handbook-tb

Neutralizing effects of hybrid mismatch arrangementsadministrations, especially those of developing countries, can or willeffectively interpret the tax laws of other countries.Mismatches arising in the context of a hybrid arrangement maybe one of two basic types. A mismatch may be harmful to the tax outcomeof the taxpayer (when compared with a consistent treatment byboth countries) or it may be beneficial to the taxpayer. Historically, taxtreaties have, in a number of ways, dealt with styles of mismatch that areharmful to taxpayers. These include the reconciliation of residence of thetaxpayer, often the source of income and transfer pricing adjustments(through corresponding adjustments) and even the provision of foreigntax relief (where otherwise both source and residence countries wouldexercise full taxing rights). The primary purpose of tax treaties has beento relieve international double taxation in order to facilitate cross-borderinvestment. 3 In the face of globalization, countries are more clearly thanever in a market place for attracting investment, a market place thatdemands relief from double taxation, which is reflected in the proliferationof unilateral measures for such relief. 4 In this way, globalizationfundamentally challenges the necessity of tax treaties.Current concerns with hybrid mismatch arrangements are witharrangements that are beneficial to taxpayers. While mismatches mightalso be harmful to taxpayers, it is likely that a well-advised taxpayerwill plan to avoid such mismatches. As Action 2 in the Organisation forEconomic Co-operation and Development Action Plan on Base Erosionand Profit Shifting (OECD Action Plan on BEPS) 5 highlights, the focus3For example, see Hugh J. Ault, “Some Reflections on the OECD and theSources of International Tax Principles,” (2013) Vol. 70, Tax Notes International,1195.4These unilateral measures involve not only foreign tax relief as a residenceState, but most importantly for present purposes the reduction ofsource-State taxation to realistic levels, for example, with respect to outboundwithholding taxes. Many developing countries now have outbounddomestic withholding taxes that are close to those that traditionally wouldhave been agreed only under a tax treaty.5OECD, Action Plan on Base Erosion and Profit Shifting (Paris: OECD,2013) (OECD Action Plan on BEPS), available at http://www.oecd.org/cctp/BEPSActionPlan.pdf. Action 2 calls for the development of “model treatyprovisions and recommendations regarding the design of domestic rules toneutralize the effect … of hybrid instruments and entities.”189