3.5.4 Other points of attention and criticism

Several of the general principles in the OECD MTC or the Commentary on it fail to contribute to achieving the OECD MTC objectives. This is discussed here, as much as possible in order of the relevant provisions. Solely issues that are relevant for groups of companies are discussed.

While the place of establishment is a major element in assessing treaty residence, it is relatively easy to manipulate. The concept of full tax liability is used to determine whether there is treaty residence. This encourages tax avoidance. This can be exploited within a multinational company.

Most of the OECD MTC provisions solely focus on preventing international juridical double taxation. The main exception to this is art. 9 OECD MTC, which specifically deals with the avoidance of economic double taxation. The question arises whether other provisions, too, should target the elimination of economic double taxation. This question is particularly relevant for the application of art. 10 and art. 13 OECD MTC in group relations.

Furthermore, the different treatment of dividends, interest and royalties, especially in group situations, encourages recharacterization of income. This leads to situations contrary to the OECD's objective of combatting tax avoidance.

The provisions of the OECD MTC do not contain a subject-to-tax requirement, potentially resulting in intended or unintended double non-taxation. This will especially be the case under the exemption method. This can lead to tax avoidance opportunities, which can be exploited within a multinational company.

Finally, I would like to point out that the OECD MTC provides a starting point for treaty negotiations between two states. Thus, the scope of application of the tax treaty eventually agreed upon is bilateral.1 Because of this limited scope, tax treaties do not provide an adequate solution in situations involving more than two countries (triangular or multilateral cases). This can be an obstacle for international trade. A triangular case usually arises if a person is a treaty resident of two states (a dual resident) or if a person is a treaty resident in one state and has a permanent establishment in another state, involving dealings with a third state.2 Triangular cases are not limited to group situations. However, exploiting a triangular case for tax avoidance opportunities seems most easy within a group. Since the 2017 update, the OECD MTC includes a specific provision that addresses triangular cases where income attributable to a permanent establishment in a third state is subject to low taxation.3 Although this provision provides guidance in a specific triangular case, it does not solve the problem as such.4