The OECD has released an update to its work on action two of the base erosion and profit shifting (BEPS) project, designed to address the effects of branch mismatch arrangements, which had previously been overlooked
In October 2015, as part of the final BEPS package, the OECD/G20 published a report on Neutralising the Effects of Hybrid Mismatch Arrangements. This report set out recommendations for domestic rules that put an end to the use of hybrid entities to generate multiple deductions for a single expense or deductions without corresponding taxation of the same payment.
The OECD says that while the 2015 report addresses mismatches that are a result of differences in the tax treatment or characterisation of hybrid entities, it did not directly consider similar issues that can arise through the use of branch structures.
These branch mismatches occur where two jurisdictions take a different view as to the existence of, or the allocation of income or expenditure between, the branch in head office of the same taxpayer. These differences can produce the same kind of mismatches that are targeted by the 2015 report thereby raising the same issues in terms of competition, transparency, efficiency and fairness.
In response, the OECD has published a new report, Neutralising the Effects of Branch Mismatch Arrangements, which sets out recommendations for changes to domestic law that would bring the treatment of these branch mismatch structures into line with outcomes described in the 2015 report.
Unlike hybrid mismatches, which result from conflicts in the legal treatment of entities or instruments, branch mismatches are the result of differences in the way the branch and head office account for a payment made by or to the branch.
The 2017 report identifies five basic types of branch mismatch arrangements that give rise to one of three types of mismatches: deduction / no inclusion (D/NI) outcomes, double deduction (DD) outcomes, and indirect deduction / no inclusion (indirect D/NI) outcomes.
The report includes specific recommendations for improvements to domestic law intended to reduce the frequency of branch mismatches as well as targeted branch mismatch rules which adjust the tax consequences in either the residence or branch jurisdiction in order to neutralise the hybrid mismatch without disturbing any of the other tax, commercial or regulatory outcomes.
The annexes of the report summarise the recommendations and set out a number of examples illustrating the intended operation of the recommended rules.
Neutralising the Effects of Branch Mismatch Arrangements is here.
