handbook-tb

Neutralizing effects of hybrid mismatch arrangementsof implementing the OECD proposals, especially from the perspectiveof a developing country.The fourth section returns to the basics discussed in the firstsection and considers whether there are simpler steps that countries,especially developing countries, may take to alleviate the problemscaused by hybrid mismatch arrangements. In particular, the OECDrecommendations require an unprecedented level of integrationbetween countries’ tax systems and laws. Discussion in the sectionconsiders whether the problem of hybrid mismatch arrangements canbe dealt with in ways that require lower levels of integration. The focusis on two anti-base erosion measures that a source State can take, butmeasures that may be taken by a residence State are also considered.Inevitably, there is no “one-size-fits-all” solution to the problems ofhybrid mismatch arrangements and countries must make their owndecisions based on their own capacity and economic needs.1. Determining the scope of the problem1.1 Income tax fundamentalsThere are three essentials that all income tax laws incorporate andeach of them (persons, earning activities and income) demonstratesa number of fundamental features that income tax laws must detail.Income tax laws are personal taxes and so must identify the “persons”to whom they apply. Persons are taxed with respect to their “income.”However, not all amounts that “come in” or which may be allocatedto a person fall within the ambit of a typical income tax. Inevitably(and through differing legislative mechanisms), only income thatcan be related to an “earning activity” (an activity that is not private)falls within the scope of an income tax. Within the scope of an earningactivity, certain amounts positively enter into the calculation ofincome and some amounts are entered negatively, that is to say, formost countries income is a net concept (although there are exceptions,for example, sometimes for employment income).All income tax laws must identify what constitutes a person (atax subject or at least things that can be attributed to earning activitiesand income). As with many other areas, here an income tax law may191