handbook-tb

Neutralizing effects of hybrid mismatch arrangementsExample 12Mismatch in residence — Deduction but no residence taxationZ, a resident of Country A, pays for goods bought from Y. Y isformed under the laws of Country A and managed from CountryB, but neither Country A nor Country B considers Y to be residentin their jurisdiction (different tests of residence). As a result,neither Country A nor Country B taxes Y with respect to the proceedsof sale.There is a mismatch between Country A and Country B as regardsthe residence of Y. This gives rise to a cross-border tax benefitbecause the sales proceeds are likely to be deductible to Z inCountry A with no pick-up in the taxation of Y because it is notresident anywhere (presuming the sale is not attributable to a PEin Country A or Country B, for example, goods shipped from athird country).Example 13Mismatch in residence — Double-dip deductionZ Co is a member of a multinational group of companies. It hasbeen making losses. It is managed from Country A but formedunder the laws of Country B. Both Country A and Country B considerZ Co to be resident in their jurisdiction. As a result, bothCountry A and Country B provide tax loss relief, including by wayof setting the losses of Z Co against income derived by other groupmembers resident in their jurisdiction.There is a mismatch between Country A and Country B in respectof the residence of Z Co. This gives rise to a cross-border tax benefitbecause the losses of Z Co are simultaneously used to reduce theincome of more than one member of the corporate group.Examples 12 and 13 help to demonstrate that much mismatchtax planning revolves around inconsistencies in the manner in whichcountries exercise their jurisdiction to tax. What constitutes a “person”and the fundamental features of the person are important where209