In the Federal 2016-17 Budget, the Government announced it would implement the Organisation for Economic Cooperation and Development (OECD) hybrid mismatch and branch mismatch rules from Action Item 2 of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. Legislation containing these measures, which aims to overcome loopholes to ensure that multinationals pay their fair share of tax in Australia, has passed through both Houses of Parliament and now awaits assent.
In effect, the Hybrid Mismatch rules aim to prevent multinational companies from exploiting differences in tax jurisdictions to gain an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements.
What will the rules apply to?
The rules will apply to payments that give rise to hybrid mismatch outcomes which can be best summarised as:
- deduction/non-inclusion mismatches (“D/NI”) where a payment is deductible in one jurisdiction and nonassessable in the other jurisdiction;
- deduction/deduction mismatches (“D/D”) where the one payment qualifies for a tax deduction in two jurisdictions;
- imported hybrid mismatches whereby receipts are sheltered from tax directly or indirectly by hybrid outcomes elsewhere in a group of entities or a chain of transactions.
These rules will operate to prevent entities that are liable to income tax in Australia from being able to avoid income tax or obtain a double taxation benefit by exploiting differences between the taxation treatment of entities and instruments across different countries.
The rules will neutralise hybrid mismatches by cancelling deductions or including amounts in assessable income of the Australian entity. The rules also contain targeted integrity provisions which will prevent the effect of the
hybrid mismatch rules from being compromised by multinational groups using interposed country conduit type vehicles to invest into Australia, as an alternative to investing into Australia using hybrid instruments or entities. These structures can be used to effectively replicate a deduction/non-inclusion outcome. Intragroup financing arrangements involving routing of funds through foreign interposed entities which result in an Australian income tax deduction (for example, interest on a loan), and the imposition of foreign income tax on the payment at a rate of 10% or less, are arrangements where the integrity rules may be applied.
Subject to some exceptions, the rules have application to certain payments after 1 January 2019, and to income years commencing on or after 1 January 2019. Limited transitional arrangements, impacting frankable dividend
distributions, apply for Additional Tier 1 regulatory capital issued by banks or insurance companies.
Unfortunately, the measures clarify that the thin capitalisation measures are not impacted by the new rules. This means an inappropriate outcome will arise where a debt deduction is disallowed under the hybrid mismatch provisions given the debt itself remains in the calculation of debt for thin capitalisation purposes.
Who do these rules apply to?
The rules can apply to payments between related parties, members of a control group or between parties under a structured arrangement. Unlike the recently enacted Diverted Profits Tax or Multinational Anti-Avoidance Law
measures, the Hybrid Mismatch rules do not have a de minimis or materiality threshold.
Stephen Rogers, SRogers@nexiasydney.com.au
Nexia Australia, Sydney