Action Plan 2 – Neutralize the effects of Hybrid Mismatch Arrangements - International Taxation - Income Tax

..... of that asset are treated as obligations of the counterparty. Ownership of an asset for these purposes includes any rules that result in the taxpayer being taxed as the owner of the corresponding cash-flows from the asset. A jurisdiction should treat any arrangement where one person provides money to another in consideration for a financing or equity return as a financial instrument to the extent of such financing or equity return. Any payment under an arrangement that is not treated as a financial instrument under the laws of the counterparty jurisdiction shall be treated as giving rise to a mismatch only to the extent the payment constitutes a financing or equity return. Action 2 calls for the development of model treaty provisions an .....

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Action Plan 2 Neutralize the effects of Hybrid Mismatch Arrangements - International Taxation - Income Tax

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..... es deny the taxpayer s deduction for a payment to the extent that it is not included in the taxable income of the recipient in the counterparty jurisdiction or it is also deductible in the counterparty jurisdiction. If the primary rule is not applied, then the counterparty jurisdiction can generally apply a defensive rule, requiring the deductible payment to be included in income or denying the duplicate deduction depending on the nature of the mismatch. Treaty Changes Action Plan 2 recommends a new provision in the case of income earned by a transparent entity. As per the new provision, treaty benefits will only be afforded to so much of the income of the entity as the income of a resident of that state. A specific or general saving rule i .....

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Action Plan 2 Neutralize the effects of Hybrid Mismatch Arrangements - International Taxation - Income Tax

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..... mismatches turn on differences in tax accounting rather than legal characterisation, the same basic legal structure may call for the application of different branch mismatch rules, depending on the accounting treatment adopted by the branch and head office. 2. This report identifies five basic types of branch mismatch arrangements: disregarded branch structures where the branch does not give rise to a permanent establishment (PE) or other taxable presence in the branch jurisdiction diverted branch payments where the branch jurisdiction recognises the existence of the branch but the payment made to the branch is treated by the branch jurisdiction as attributable to the head office, while the residence jurisdiction exempts the payment fro .....

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Action Plan 2 Neutralize the effects of Hybrid Mismatch Arrangements - International Taxation - Income Tax

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