On 30 January 2024, the Australian Taxation Office (ATO) published guidance on the hybrid mismatch rules. The guidance explains why hybrid mismatch rules exist, how hybrid mismatch rules work and when they should be applied.
Australia’s hybrid mismatch rules largely follow 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 ATO, in consultation with the Board of Taxation, designed and implemented hybrid mismatch rules to prevent multinational companies from gaining an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements.
The rules apply to payments that give rise to hybrid mismatch outcomes, which can be summarised as follows:
- deduction or non-inclusion mismatches (D/NI) where a payment is deductible in one jurisdiction and non-assessable in the other jurisdiction
- deduction or deduction mismatches (D/D) where one payment qualifies for a tax deduction in 2 jurisdictions
- imported hybrid mismatches where receipts are sheltered from tax directly or indirectly by hybrid outcomes in a group of entities or a chain of transactions.
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 apply 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 starting on or after 1 January 2020. This aligns with the EU introduction of the hybrid mismatch rules.
The rules apply to payments between related parties, members of a control group, and parties under a structured arrangement.
