Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/2.3.3.2
2.3.3.2 Integration
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS657692:1
- Vakgebied(en)
Europees belastingrecht / Richtlijnen EU
Vennootschapsbelasting / Fiscale eenheid
Internationaal belastingrecht / Belastingverdragen
Vennootschapsbelasting / Belastingplichtige
Voetnoten
Voetnoten
P. Blumberg, ‘The Transformation of Modern Corporation Law: The Law of Corporate Groups’, Connecticut Law Review 2005, vol. 37, no. 3, p. 610.
V.E. Harper Ho, ‘Theories of Corporate Groups: Corporate Identity Reconceived’, Seton Hall Law Review 2012, vol. 42, no. 3, p. 945.
E.g., a central accounting department.
D. Francescucci, ‘The arm’s length principle and group dynamics - part 1: the conceptual shortcomings’, International Transfer Pricing Journal 2004, vol. 11, no. 2, par. 3.2.
Dunning and Robson summarize the forces that influence corporate integration as follows: ‘To exploit economies of the firm. To reduce risk and uncertainty associated with market transactions. To protect quality control of intermediate and final products. To capture the economies of synergy, which result from the common ownership of separate, but interrelated activities. To protect the value of proprietary assets, e.g. technology, trade marks, management skills etc. To overcome the transaction costs of using markets. To gain competitive strength. To share common overheads.’ (J.H. Dunning & P. Robson, ‘Multinational Corporate Integration and Regional Economic Integration’, Journal of Common Market Studies 1987, vol. 26, no. 2, par. 1).
A. Agúndez-Garcia, ‘The Delineation and Apportionment of an EU Consolidated Tax Base For Multi-Jurisdictional Corporate Income Taxation: A Review Of Issues and Options’, European Commission Directorate-General Taxation & Customs Union Working Paper 2006, no. 9, p. 14.
W. Hellerstein & C.E. McLure, Jr., ‘The European Commission’s Report on Company Income Taxation: What the EU Can Learn from the Experience of the US States’, International Tax and Public Finance 2004, vol. 11, no. 2, par. 3.1.
E.g., conduct both manufacturing and distribution activities of a product (D. Francescucci, ‘The arm’s length principle and group dynamics - part 1: the conceptual shortcomings’, International Transfer Pricing Journal 2004, vol. 11, no. 2, par. 3.1). A reason for vertical integration can be that a company wishes to gain control over the supply of essential resources to protect or improve its market position. Additionally, after vertical integration a supplier will no longer use ‘his options’ (e.g., varying in output or quality, raise prices etc.) to the disadvantage of the buyer (J.H. Dunning & S.M. Lundan, Multinational Enterprises and the Global Economy, Cheltenham: Edward Elgar 2008, par. 6.4.3).
E.g., companies that produce the same products merge.
S. Palmisano, ‘The Globally Integrated Enterprise’, Foreign Affairs 2006, vol. 85, no. 3, p. 129.
OECD, Action Plan on Base Erosion and Profit Shifting, Paris: OECD Publishing 2013, p. 7.
Schön identifies the following four integration steps: (1) long-term contractual relationships, (2) exploitation of intangibles, (3) ongoing cooperation among group companies, and (4) the unitary enterprise (W. Schön, ‘International Tax Coordination for a Second-Best World (Part III)’, World Tax Journal 2010, vol. 2, no. 3, par. 4.7.5-4.7.8).
E.G.J. Vosselman & J. van der Meer-Kooistra, ‘Management control of interfirm transactional relationships: the case of industrial renovation and maintenance’, Accounting, Organizations and Society 2000, vol. 25, no. 1, p. 51.
A. Agúndez-Garcia, ‘The Delineation and Apportionment of an EU Consolidated Tax Base For Multi-Jurisdictional Corporate Income Taxation: A Review Of Issues and Options’, European Commission Directorate-General Taxation & Customs Union Working Paper 2006, no. 9, p. 14.
W. Hellerstein & C.E. McLure, Jr., ‘The European Commission’s Report on Company Income Taxation: What the EU Can Learn from the Experience of the US States’, International Tax and Public Finance 2004, vol. 11, no. 2, par. 3.1.
Integration means that different economic activities are combined under unified control. There is a close economic intertwining of the various conducted activities.1 Integration can follow from functional characteristics, such as ‘shared personnel, joint authority over strategy, and other factors suggesting the group’s function as a single coordinated enterprise.’2 Those other factors include financial and administrative integration,3 dependence regarding deliveries and sales, common legal representation, intercompany financing as well as a central planning and control system.
An integrated firm can achieve significant economies of scale in transaction costs, logistics, brand development, risk management and other functions or risks.4 Essentially, via integration firms can capture transactional benefits by placing the activities under common ownership. Corporate integration is thus founded on the idea that unified control of separate activities provides benefits to the owners that are bigger than the benefits that would be available if they were separately owned. The basic aim with corporate integration is improving profitability and in the long run the competitive position.5 If the economic interdependence of group units is limited, even under common control, there will likely be no excess profits due to a lack of economies of integration.6
Defining a group in economic terms means that the commonly controlled entities that constitute a single economically integrated business form a group. Applying this approach means that a given corporate group could be engaged in more than one activity.7 In this regard it should be kept in mind that integration can occur both vertically and horizontally. Vertical integration means the activities are integrated within a single value chain.8 Horizontal integration concerns the integration of activities in the same part of the supply chain.9
Due to corporate globalization, the globally integrated enterprise has emerged: an enterprise that chooses its strategy, management and production in pursuit of ‘a new goal: the integration of production and value delivery worldwide.’10 In this regard country borders have become less relevant. Individual group companies undertake their activities in light of group policies and strategies. As a result, separate legal entities form a group that operates as a single integrated enterprise that follows an overall business strategy.11
It is difficult to determine when ‘sufficient’ integration exists to conclude that there is a group from an economic perspective.12 This will also be continuously subject to change, because firms start new activities, end existing activities and create new allegiances with other companies.13 For example, when a new entity is acquired, it will take some time before there will be integration. There should be agreement upon the criteria and testing to measure whether there is economic integration. This will be highly subjective and difficult to reach agreement upon. Likely it will lead to a complex system for both tax authorities and taxpayers.14 In literature it has also been suggested to use certain objective and easily administrable indicators for economic integration, such as a percentage of revenues derived from related-party transactions.15 A downside of such an objective criterium is again that it can be subject to abuse.