handbook-tb

Peter A. Harrispayer State have to consider the potential allocation of expenses in theinvestor State (such as where the investor is in a loss position there)?The rule for hybrid entity payments is subject to an additionalqualification — a deduction should be allowed to the extent it does notexceed the taxpayer’s “dual inclusion income” for the same period. 90This qualification recognizes that income will often be subject to taxtwice, once in the source State and again in the residence State, andso the expense claimed, for example, in the source State, can resultin greater taxation in the residence State. Accordingly, the rule is targetedat setting the deduction against income that is not included inthe other country. To facilitate this qualification, the OECD PublicDiscussion Draft on BEPS Action 2 — Domestic Issues contains difficultdefinitions of “disregarded payment” and “dual inclusion income.”Not only are the concepts of “disregarded payment” and “dualinclusion income” difficult to understand, they also instil little confidencethat they are balanced and robust against abuse. For example, itis possible that the income of a related party against which the deductionis set is “dual inclusion income” (also taxable in the residence Stateor another State). Under the OECD Public Discussion Draft on BEPSAction 2 — Domestic Issues, it appears that did not count because itreferred to the “taxpayer’s dual inclusion income.” 91 While the OECDAction 2 — 2014 Deliverable removed most of the references to “taxpayer”in this regard, it did not clarify its intention with respect towhose income it must be. Further, it is the whole of the taxpayer’s dualinclusion income that counts irrespective of whether the deduction isactually set against that income. For example, where the taxpayer hasother income that is taxable in the source State by way of low withholdingtax that is also taxable in the residence State (with foreign taxcredit). If the deduction claimed is transferred to another source-Stategroup member but does not exceed the income subject to withholdingtax, would the primary rule still apply? 9290Recommendation 3, paragraph 1 (c), OECD Action 2 — 2014 Deliverable,supra note 2, 44.91OECD Public Discussion Draft on BEPS Action 2 — Domestic Issues,supra note 2, 51, paragraph (h).92This may be countered by the discussion in the OECD Public DiscussionDraft on BEPS Action 2 — Domestic Issues, supra note 2, paragraph 187,234