Limiting Base Erosion

S. 1211. Introduction

BEPS Action 2 addresses hybrid mismatch arrangements that are used for tax planning by exploiting differences – mostly characterisation conflicts – between the laws of the jurisdictions involved to minimise taxation in an inappropriate manner. The OECD/G20 BEPS Project: Neutralising the Effects of Hybrids Mismatch Arrangements report sets out recommendations for domestic legislation to neutralise the effect of such hybrid mismatches and also includes changes to the OECD Model Tax Convention to address these arrangements.

In the following sections, the author summarizes the hybrid mismatch rules and then makes an attempt to review the possible interactions between hybrid mismatch rules under national and international tax law.

2. Recommendations under Action 2 Report

Part I of Action 2 Report defines recommendations for domestic legislation to address mismatches when they arise in respect of payments made under a hybrid financial instrument or payments made to or by a hybrid entity. It also recommends rules to address indirect mismatches that arise when the effects of a hybrid mismatch arrangement are imported into a third jurisdiction. These recommendations target the f...