handbook-tb

Peter A. HarrisA.3 Mismatches in respect of persons: examples 11, 12 and 13A.3.1 The mismatch in example 11 (identifying person) would largelybe addressed by comprehensive withholding in Country A. As it seesZ as an entity, it is not clear that Country A has any greater interest inthis arrangement. There are likely to be many other scenarios in whicha Country A resident is allowed a deduction for a payment to a nonresidentthat is not subject to substantial taxation, for example, wherethe recipient is exempt, in a loss position or resident in a tax haven. Itis not clear that this scenario warrants any special treatment. As forCountry B, this situation is similar to examples 7 and 8 in that it maybe granting an unnecessary PE exemption and should perhaps limit itsexemption to the amount of income of Z subject to tax in Country A.Further, the scenario in example 11 is unlikely to give rise to tax benefitsif Country B adopts a foreign tax credit system. The other commentsdiscussed with respect to Country B for examples 7 and 8 applyequally to example 11.A.3.2 Figure 9 [figure 2.3 in the OECD Action 2 — 2014 Deliverable]in the OECD Public Discussion Draft on BEPS Action 2 — DomesticIssues is effectively the same as example 11, but a similar effect may beachieved using a PE instead of a hybrid entity. As discussed in section2.3 above, a mismatch with a PE may arise under the OECD ModelConvention, which under the Authorised OECD Approach underArticle 7 (2) requires treating the PE in the host State as a separate entityfor purposes of calculating its income. g While a similar approach is suggestedfor the residence State in calculating foreign tax relief, the domesticlaw of many countries will not authorize this, that is to say, domestictax law will ignore dealings between a PE and its owner. This may giverise to a mismatch of the same style as in example 11 and the commentsthere are relevant here. One difference is that tax treaties may see thepayment for purposes of calculating the income of the PE but not forpurposes of imposing withholding tax on such a payment. Tax treatiesmay therefore prohibit withholding tax on the deemed payment. hgParagraph 15 of the Commentary on Article 7 of the OECD ModelConvention.hParagraphs 28 and 29 of the Commentary on Article 7 of the OECDModel Convention.268