6.2.3.1 Introduction

A unitary business concept within tax treaties would mean that taxation would take place as much as possible in line with the economic reality that an entity is usually part of a bigger enterprise with a shared profit motive. As for tax treaties based on the OECD MTC a separate entity approach is applied, recognizing a unitary business for tax treaty purposes does not seem to fit within the current framework. Under a unitary business approach, the taxable basis of an entity can be influenced by the taxable income and loss of group entities. An attempt to apply such a system across borders would not be in concurrence with the building blocks of the international tax system as reflected in tax treaties.1

As indicated in the previous section, a switch towards unitary taxation would require changes in the national legislation. Similarly, it would require changes to tax treaties. The required changes from a tax treaty perspective with respect to the chapter II, III and V of the OECD MTC are described in the following section. The emphasis is on the provisions that would require substantive changes and the provisions that play an important role in a group context.2 The changes would have to be made multilaterally.

As tax treaties solely allocate taxing rights, a change in the approach would influence ‘who to tax’ and ‘where to tax’. The taxable basis as such (‘what to tax’) is governed by domestic law rather than by tax treaties. Also, the tax rate (‘how much tax’) is an element that is in principle governed by domestic legislation.