handbook-tb

Neutralizing effects of hybrid mismatch arrangementsalso grants foreign tax relief with respect to them. In particular,Country B considers that the rent is derived through a PE inCountry A.Conceptually, it may be argued that an accurate rate of depreciationfor a leased asset is equal to rent charged for the asset less anotional interest charge. In such a case, there might be little taxadvantage in an example such as this one. However, most countriesgrant tax depreciation at a rate in excess of economic depreciationand sometimes for more than 100 per cent of the cost of anasset. In such a situation, a mismatch such as in this example thatgives rise to two sets of depreciation can give rise to substantialcross-border timing advantages, irrespective of whether there isalso a mismatch in the tax treatment of the rent payments becausethe countries characterize them differently.As in example 8, example 9 involves a mismatch in the fundamentalsof a provision of resources, in this case whether the provisionof an asset is by way of transfer or lease. In this example, Country Acharacterizes a finance lease as a transfer of an asset with debt financing.By contrast, Country B characterizes the finance lease as a lease.The result is that Country A considers Z to be the owner of the assetand Country B considers Y to be the owner of the asset and so bothcountries simultaneously grant tax depreciation to two different persons.Depending on the facts, it is possible for the reverse scenario alsoto give rise to tax benefits, that is to say, where Country A considers Yto be the owner of the asset and Country B considers Z to be the ownerof the asset. If the asset is an appreciating asset, neither country maytax a gain arising on the disposal of the asset.Example 9 also demonstrates that disagreement as to ownershipof an asset can trigger mismatches in the character of a payment,but such mismatches may also be triggered by simple disagreementas to the character of an asset. In example 9, the mismatch in ownershipcauses Country A to consider the payments under the financelease to be a mixture of interest and capital (purchase price), whereasCountry B considers the payments to be purely rent. Such a mismatchcan be caused where two countries do not agree as to the characterof an asset, even if they agree as to its ownership. For example, if one205