Limiting Base Erosion

S. 821. Introduction

Hybrid mismatch arrangements exploit differences in the tax treatment of an entity under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral. Outside of the rules recommended by the OECD regarding the design of domestic rules for hybrid mismatches, the OECD has also developed model treaty provisions that would neutralize the tax effects of hybrid mismatch arrangements. These rules are also focused on ensuring that hybrid entities, as well as dual resident entities, are not used to unduly obtain the benefits of tax treaties.

In the OECD report on Hybrid Mismatch Arrangements, hybrid entities are described as entities that are treated as transparent or disregarded for tax purposes in one country and as non-transparent in another country (for example, partnerships, trusts, collective investment vehicles, sovereign wealth funds). The BEPS Report – Action 2 includes into the definition of hybrid entities also dual resident entities, i.e. entities that are residents of two States for tax purposes based on their domestic law. For purposes of this contribution, the author will not focus on an analysis of this proposal relatin...