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


Author:  Stanley C. Ruchelman.


Source: Volume 27, Number 05, May/June 2014 , pp.25-36(12)




Journal of Taxation and Regulation of Financial Institutions

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Abstract: 

In two new discussion drafts, the Organization for Economic Co-operation and Development (OECD) proposes steps to neutralize abusive tax planning through hybrid mismatch arrangements. These arrangements take advantage of incongruous tax rules in two or more jurisdictions; the goal of the planner is to create deductions for interest expense in the jurisdiction of residence of the borrower without the imposition of either withholding tax in the borrower’s jurisdiction of residence or income tax in the jurisdiction where the lender is resident. In some circumstances, double benefits are generated for interest expense--again without the payment of tax. This article explains the three types of arrangements targeted and the OECD’s proposals to put a stop to them--including proposed changes in domestic tax law and provisions in bilateral income tax treaties.

Keywords: cross-border investments; hybrid financial instruments; hybrid entity payments; reverse hybrids; imported mismatch arrangements; OECD Model Tax Convention

Affiliations:  1: Ruchelman P.L.L.C..

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