In the 2016–17 Budget, the Australian government announced it would implement the Organisation for Economic Cooperation and Development (OECD) hybrid mismatch and branch mismatch rules from Action Item 2 of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan.
The Hybrid Mismatch rules aim to prevent multinational companies from gaining an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements. These arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions.
The rules will apply to payments that give rise to hybrid mismatch outcomes which can be best summarized as:
- deduction/non-inclusion mismatches (‘D/NI’) where a payment is deductible in one jurisdiction and non-assessable in the other jurisdiction;
- deduction/deduction mismatches (‘D/D’) where the one payment qualifies for a tax deduction in two jurisdictions;
- imported hybrid mismatches whereby receipts are sheltered from tax directly or indirectly by hybrid outcomes elsewhere in a group of entities or a chain of transactions.
These rules will operate in Australia to neutralize hybrid mismatches by cancelling deductions or including amounts in assessable income. The rules also contain a targeted integrity provision that applies to certain deductible interest payments, or payments under a derivative, made to an interposed foreign entity where the rate of foreign income tax on the payment is 10% or less.
Subject to some exceptions, the rules have application to certain payments after 1 January 2019, and to income years commencing on or after 1 January 2019. Limited transitional arrangements, impacting frankable distributions, apply for Additional Tier 1 regulatory capital issued by banks or insurance companies.
In addition, the imported mismatch rules will only apply in respect of ‘structured arrangements’ for income years commencing on or after 1 January 2019. The complete imported mismatch rule will be delayed to income years commencing on or after 1 January 2020 (to align with the EU introduction of the hybrid mismatch rules).
The rules can apply to payments between related parties, members of a control group or between parties under a structured arrangement. Unlike the recently enacted Diverted Profits Tax or Multinational Anti-Avoidance Law measures, the Hybrid Mismatch rules do not have a de minimis or materiality threshold. The Hybrid Mismatch rules received royal assent on 24 August 2018 (as contained in Schedule 1 and 2 of Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018).
