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Anti-Tax Arbitrage the U.S. Way

Anti-Tax Arbitrage the U.S. Way

Hybrid arrangements come in various forms but share a common goal: Each is designed to enhance beneficial tax results by exploiting differences in tax treatment under the laws of two or more countries.  Anti-hybrid rules were adopted as part of the T.C.J.A., which was enacted in the waning days of 2017.  In December 2018, the I.R.S. released proposed regulations that provide guidance on anti-hybrid rules adopted by Congress.  New terms must be understood, including (i) the deduction/no inclusion (“D./N.I.”) rules, (ii) tiered hybrid dividends, (iii) the hybrid deduction account (“H.D.A.”) that addresses timing, and (iv) a principal purposes test denying the benefit of the dividends received deduction.  If final regulations are adopted by June 22, 2019, they will be effective retroactively to the date of enactment of the statute.  In their article, Beate Erwin and Fanny Karaman explain the workings the proposed regulations.

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Neutralizing the Effects of Hybrid Mismatch Arrangements: The New OECD Discussion Drafts Regarding Base Erosion and Profit Shifting

Published in Journal of Taxation and Regulation of Financial Institutions, Volume 27, Number 5: May/June 2014. © Civic Research Institute. Authorized Reprint.

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J.C.T. Report on Competitiveness – A Step Toward Consideration of New Rules

volume 2 no 4   /   Read article

By Stanley C. Ruchelman

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. Stanley C. Ruchelman leads with comments on the J.C.T. analysis of Subchapter N of today’s Code – the foreign provisions.  See more →

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Hybrid Entities in Cross Border Transactions: The Canadian Experience, the U.S. Response, & B.E.P.S. - the O.E.C.D. End Game

Published by the Practising Law Institute (PLI).

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Action Item 2: Neutralizing the Effects of Hybrid Mismatch Arrangements

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On the heels of the discussion drafts issued in March, the Organization for Economic Cooperation and Development (“O.E.C.D.”) released the initial components of its plan to fight base erosion and profit shifting (the “B.E.P.S. Action Plan”). Action Item 2 addresses the effects of hybrid mismatch arrangements and proposes plans to neutralize the tax deficits caused.

These responses aim to tackle the following issues created by the hybrid mismatch arrangements:

  • Reduction in overall tax revenue,
  • Unfair advantage given to multinational taxpayers with access to sophisticated tax-planning expertise, and
  • Increased expense often incurred in setting up hybrid arrangements compared to domestic structures.

This article introduces the different hybrid arrangements, looks at the proposed changes in both domestic law and international tax treaties, and discusses the ripple effect this could have if implemented.

INTRODUCTION

A hybrid mismatch arrangement is one that exploits a difference in the way an entity or instrument is taxed under different jurisdictions to yield a mismatch in total tax liability incurred by the parties. The two possible mismatches that could result are either a “double deduction” (“DD”) or a deduction that is not offset in any jurisdiction by ordinary income (“D/NI”). These mismatches are brought about by the different interpretations afforded to the entities and transactions in relevantjurisdictions. The root cause of the hybrid mismatch is that an entity may be a “hybrid entity” and an instrument may be a “hybrid instrument.” Understanding the different hybrid arrangements is instrumental to understanding the plan proposed by the O.E.C.D.