handbook-tb

Peter A. HarrisIn the context of DD types of mismatch for hybrid entity payments,the OECD recommends that the investor State be the primaryState. In the DD case, the investor State is to deny a deduction forthe expense.As with D/NI mismatches for hybrid entity payments, the DDcase is subject to an additional qualification — the dual deduction canbe claimed to the extent it does not exceed “dual inclusion income”(income brought into account for tax purposes under the laws of bothjurisdictions). 97 The difficulties of complexity, balance and robustnessidentified above are again at issue. In addition, an amount for which adeduction is denied should be carried forward for set-off against anyfuture dual inclusion income. Further, in the case of DD, in a virtualtertiary rule, the investor State should allow a deduction to the extentthe taxpayer can show that the payment “cannot be set off against theincome of any person” in the host State (the “stranded losses rule”).In respect of exceptions to these investor State rules, there isless consistency than in the case of payer/host States. The exceptionsfor D/NI types of mismatch are the same as in the case of the payer/host State, discussed in section 3.2 above. By contrast, in DD types ofmismatch for hybrid entity payments there is no limit on the investorState applying the primary rule. This can be contrasted with the situationin the payer State where the secondary rule can only be applied incontrolled group and structured arrangement situations. 98As noted in section 3.2 above, the recommendation for dualresidents applies equally to both residence States and there is no limitationto scope.3.4 Actions by intermediate StateActions by an intermediate State are relevant only in the context of“imported mismatches.” The OECD Action 2 — 2014 Deliverable continuesto emphasize that the “most reliable protection against imported97Recommendation 6, paragraph 1 (c), OECD Action 2 — 2014 Deliverable,supra note 2, 53.98Recommendation 6, paragraph 1 (c), OECD Action 2 — 2014 Deliverable,supra note 2, 54.238