The OECD has published comments received following its release of discussion drafts in March on proposals to tackle the effects of hybrid mismatch arrangements, whereby companies seek to exploit differences between two or more tax jurisdictions.

Feedback was submitted by more than 60 international respondents, ranging from professional bodies to legal and accounting firms.

According to Freshfields Bruckhaus Deringer, the discussion draft is a ‘hugely impressive but also hugely ambitious. It results in complexity, possible administrative and compliance burdens, and a risk that more arrangements are captured than deserve to be captured’. Many firms voiced similar concerns.

The Chartered Institute of Taxation (CIOT) says that international co-operation is critical when addressing the issue of hybrids.

‘If not all states adopt measures to ensure single taxation of hybrids, there is potential for substantial tax advantages to remain for companies resident in those states. This could lead to distorted tax competition.

‘We anticipate this may be a particular issue with hybrids involving entity classification, where it may be difficult for certain states to change domestic rules. There is a danger of a situation where some states initiate partial measures, some none at all and some comprehensive measures, leaving continuing opportunities for companies resident in the states with no or partial measures to receive a “subsidy” from the international tax system not available to those in states where the measures are comprehensive.’

Deloitte commented that while the objectives and design principles of the recommendations in the discussion draft are generally clear, ‘we think that the discussion draft under-estimates the complexity of taking forward its recommendations’, given that ‘in practice there are likely to be many cases where significant complexity arises in establishing the tax treatment in another country’.

Similarly, EY raised concerns that the proposed framework for the treatment of hybrid transactions and arrangements ‘seems more complicated than any domestic law regime of any country in place today’. The EY response stated: ‘It does not seem possible that countries could adopt and interpret this construct in a completely consistent way. Indeed, the proposal leaves key concepts and definitions open with the idea that these details are to be filled in by each country.’

This view is shared by PWC, which said: ‘In our view, the complexity of the issues and interactions set out in the discussion draft, both at a policy level and with regard to the detailed mechanics of the recommendations, could result in an outcome whereby jurisdictions are not able to universally adopt some or all of the recommendations in a coordinated, consensus manner.’

A public consultation on the discussion drafts will be held at the OECD Conference Centre on 15 May 2014.

All feedback is available from OECD at http://www.oecd.org/tax/aggressive/comments-action-2-hybrid-mismatch-arrangements.pdf