Implementation of the OECD hybrid mismatch rules
On 3 May 2016, the Government announced the release of the Board’s final report on the implementation of the Organisation for Economic Co-operation and Development (OECD) hybrid mismatch rules.
As part of the 2015 Budget, the Treasurer, the Hon Joe Hockey MP (as at 12/05/2015), wrote to the Board of Taxation to ask it to consult on implementation of hybrid mismatch rules developed by the OECD. On 14 July 2015, the Treasurer issued the terms of reference for this project.
- The Board of Taxation (Board) is asked to undertake consultation on the implementation of new tax laws to neutralise hybrid mismatch arrangements (hybrid mismatch rules), pursuant to the recommendations of the G20 and OECD under Action Item 2 of the Base Erosion and Profit Shifting (BEPS) Action Plan.
- Hybrid mismatch arrangements can be used to achieve double non-taxation, including long-term tax deferral. They reduce the collective tax base of countries around the world even if it may sometimes be difficult to determine which individual country has lost tax revenue. Under Action 2 of the BEPS Action Plan, the OECD has developed recommendations regarding the design of anti-hybrid rules.
- Guidance on the practical operation of the rules and refinements on some outstanding issues will be released in a report in October 2015. The commentary will set out the principles underpinning the recommendations, agreed definitions and will include detailed examples of the practical application of the anti-hybrid rules.
- The Board is asked to examine how best to implement anti-mismatch rules in the Australian legal context. In particular, the Board should identify an implementation strategy that has regard to:4.1. Delivering on the objectives of eliminating double non-taxation, including long term tax deferral;4.2. Economic costs for Australia; 4.3. Compliance costs for taxpayers; and 4.4. Interactions between Australia’s domestic legislation (e.g. the debt-equity rules and regulated capital requirements for banks), international obligations (including tax treaties) and the new anti-hybrid rules.
- The Board should conduct targeted consultation with relevant parties. We ask that the Board utilise its extensive links with tax professionals and key business groups. The Board should also work closely with Treasury and Australian Taxation Office in preparing its advice.
- Further, the advice should utilise and build upon the conclusions of the Board’s recent review of Australia’s debt/equity rules and its consultation with businesses about their perspective on the G20 / OECD BEPS Action Plan.
- The Board is requested to report to Government by March 2016 to allow this issue to be considered as part of the 2016 Budget.
On 20 November 2015, the Board released its Consultation Paper on the Implementation of the OECD hybrid mismatch rules.
The Chair of the Board, Mr Michael Andrew, announced the release of the Consultation Paper [PDF 1.23MB | RTF 4.04MB]. The Board developed this Consultation Paper to invite submissions and facilitate stakeholder consultation on the issues raised in accordance with the terms of reference given for the review. Submissions to the review closed 15 January 2016.
Ms Karen Payne led the Board’s consultation on implementation of hybrid mismatch rules. A working group was established with members including representatives of the Australian Taxation Office, Treasury, academia, community organisations, businesses and professional firms.
Board’s Report on the implementation of the OECD hybrid mismatch rules
On 31 March 2016 the Board completed its consultation on the implementation of hybrid mismatch rules developed by the OECD and provided its report to Government .
The Government announced a measure in the 2016-17 Budget, Tax Integrity Package – implementing the OECD hybrid mismatch arrangement rules, which forms the Government’s response to the report.
Review of Application of Hybrid Mismatch Rules to Regulatory Capital
On 8 April 2016, the Treasurer requested the Board undertake a subsequent review to examine how best to implement the OECD Hybrid Mismatch Recommendations to eliminate deductible/frankable hybrid mismatch arrangements that arise in relation to regulatory capital.
Terms of Reference
- The OECD released its final package of Base Erosion and Profit Shifting (BEPS) Action recommendations on 5 October 2015. As part of this package, the OECD released its Action 2 Report – Neutralising the Effects of Hybrid Mismatch Arrangements (Action 2 Report). The Action 2 Report sets out recommendations for countries to make changes to their domestic law to neutralise the effect of the hybrid mismatch arrangements and includes changes to the OECT Model Tax Convention to address such arrangements.
- The Board of Taxation (Board) provided their report to Government on the implementation off the OECD hybrid mismatch rules on 31 March 2016. This report identified that deductible/frankable arrangements that arise in relation to regulatory capital result in a hybrid mismatch and recommended a subsequent process to consider the appropriate policy response given the complexities and interactions involved.
- Consistent with the Board’s recommendation and the Government’s commitment to implementing the Action 2 Report, the Board is asked to further examine how best to neutralise the hybrid mismatch arrangement identified in the Action 2 Report.
- In determining how best to neutralise the hybrid mismatch arrangement involving regulatory capital, the Board should identify an implementation strategy that has regard to:
4.1 Delivering on the objectives of eliminating double non-taxation;
4.2 Capital regulatory requirements as enforced and set by Australian Prudential Regulatory Authority;
4.3 Fostering a level playing field internationally and within the Australian banking and insurance sector;
4.4 Economic implications and potential market disruption;
4.5 Compliance and administrative costs for taxpayers; and
4.6 interactions between Australia’s existing domestic legislation, including with related tax laws.
- The Board should conduct targeted consultation with relevant parties by drawing on its extensive links with tax professionals, key business groups and other relevant bodies. The Board should also work closely with Treasury and the Australian Taxation Office in finalising its advice.
- Further, the Board’s advice should utilise and build upon the work done as part of the Board’s recent review of the broader Australian implementation of the hybrid mismatch rules.
- The Board is requested to report to Government by the end of July 2016 to enable the commencement of the hybrid rules to deductable/frankable arrangements to align with the proposed commencement date of the hybrid mismatch rules in Australia.’
Board’s Report on the Application of Hybrid Mismatch Rules to Regulatory Capital
The Board has completed its consultation on how best to implement the OECD Hybrid Mismatch Recommendations to eliminate deductible/frankable hybrid mismatch arrangements that arise in relation to regulatory capital. The Board provided its report to Government on 21 December 2016.
The Government has announced a measure in the 2017-18 Budget, Tax Integrity Package – application of the OECD hybrid mismatch rules to regulatory capital, which forms the Government’s response to the report.”
For further information about the Board’s work on Implementation of the anti-hybrid rules, please contact the Board of Taxation Secretariat at firstname.lastname@example.org or +61 2 6263 4366.
Letter to the Chair of the Board of Taxation, 12 May 2015
|American Chamber of Commerce in Australia||758KB|
|Corporate Tax Association of Australia||850KB|
|Ernst & Young||49KB|
|Insurance Australia Group Limited (IAG)||181KB|
|Joint submission: CBA, Macquarie Group, NAB, Westpac||830KB|
|The Tax Institute||96KB|