handbook-tb

Peter A. Harrisdifference between following legal classification and adopting a disjointedapproach for identifying persons was discussed above in section1.1. Another common example involves disagreement as to whether atransaction transfers the ownership of an asset or not. At one extreme,a finance lease does not transfer legal ownership but might be consideredin substance to do so. At the other extreme, a sale and repurchaseagreement does transfer legal ownership but might be considered insubstance not to do so. In the middle there can be legal mortgages (forexample, securities lending arrangements) under which the legal titleto an asset is transferred as collateral for a loan.Most commonly (although not always) mismatches with respectto persons and earning activities (and the provision of resources)manifest themselves in mismatches in the fundamentals of a payment.9 Therefore, the following discussion starts by considering howdisagreement between two countries in the fundamentals of a paymentmay give rise to cross-border mismatch opportunities. This isdone in the context of six examples. Subsequent subsections proceedto develop other examples demonstrating how mismatches in the fundamentalsof a payment can be triggered by disagreement with respectto the identification of earning activities or of who or what is a person.Example 1 is a simple illustration of a mismatch between twocountries regarding whether a payment exists for tax purposes.Example 1Mismatch in identifying payment — Deduction but no incomeZ, a resident of Country A, owes money to Y, a resident of CountryB. Z enters into an arrangement with its creditors whereby part ofthe debt owed to Y is written off. Under the Country B tax law, Ycan deduct the amount of the debt that is written off. Under theCountry A tax law, Z is not required to report any income.Shifting: A Roadmap for Reform — Tax Arbitrage with Hybrid Instruments,”(2014) Vol. 68, No. 6/7 Bulletin for International Taxation, 318-20.9As noted above, OECD Public Discussion Draft on BEPS Action2 — Domestic Issues and OECD Action 2 — 2014 Deliverable, supra note 2,focus on hybrid mismatch arrangements involving payments.196