On August 22, 2016, the OECD released a discussion draft on branch mismatch structures.
The report on BEPS Action 2 (Neutralising the Effects of Hybrids Mismatch Arrangements) sets out recommendations for domestic rules designed to neutralize mismatches in tax outcomes that arise in respect of payments under a hybrid mismatch arrangement.
More spesifically, the report sets out rules targeting payments made by or to a hybrid entity that give rise to one of three types of mismatches:
- Deduction / no inclusion (D/NI) outcomes, where the payment is deductible under the rules of the payer jurisdiction but not included in the ordinary income of the payee;
- Double deduction (DD) outcomes, where the payment triggers two deductions in respect of the same payment; and
- Indirect deduction / no inclusion (indirect D/NI) outcomes, where the income from a deductible payment is set-off by the payee against a deduction under a hybrid mismatch arrangement.
The discussion draft identifies five basic types of branch mismatch arrangements:
- Disregarded branch structures where the branch does not give rise to a permanent establishment (PE) or other taxable presence in the branch jurisdiction;
- Diverted branch payments where the branch jurisdiction recognises the existence of the branch but the payment made to the branch is treated by the branch jurisdiction as attributable to the head office, while the residence jurisdiction exempts the payment from taxation on the grounds that the payment was made to the branch;
- Deemed branch payments where the branch is treated as making a notional payment to the head office that results in a mismatch in tax outcomes under the laws of the residence and branch jurisdictions;
- DD branch payments where the same item of expenditure gives rise to a deduction under the laws of both the residence and branch jurisdictions; and
- Imported branch mismatches where the payee offsets the income from a deductible payment against a deduction arising under a branch mismatch arrangement.
The report also sets out a list of preliminary recommendations for domestic rules which would neutralise the resulting mismatch in tax outcomes, including limiting the scope of the branch exemption, extending the recommendations to cover notional payments between branch and head-office and denying of the deduction in the branch jurisdiction.
In order to facilitate the analysis of the issues covered by the discussion draft, the Committee on Fiscal Affairs CFA invites interested parties to send written responses to the questions presented in the discussion draft.
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