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Peter A. Harrisof the OECD recommendations in this regard may well be “low,” developingcountries must be aware of the revenue risk raised by hybrid mismatcharrangements. There is a need to consider and respond to sucharrangements, but not necessarily using the OECD recommendations.Many countries will look for simpler ways of addressing hybridmismatch arrangements, particularly if they can be coordinated moregenerally with measures to prevent base erosion and profit shifting. 112In order to identify other options, it is necessary to return to basics toidentify the core of the problem. After all, financial instruments anddifferent types of entities are not the problem; they are only vehiclesthat are used to exploit flaws in tax fundamentals. Those tax fundamentalsneed to be investigated to see what can be done.Annex II considers what effect the other options identifiedunder this heading might have on the 13 examples used in the presentchapter and the 21 examples used in the OECD documents.4.1 Stepping back: the bigger pictureThe core structural problem that hybrid mismatch arrangements demonstrateis the mixing of source and residence tax bases. Historically,most income tax laws in Europe developed from separate taxes onthe basis of source that were subsequently supplemented with a generaltax on the basis of residence. The taxes on source and those onresidence were quite distinct. 113 It was from this basis that the firsttax treaties evolved, which not surprisingly incorporated a schedularapproach. 114 This was not the case in the United Kingdom of GreatBritain and Northern Ireland and the United States of America, which112Amanda Athanasiou, “OECD’s Hybrid Mismatch Proposals TooDrastic, Commentators Say,” supra note 37, also notes that the issues coveredby Action 2 “overlap with a number of other BEPS actions.”113For example, see Peter A. Harris, Corporate/Shareholder IncomeTaxation and Allocating Taxing Rights Between Countries: A Comparison ofImputation Systems (Amsterdam: IBFD, 1996), 73-88 and 286-300.114Ibid., 286-306. The difference between schedular taxes on differentsources of income and a complementary comprehensive income tax on thebasis of residence is evident in some of the early model tax treaties of theLeague of Nations.242