On 19 March 2014, the Organization for Economic Cooperation and Development (OECD) published for consultation two Public Discussion Drafts in relation to Action 2 on hybrid mismatch arrangements under the Action Plan on Base Erosion and Profit Shifting (BEPS).

The first document, BEPS Action 2: Neutralise the Effects of Hybrid Mismatch Arrangements (Recommendations for Domestic Laws) (the First Discussion Draft) sets out the OECD’s recommendations for domestic rules. The paper sets out the design of hybrid mismatch rules and gives attention to the factors that need to be included in rules for neutralizing hybrid financial instruments. It also looks at the necessary elements to be included in rules combating the use of hybrid entities to gain a tax advantage and to establish circumstances in which payments by hybrid entities are not tax deductible. The paper also looks at rules to deal with imported mismatches and reverse hybrids.

The second discussion draft entitled BEPS Action 2: Neutralise the Effects of Hybrid Mismatch Arrangements (Treaty Issues) considers the effect that a change in the rules would have on the current wording of the OECD Model Tax Convention. The discussion draft proposes amendments to the Convention to clarify the treatment of hybrid entities. This includes a consideration of arrangements to ensure that dual entities or transparent entities are not used to obtain the benefits of tax treaties in certain situations.

These Discussion Drafts give the relevant interested parties a view of the proposals to be analyzed and commented. Comments are invited from interested parties by 2 May 2014. As this date is already quite close any comments on this topic should be prepared and sent to the OECD as soon as possible.