty residence in specific cases, the test for the existence of a permanent establishment, as well as the partial group approach for dividends. Moreover, the group approach in case of excessive interest payments, the provision aimed at preventing tax avoidance with property companies and the group approach underlying the anti-abuse provisions contribute to achieving the OECD MTC objectives to a certain extent.

The lack of a group approach or a clear group approach for various provisions in the model is negative for achieving the OECD MTC objectives. As the arm’s length principle which is at the heart of art. 7 and art. 9 OECD MTC is based on the separate entity approach, it fails to truly consider the group situation of an entity. The bilateral scope of various anti-abuse provisions in the permanent establishment article does not seem to effectively contribute to eliminating tax avoidance. The provisions to eliminate double taxation on passive income can lead to remaining double taxation, also in group situations. Additionally, the capital gains article does not provide for a postponement of taxation in case of intra-group transfers. This seems unfavourable for promoting international trade.

The consideration of the provisions of the OECD MTC has led to various other points of attention and criticism, specifically for groups of companies. The procedural approach with respect to determining whether there is full tax liability does not contribute to achieving the OECD MTC objectives and can easily be exploited in an intra-group context. Additionally, one of the questions arising is whether the prevention of economic double taxation resulting from intra-group profit distributions should be an objective of the OECD MTC. Moreover, the current classification of the articles on passive income encourages recharacterization of income in an intra-group context. Furthermore, the fact that the OECD MTC does not have a subject-to-tax requirement may encourage unintended double non-taxation, which can be exploited within a multinational company. Finally, the OECD MTC does not provide for a solution for triangular cases, which could provide tax avoidance opportunities in group situations.