Tax Executives Institute, Inc. (TEI) has provided comments on the OECD BEPS Action 2 proposal addressing hybrid mismatch arrangements. The submission is referenced at the following link:
Some key highlights of Submission:
- Some suggested solutions are overly broad and administratively unworkable.
- The comments are not limited to hybrid arrangements that are inappropriate or abusive.
- Simultaneous adoption by countries is encouraged, versus a question of adoption and / or timing of adoption by countries.
- Double taxation issues, with Competent Authority requests, may increase.
- A “bottoms-up” approach, applying only to instruments held between related parties, is recommended, using a 50% or greater rule for related parties.
- For deductible payments not included in “ordinary income” of the holder’s jurisdiction, the term “ordinary income” should be expanded.
- Further clarification could be provided by delineating how two countries that simultaneously apply their domestic anti-hybrid instruments can coordinate their application.
- The impact on financial accounting in application of the hybrid rules should be considered.
- Recommended rules for hybrids will not always produce uniformity due to differing tax systems (i.e., worldwide or territorial).
- An anti-abuse rule adopted by the OECD should only apply in narrowly targeted axes of abuse, with strict bright line tests.
- Bilateral tax treaties are not a tool to address legal tax planning adopted by various countries.
TEI’s excellent comments provide further insight into this significant, and broad, proposal. Accordingly, they should be reviewed to understand complexities of adopting a complex rule without increasing risks of double taxation, with increased pressures on the Competent Authority process.