Hybrid Mismatch Arrangements

Report
HYBRID MISMATCH
ARRANGEMENTS
OMLEEN AJIMAL
Director of International Tax
21 November 2014
A QUICK RECAP
WHAT ARE THEY?
 “HYBRID”
 “MISMATCH”
 “ARRANGEMENTS”
…..HYBRIDS ARE VERY HARD TO KILL
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THE POSSIBILITIES ARE ENDLESS…
Crafty tax types have been known to exploit mismatches in
(virtually everything):
• identifying a payment;
• the character of a payment;
• the amount of a payment;
• Identifying the person making/receiving a payment;
• the timing of a payment;
• the classification of earning activities;
• the character of an asset;
• the ownership of an asset; and/or
• the tax residence of any, or all, of the persons involved
in any, or all, of the above…
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THE CURRENT ANTIAVOIDANCE LANDSCAPE
ANTI-AVOIDANCE OPTIONS
 SPECIFIC anti-avoidance rule?
 TARGETED anti-avoidance rule?
 GENERAL anti-avoidance rule?
…..THERE IS NO UNIVERSAL POISON
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EXISTING RULES – A BRIEF SAMPLING
 UK RULES: on tax arbitrage
 US RULES: on foreign tax credits and dual consolidated
losses
 GERMANY: on certain hybrid financing structures
 FRANCE: on certain debt/equity hybrid instruments (and
more?)
 SPAIN: new anti-hybrid rules are on the horizon
 EU MEASURES
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THE FUTURE: GLOBAL
COOPERATION?
Death of the hybrid?
BEPS!! THE OECD’S ACTION 2 - overview

Recommendations for the design of DOMESTIC RULES:
• Hybrid Mismatch Arrangements rules:
– The “Linking Rule”
– The “Primary Response”
– The “Defensive Rule”
•

Certain specific rules for financial instruments.
Recommendations on TREATY ISSUES
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THE OECD’S ACTION 2 – domestic rules (1)
 “DEDUCTION / NO INCLUSION outcomes”
Hybrid Financial Instrument
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THE OECD’S ACTION 2 – domestic rules (2)
 “DEDUCTION / NO INCLUSION outcomes”
Hybrid Transfer
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THE OECD’S ACTION 2 – domestic rules (3)
 “DEDUCTION / NO INCLUSION outcomes”
Disregarded payments by a Hybrid Entity
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THE OECD’S ACTION 2 – domestic rules (4)
 “DEDUCTION / NO INCLUSION outcomes”
Payment to a foreign Reverse Hybrid
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THE OECD’S ACTION 2 – domestic rules (5)
 “DOUBLE DEDUCTION outcomes”
Double deduction structure using a Hybrid Entity
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THE OECD’S ACTION 2 – domestic rules (6)
 “DOUBLE DEDUCTION outcomes”
Dual consolidated companies
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THE OECD’S ACTION 2 – domestic rules (7)
 “INDIRECT DEDUCTION / NO INCLUSION outcomes”
Importing a mismatch from a Hybrid Financial Instrument
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THE OECD’S ACTION 2 – treaty issues
 Treaty provisions for DUAL-RESIDENT ENTITIES:
Residence to be decided on a case-by-case basis (Action 6)
 New provisions for TRANSPARENT ENTITIES:
Income of transparent entities to be treated in accordance with
the principles of the OECD Partnership Report (The Application of
the OECD Model Tax Convention to Partnerships, OECD,1999)
 Interaction between DOMESTIC LAW CHANGES and TAX
TREATIES…
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THE EU WEIGHS IN…
The Parent-Subsidiary Directive (2011/96/EU) has been amended.
Article 4(1)(a) now states that the Member State of a parent
company that receives distributed profits from an EU subsidiary
shall:
• BEFORE : “refrain from taxing such profits…”
• AFTER : “…to the extent that such profits are not
deductible by the subsidiary, and tax such profits to the
extent that such profits are deductible by the
subsidiary…”.
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THE FUTURE?
 Domestic anti-avoidance legislation has inherent
limitations.
 EU-wide measures are only EU-wide measures (and
currently only intra-group).
 Global measures very much depend on widespread,
comprehensive and consistent implementation, and so
could have limited effect.
…..HYBRIDS ARE VERY HARD TO KILL!
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HYBRID MISMATCH
ARRANGEMENTS
OMLEEN AJIMAL
Director of International Tax
21 November 2014

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