Background
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.
Government Response
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.
Further information
For further information about the Board’s work on Implementation of the hybrid mismatch rules, please contact the Board of Taxation Secretariat at taxboard@treasury.gov.au or (02) 6263 4366.
