handbook-tb

Neutralizing effects of hybrid mismatch arrangementsrecommended by the OECD, involves coordination with other countries.This coordination may be implemented through amendments to domesticlaw or by conclusion or amendment of tax treaties. A country mustbe up to the task before concluding tax treaties, for fear that it will introducerestrictions on its unilateral ability to respond to flaws and abuses.In considering the response to hybrid mismatch arrangements,a country must consider what is and what is not capable of administrationby its tax authority. It is possible to understand the basic types ofbenefits sought from hybrid mismatch arrangements in terms of thefundamentals of income taxation and to formulate a response accordingly.A more difficult issue is administratively looking through themyriad types and complexities of arrangements to identify what ishappening and then administering the formulated response.At a fundamental and cynical level, hybrid mismatch arrangementsare just a means by which tax planners use two countries withnormal (and decent) tax systems to produce mismatches comparable tothose achieved by routing investment through a tax haven. Globalizationand the electronic age mean that source States must be cautious in presumingthat any foreign country will, as a residence State, tax appropriatelya flow of funds that has been let out of the source State withminimal tax. Similarly, a residence State must be cautious in presumingthat foreign source income of its residents has suffered sufficient foreigntax such that the income warrants foreign tax relief or any other relief.Neither presumption is warranted simply because the country has a taxtreaty with the other country involved. A country’s response should besimilar and coordinated, irrespective of whether a mismatch is achieveddirectly as between two countries or indirectly involving a third country.255