Limiting Base Erosion

S. 1661. Introduction

“Neutralising the Effects of Hybrid Mismatch Agreements” (Action 2) is one of the major actions of the BEPS project. Many of its recommendations, some of which will be mentioned in this contribution, have an impact on other BEPS Actions. Although each Action of the BEPS package stands on its own, it is paramount that they achieve harmonization in cases where overlaps may occur. For this reason, Action 2 must be assessed jointly with other Actions.

This contribution intends to look into the extent of the interaction of Action 2 with other Actions, mainly the interaction with Action 3 (CFC rules) and Action 6 (preventing of granting of treaty benefits in inappropriate circumstances). Although this contribution will not focus on the interaction of Action 2 with Action 4 (interest deductions), it will summarize its main points in one section.

The interaction of Action 2 with Action 3, Action 6, and Action 4 has been chosen because hybrid mismatches are more prone to occur when dealing with CFC rules (deduction non-inclusion, dual inclusion), granting of treaty benefits (particularly regarding transparent entities such as trusts and collective investment vehicles, or dual r...