6.1 Introduction

A group of legal entities is considered an economic entity, but only a single legal entity is taken into account for taxation purposes. This separate entity doctrine basically means that a company that is resident in a country is considered to be the taxable unit. Its tax basis is defined as the income or loss determined in line with the tax rules of the country. This legal approach does not match with the economic reality that an entity is often part of a bigger enterprise with a shared profit motive. Additionally, it does not seem to fit in today's internationally oriented world: it can lead to double taxation and can offer opportunities for tax avoidance. Various ad hoc rules have been implemented in trying to solve this tax issue.1 As described in the previous chapters, this is the case for tax treaties (chapter 3), EU law (chapter 4) as well as domestic legislation (chapter 5).

The question arises whether the fact that an entity is part of a group should have more impact on the way in which treaties are applied to this entity than is currently the case. Or would we even have to move towards a group concept for tax treaty purposes, as a result of which the group as such – including the foreign group members – is taken into account? In this context, the question arises whether bilateral tax treaties could effectively take into account the existence of multinational groups. The fact that an entity is part of group currently has a relatively limited impact on the way in which tax treaties are applied to this entity. The various provisions in the OECD MTC that take into account that entities may be part of a group or prescribe a group approach do not show a clear trend: different explicit and implicit group definitions are used, and the objectives pursued by taking the group situation into account differ. Because of the different group definitions an inconsistent whole has arisen. As a result of the BEPS project, the OECD MTC seemed to make steps towards a group approach. Nevertheless, the starting point remains the separate legal entity as the taxable subject.2

In the previous chapters various shortcomings of the OECD MTC – specifically in respect of the application to groups of companies – have been identified. In order to solve these issues, the decision can be made to fundamentally change the approach taken for the taxation of groups of companies from a national perspective and reflect this in the OECD MTC. The basic problem is in fact that the separate treatment of entities follows from domestic tax rules of the various countries rather than from treaty provisions. Therefore, a fundamental change to the OECD MTC also requires a fundamental change at the national level.3 However, another option is to keep the OECD MTC intact and implement specific changes. In this chapter both a fundamental change to the domestic tax law and the OECD MTC (as a preferred solution) as well as a probably a bit more realistic variant are discussed.4

Even though the international tax developments relating to Pillar One and Pillar Two5 show that a lot is possible, in my view a fundamental change to the domestic tax law and the OECD MTC does not seem realistic. It would mean that countries would give away their sovereignty and would no longer have the flexibility to pursue certain tax policy objectives. In this regard it should be emphasised that the Pillar One and Pillar Two proposals are much more narrow in scope than my proposed fundamental change to the international tax environment. The Pillar One proposal mainly focuses on a changed allocation method for in-scope entities within the digitalised economy,6 while a group approach within international tax law would mean that for taxation in general a switch from a legal approach to a more substantive group approach would be made.7 The latter thus also has implications for withholding taxes etc. The Pillar Two proposal aims to combat tax competition by establishing a minimum tax rate.8 This contributes to preventing tax avoidance, but is essentially another example of a rule to solve a certain element of the tax system (i.e., another anti-abuse rule, in this case a CFC-like rule). Both Pillar One and Pillar Two do not result in group taxation as such. Instead, they lead to a mixture between elements of a separate entity and a group approach.9

This chapter is structured as follows. First, the rationale for a group approach from a tax perspective is elaborated upon (par. 6.2). In this regard, the proposed fundamental change to the national legislation as well as to the OECD MTC is described, including various issues surrounding such a change. Next, a probably somewhat more realistic solution is given: ad hoc changes to the OECD MTC to better reflect groups of companies are proposed (par. 6.3). For both potential solutions, consideration is given to the steps required to implement them. The final section contains a conclusion (par. 6.4).