The Government has announced that rules will be introduced to eliminate instances of hybrid mismatch as part of the implementation of the Organisation for Economic Co-operation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS) – Action 2 and with further details in a Board of Tax report released on the same day as the Budget.
The measures are aimed at hybrid mismatch arrangements that result in deferring tax, no tax being paid at all, or double deductions. The target audience will be related parties, control groups, or structured arrangements.
The following are examples of hybrid mismatches:
- Hybrid financial instrument: This arises where the financial instrument is treated differently for tax purposes in both jurisdictions. For example, a loan may be considered debt in one jurisdiction giving rise to deductible interest payments, however, considered equity in the recipient’s jurisdiction giving rise to tax exempt income
- Hybrid entities: This arises where the same entity is treated differently under the laws of each jurisdiction resulting in a mismatch in the tax outcomes in each jurisdiction. For example, the United States ‘check the box’ regime, which can treat some companies as partnerships for tax purposes in the United States.
These measures will address the tax mismatch, not necessarily in the jurisdiction in which the tax benefit has arisen. Based on the OECD BEPS Action 2 and The Board of Taxation report, the following provisions may be how this is accomplished:
- Denial of dividend exemption or similar for payments that are treated as deductible by the payer
- Denial or delay of a deduction for a payment that is not included in the income by the recipient of the payment
- Denial of a deduction for a payment that is also deductible in another jurisdiction.
The Board of Taxation is currently undertaking further work at the request of the Government in relation to how best to implement these rules.
This measure will apply from either 1 January 2018, or six months after the legislation is introduced.
This measure continues the Government’s focus on cross border transactions and its commitment to the OECD’s BEPS initiatives. The success of this measure will rely on the consultation process between the Australian Taxation Office and the Foreign Tax Authority. Consideration will also need to be given to the impact the measure will have on the operation of the thin capitalisation regime, withholding tax system, Australia’s Double Taxation Agreements, and other international tax provisions.