handbook-tb

Neutralizing effects of hybrid mismatch arrangementsThe exceptions in the payer State for D/NI mismatches withrespect to hybrid financial instruments and transfers and hybrid entitypayments are not the same. The OECD intends the rules always toapply in the context of “structured arrangements.” However, the ruleson hybrid financial instruments and transfers apply only as between“related persons,” whereas the hybrid entity payments rules apply onlyas between members of the same “control group.” Recommendation 10of the OECD Action 2 — 2014 Deliverable defines “structured arrangement”and Recommendation 11 defines “related persons” and “controlgroup.” 93 While these concepts are broadly similar to concepts usedin the tax laws of most countries, integrating them properly with thoselocal concepts may not be straightforward.In the context of reverse hybrids and imported mismatches,again the host (payer) State must investigate whether the payment wasincluded in calculating income in the investor State or any intermediateState. If not, the host State is to deny a deduction for the payment. Again,the level of coordination in looking not only to the investor jurisdictionbut through potential intermediaries in potentially uncooperative thirdcountries could be substantial or impossible for many tax administrations.The exceptions for the application of this primary rule in the hostState are the same as in the case of hybrid entity payments.3.2.2 DD mismatchesIn the context of DD types of mismatch for hybrid entity payments,the OECD recommends that the host State be the secondary State.One reason for this may be because, for the host State, the expense islikely to have been incurred in deriving domestic source income. Bycomparison, for the investor State the expense is likely to have beenincurred in deriving foreign source income. This reversal of roles ofthe host and investor States as the primary State raises critical questionsregarding the allocation of expenses between domestic and foreignactivities (although the OECD Action 2 — 2014 Deliverable andbut that is not clear. A further question with respect to dual inclusion incomeis whether it will include the profits of a subsidiary that will be taxable whena dividend is distributed to a parent company.93OECD Action 2 — 2014 Deliverable, supra note 2, 67-70.235