handbook-tb

Peter A. HarrisEven if coordination is considered necessary, a country shouldcritically assess whether it will follow the OECD recommendations.The level of complexity and difficulty in administering these rulesshould not be underestimated, nor should the costs for taxpayers incomplying with these rules. The OECD promise for a Commentaryon the Action 2 — 2014 Deliverable by September 2015 is likely to addfurther substantial detail to already complex recommendations. 138 Fora few sophisticated economies with well-funded and highly trainedtax administrations, the payoff in shutting down perceived abuses maybe considered worthwhile. For a large number of countries (perhaps agreat majority), the cost-benefit analysis may not look proportionateand for countries with struggling tax administrations, implementationmay seem impossible.In any case, as identified in section 4 above, there are otherunilateral steps that countries may take to address hybrid mismatcharrangements that are consistent with addressing base erosion andprofit shifting more generally. Consistent with the traditional approachto international tax matters, the identified measures that source Statesmay take require no coordination with residence States. The identifiedmeasures that residence States may take do require them to considertax treatment in source States, but not to any greater extent than hasbeen usual for the purposes of providing foreign tax relief.A basic task for countries in considering hybrid mismatcharrangements is to analyse them by reference to the income tax fundamentalsof their own system. A country needs to perform this analysisboth from the perspective of the country as a source State and separatelyas a residence State. For this purpose, the country will need to considervery clearly “What is our source tax?” and “What is our residence tax?”In addition, it will need to ask whether the tax law currently makes asufficient distinction between these two taxes. If it does not, the countryshould consider ways in which it can clarify that distinction.After identifying whether hybrid mismatch arrangements exposeany flaws in the fundamentals of its tax law, a country needs to considerhow to respond. The logical and traditional response to flaws ina tax law is to make adjustments unilaterally. Another possibility, as138OECD Action 2 — 2014 Deliverable, supra note 2, paragraphs 5 and 7.254