A new report from the Organisation for Economic Cooperation and Development describes aggressive tax planning as an increasing source of concern for governments and recommends specific and targeted rules to the deny the effects of hybrid mismatch arrangements.
The report, titled ‘Hybrid Arrangements: Tax Policy and Compliance Issues’, offers examples for these structures and transactions, which exploit the differences in tax treatments of instruments, entities and transfers between two or more countries. Such arrangements are designed to deduct the same expense in several different countries, to make income “disappear” between countries or to artificially generate several tax credits for the same foreign tax.
The report notes that the same concerns that exist about distortions caused by double taxation also apply to the unintended double non-taxation.
Pascal Saint-Amans said that while the OECD is working hard to eliminate double taxation, the organisation needs to “make sure that there are no tax loopholes between tax systems that would allow some taxpayers to gain an unfair competitive advantage over others”.
The report, which draws from the OECD Directory on Aggressive Tax Planning, concludes that hybrid mismatch arrangements generate significant policy issues in terms of tax revenue, competition, economic efficiency, fairness and transparency.
Quoting anecdotal evidence, the OECD said international tax loopholes result in billions of dollars of uncollected tax revenue. While New Zealand settled cases involving four banks for a combined sum exceeding NZD$2.2 billion, Italy recently settled a dozen cases involving hybrids for an amount of approximately 1.5 billion euro. In the United States, the amount of tax evaded in 11 foreign tax credit generator transactions has been estimated at US$3.5 billion, the OECD said.
The report summarises the tax policy issues raised by hybrid mismatch arrangements and outlines policy options to address them, including the harmonisation of domestic laws, general and specific anti-avoidance rules and rules tackling specific hybrid mismatch arrangements.
Specific and targeted rules which link the tax treatment in one country to the tax treatment in another country can hold significant potential to address certain hybrid mismatch arrangements and have recently been introduced by a number of countries. The experience with the application of such rules has been positive, the report noted.
However, the application of the rules needs to be constantly monitored to ensure that the rules apply and are not circumvented through the use of even more complex arrangements.
Governments should consider introducing specific and targeted rules to tackle the unintended effects of hybrid mismatch arrangements, share intelligence on the structures and experience with the effectiveness of rules and introduce disclosure initiatives for these types of arrangements, the OECD said.
The report comes a week after the EU Commission launched a public consultation on the double non-taxation of cross-border companies to assess the scale of the issue and develop a policy response before year’s end.
The consultation will also accept anonymous submissions.
Algirdas Šemeta, Commissioner for Taxation, Customs, Anti-fraud and Audit, said: “Fairness must be at the heart of our tax policies. Double non-taxation undermines fair burden sharing in taxation and allows an unjust competitive advantage to companies that seek to exploit it. Tackling double non-taxation will not only deliver important revenues to member states, but it will also ensure a stronger, fairer single market for all EU businesses.”