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

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…

THE CURRENT ANTI AVOIDANCE LANDSCAPE

ANTI-AVOIDANCE OPTIONS 

SPECIFIC

anti-avoidance rule?



TARGETED

anti-avoidance rule?



GENERAL

anti-avoidance rule?

…..THERE IS NO UNIVERSAL POISON

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

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

THE OECD’S ACTION 2 – domestic rules (1)  “

DEDUCTION / NO INCLUSION

outcomes”

Hybrid Financial Instrument

THE OECD’S ACTION 2 – domestic rules (2)  “

DEDUCTION / NO INCLUSION

outcomes”

Hybrid Transfer

THE OECD’S ACTION 2 – domestic rules (3)  “

DEDUCTION / NO INCLUSION

outcomes”

Disregarded payments by a Hybrid Entity

THE OECD’S ACTION 2 – domestic rules (4)  “

DEDUCTION / NO INCLUSION

outcomes”

Payment to a foreign Reverse Hybrid

THE OECD’S ACTION 2 – domestic rules (5)  “

DOUBLE DEDUCTION

outcomes”

Double deduction structure using a Hybrid Entity

THE OECD’S ACTION 2 – domestic rules (6)  “

DOUBLE DEDUCTION

outcomes”

Dual consolidated companies

THE OECD’S ACTION 2 – domestic rules (7)  “

INDIRECT DEDUCTION / NO INCLUSION

outcomes”

Importing a mismatch from a Hybrid Financial Instrument

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 TREATIES

… and

TAX

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

…”.

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!

HYBRID MISMATCH ARRANGEMENTS

OMLEEN AJIMAL Director of International Tax 21 November 2014