handbook-tb

Peter A. HarrisAnnex IIEffects of other steps on the 13 examplesand OECD figuresA.1 Mismatches in respect of payments: examples 1, 2, 3, 4,5 and 6A.1.1 The mismatch in example 1 would largely be addressed byquarantining foreign expenses. Country B might deny this loss on thedebt instrument to be deducted against domestic source income if thereturn on the instrument has a foreign source. Country A might consideramending its law to include debt forgiveness.A.1.2 The mismatch in example 2 would largely be addressed by comprehensivewithholding in Country A. Further, presuming that X isa subsidiary of Y, CFC rules would prevent any avoidance of tax inCountry B, whether imposed on Y or directly on the shareholders of Y.Alternately, if Y is a subsidiary of Z or X, Country B has little concernin this matter. CFC rules in Country A would then address deferral ofresidence-State tax.A.1.3 The mismatch in example 3 would largely be addressed by quarantiningforeign expenses. There are three possibilities here. First, thepayment is made through a PE situated in Country B. In this case,quarantining of foreign expenses in Country A would protect its taxbase and the deduction in Country B seems appropriate. If Country Bpermits a loss of the PE to offset profits of, say Y, then the deductionin Country A would be denied (irrespective of quarantining). Second,the payment is made through a PE situated in Country A. In this case,comprehensive withholding in Country A will largely address its taxbase erosion, and B will get a foreign tax credit for this tax. Country Bwill be protected by quarantining the foreign interest expense of X anddenying it if Z transfers a loss to a related party in Country A.A.1.4 The third possibility in example 3 is that there is no PE inCountry A or Country B through which the payment is made. If thepayment is made through a PE in a third country, then both Country A260