handbook-tb

Neutralizing effects of hybrid mismatch arrangementstax relief. This case produces “double non-taxation” in a similar fashionto that in example 6, but in this case Country B is providing directforeign tax relief as opposed to indirect foreign tax relief (dividendrelief). Similar examples arise where the residence State thinks that aperson is engaged in an earning activity, for example, employment,and the source State thinks there is insufficient activity to constitutean earning activity (for example, private activity).Example 7Mismatch of earning activities — No source-State tax butforeign tax reliefY, a resident of Country B, deals in securities in Country A.Country A does not consider that the activities of Y are sufficientto amount to conducting a business and so classifies them as aninvestment. As a result, Country A does not tax Y with respect tothe dealings. By contrast, Country B considers that Y is conductinga business in Country A (for example, through a permanentestablishment) and so grants Y foreign tax relief in the form of anexemption.There is a mismatch between Country A and Country B regardingthe type of earning activity Y is conducting (investment or business).This gives rise to a cross-border tax benefit in that neithercountry taxes income derived from the dealing in securities. Thereare many variations of this style of mismatch. Some occur eventhough the two countries classify the activity in the same manner,as in example 8 below.Disagreement as to whether a source-State tax threshold such aspermanent establishment (PE) is met can also give rise to a mismatch,as illustrated in example 8.Example 8Mismatch of who contracts — No income but foreign tax reliefY, a resident of Country B, sells stock in Country A through a commissionairearrangement. Under this arrangement, the commissionaire,Z, who is resident in Country A, sells the products of Y203