3.5.3 Lack of a group approach or a clear group approach is negative for achieving the OECD MTC objectives

The OECD MTC contains various provisions in which the lack of a group approach or a clear group approach negatively affects the achievement of the objectives of the OECD MTC.

As described above, the changes with respect to the permanent establishment provision contribute to eliminating tax avoidance opportunities. However, the concept of closely related enterprise seems to have a bilateral scope, which does not contribute to the prevention of tax avoidance in situations involving three or more countries. In addition, the newly introduced concept of closely related enterprise only applies to the application of art. 5 OECD MTC, causing a further fragmentation in the definitions used within the OECD MTC.

The arm's length principle is applied for the application of art. 7 and art. 9 OECD MTC and does not – fully – take into account the group relationship. This results in tax avoidance opportunities and potential double taxation. A possible partial solution, within the current profit allocation method, seems to be to require mutual consultation. However, a true solution is not possible within the current framework, as the arm’s length principle cannot properly reflect a highly integrated business.

The substantive approach in place for the application of art. 9 OECD MTC may lead to differences in the interpretation and application of the concept of associated enterprise. This may result in economic double taxation, which is precisely what the OECD is trying to prevent by applying art. 9 OECD MTC.

Although a reduced rate may be withheld in group situations when the dividend article is applied, the juridical double taxation is not fully eliminated. The reason for this is that withholding tax is levied as a percentage of the gross amount, whereas the net amount is taken into account when determining the credit for taxes paid abroad. Also, the provision on interest payments can lead to remaining double taxation.

The provisions for dividends, interest and royalties are not applicable if the recipient of the item of income is not regarded as the beneficial owner. In this regard the group situation of an entity is not taken into account. This may lead to double taxation without there being tax avoidance, which is not in line with the objectives of the OECD MTC.

The fact that art. 13 OECD MTC does not provide for a group approach in the case of transfers in a group situation is not in line with the OECD's objective of promoting international trade. This is also reflected in the consideration of the existing group provisions in bilateral tax treaties, showing that in various situations a specific group provision is considered necessary. This concerns in particular provisions in the context of reorganizations. The background to such provisions seems to be that taxation should be postponed, since the ultimate owner of the assets and liabilities transferred within the group remains the same.

It is not entirely clear whether for the application of the PPT a group approach may be applied in a positive manner for taxpayers. This could negatively influence cross-border investments.