BEPS Action 2: Neutralizing the Effects on Hybrid Mismatch Arrangements

Curbing tax arbitrage is one of the main priorities of the Organization for Economic Cooperation and Development (OECD) (endorsed by the G20 and the G8) ever since the public debate on base erosion fully erupted. Neutralizing the effect of hybrid mismatch arrangements has become Action No. 2 of the OECD Base erosion and profit shifting (BEPS) Action Plan. This has resulted in the recent 2014 deliverable, which is divided into two parts: recommendations for domestic law (part I), and treaty issues (part II). The authors analyse and evaluate the report on the 2014 deliverables on BEPS action point 2. They submit that, given the draw backs of specific anti-hybrid rules as to practical and political feasibility, a further review of alternatives is warranted, particularly with respect to CFC and interest deduction limitations. A more simplified mismatch rule applicable to interest seems particularly worthy of further analysis, given that hybrid mismatch arrangements almost always evolve around interest deduction (a notable exception applies with respect to payments to reverse hybrids; however, effective CFC rules may be effective in countering this particular brand of mismatches). In addition, more generic interest deduction limitations (as opposed to specific hybrid mismatch rules) may be a viable complementary way to mitigate double non-taxation resulting from hybrid mismatches and thus act as a sufficient discouragement for entering into such arrangements.