6.2.6 Interim conclusion: fundamental change to the OECD MTC (a group approach)

A profit tax system that no longer considers the legal independence of corporate entities but rather takes the unitary business as a mandatory starting point better reflects economic reality. After all, entities are usually not independent, but are part of a larger whole. In this regard, the worldwide income of a group should be taxed and subsequently allocated to the countries where there is a sufficient economic nexus. Subsequently, double taxation should be avoided through a suitable method to eliminate double taxation.

To apply a system based on unitary taxation, first of all, a proper definition of the concept unitary business should be established. Moreover, the tax base would have to be defined. Also, it should be defined when there is a taxable connection within a country. Furthermore, the profit allocation mechanism would have to be agreed upon. In this regard it should be determined how transactions with minority shareholders and other associated entities would have to be valued. As a last step, the tax rate would have to be established.

For tax treaties based on the OECD MTC, the starting point is that each separate legal entity must be considered for treaty application. Under the unitary business approach this would be different: the group as such would be seen as a tax treaty resident. Most of the articles in the OECD MTC would no longer be relevant in an intra-unitary business context. The current art. 7 and 9 up to and including 13 OECD MTC would no longer be suitable for unitary business companies and would have to be amended. For unitary businesses the OECD MTC would mainly be relevant to confirm the method to define jurisdiction to tax, the applied profit allocation method and to establish a proper method to avoid double taxation. Implementing such a fundamental new approach would require a multilateral tax treaty.

As unitary taxation would have to be applied on a worldwide basis to truly eliminate double taxation without providing opportunities for tax avoidance, international consensus would be required. Additionally, various issues, such as establishing the profit allocation method that properly reflects the digitalisation of the economy, would remain. Also, it could lead to manipulation with respect to being considered part of the group. Apart from that, it would negatively influence legal certainty. Lastly, unitary taxation could lead to administrative issues, both in the transitional phase and in the long run.