handbook-tb

Neutralizing effects of hybrid mismatch arrangementsA number of the recommendations in the OECD PublicDiscussion Draft on BEPS Action 2 — Domestic Issues sit uncomfortablywith OECD past practice with respect to CFC rules. As noted insection 3.3 above, a number of the recommendations prescribe taxationin the residence State (whether under a primary or secondaryrule) in the case of reverse hybrids by lifting what the investor Stateperceives to be a corporate veil. To this extent, the recommendation iseffectively the same as CFC rules, but more specific and prescriptivethan the OECD has ever been on this front. The OECD Action 2 — 2014Deliverable now contains a specific recommendation in this regardfor at least a limited-scope CFC regime. 131 It is not clear why a moreaggressive position should be taken with respect to reverse hybridsthan with respect to deferral or avoidance through more traditionaltax havens. 132 Perhaps this issue of consistency will be addressed bythe OECD Action Plan on BEPS, Action 3: Strengthen CFC Rules. 133The same could be said of the recommendation that no dividendexemption be given for a payment that is deductible for the payer.Without questioning the appropriateness of such a rule, it is not clearthat it is sensible without strong CFC rules. If countries grant a dividendexemption for payments from tax havens (or just low-tax countries),it is not clear why they should deny an exemption for paymentsthat are deductible, which can produce the same result. 134 Trying totax the deductible payment is likely to drive more business to be intermediatedthrough tax havens. The point is that as a tax design matter,the denial of a dividend exemption for deductible payments should beintegrated into and coordinated with CFC rules.131Recommendation 5 (1) in OECD Action 2 — 2014 Deliverable, supranote 2, 49. The thrust of the recommendation is that if a country has CFCrules it should ensure they cover reverse hybrids (and imported mismatches)and if it does not, it should introduce such rules to specifically cover them.132See also Michael L. Schler, “BEPS Action 2: Ending Mismatches onHybrid Instruments,” (Part 1), supra note 68, 488.133OECD Action 2 — 2014 Deliverable, supra note 2, paragraph. 88; GuglielmoMaisto, “Controlled Foreign Company Legislation, Corporate Residenceand Anti-Hybrid Arrangement Rules,” supra note 130, 329, considerscoordination of OECD Action 2 and Action 3 to be “a critical matter.”134See also Nathan Boidman and Michael Kandev, “BEPS Action Plan onHybrid Mismatches: A Canadian Perspective,” supra note 1, 1237.251