Action Plan 2 – Neutralize the effects of Hybrid Mismatch Arrangements

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..... that asset are treated as obligations of the taxpayer; and under the laws of the counterparty jurisdiction, the counterparty is the owner of the transferred asset and the rights of the taxpayer in respect of that asset are treated as obligations of the counterparty. Ownership of an asset for these purposes includes any rules that result in the taxpayer being taxed as the owner of the corresponding cash-flows from the asset. A jurisdiction should treat any arrangement where one person provides money to another in consideration for a financing or equity return as a financial instrument to the extent of such financing or equity return. Any payment under an arrangement that is not treated as a financial instrument under the la .....

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..... tax is also credited to some other entities; and Amendments to CFC and similar regimes attributing local sharholders the income of foreign entities that are treated as transparent under their local laws. The recommended primary rule is that countries deny the taxpayer s deduction for a payment to the extent that it is not included in the taxable income of the recipient in the counterparty jurisdiction or it is also deductible in the counterparty jurisdiction. If the primary rule is not applied, then the counterparty jurisdiction can generally apply a defensive rule, requiring the deductible payment to be included in income or denying the duplicate deduction depending on the nature of the mismatch. Treaty Changes Action Plan 2 r .....

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..... branch and residence jurisdiction. Unlike hybrid mismatches, which result from conflicts in the legal treatment of entities or instruments, branch mismatches are the result of differences in the way the branch and head office account for a payment made by or to the branch. Because branch mismatches turn on differences in tax accounting rather than legal characterisation, the same basic legal structure may call for the application of different branch mismatch rules, depending on the accounting treatment adopted by the branch and head office. 2. This report identifies five basic types of branch mismatch arrangements: disregarded branch structures where the branch does not give rise to a permanent establishment (PE) or other taxable p .....

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