Limiting Base Erosion

S. 471. Introduction

The issue of hybrid mismatch arrangements has become the focus of Action 2 of the OECD’s Base Erosion and Profit Shifting project. The issue is relevant, since hybrid mismatch arrangements are increasingly being used by multinational entities for financing purposes. As a result, states lose corporate tax revenue due to aggressive tax planning strategies that often involve dual inclusion income and deduction as well as non-inclusion of income. The BEPS initiative is designed to modernize nearly a century old international tax rules. It attempts to ensure that taxation takes place at the source, where profits are generated, and the OECD intends to “design clear, automatic and comprehensive rules that neutralize the tax mismatch without disturbing the commercial or regulatory consequences”. It has long been the position of the OECD that countries should “consider introducing restrictions on the multiple use of the same loss”, since countries lose tax revenue and hybrid mismatch arrangements have a negative impact on competition, efficiency, transparency and fairness. The aim of this contribution is to explain the purpose, substance and scope of the OECD’s proposals desi...