Coordinating Inconsistent Choices – The Problem of Hybrids
25 Pages Posted: 15 Dec 2014
Date Written: December 14, 2014
Abstract
The BEPS project would, it was said, establish 'a fundamentally new set of standards designed to establish international coherence in corporate income taxation.' While many of the items in the Action Plan are better described as tinkering, item 2 was directed to 'international coherence in corporate income taxation.' Yet, while item 2 had the potential to be hugely ambitious, as designed it is now a narrow and targeted anti-abuse measure directed to disagreements about just 3 things: the debt-equity divide, the proper characterisation of transactions, and the existence -- and the number -- of entities involved in a structure.
This paper examines the rules being proposed and identifies six features which underpin the proposal: the rules are intentionally designed to be domestic, unharmonised and agnostic as to outcomes; they will make national systems more dependent upon the actions of other countries so that adopting these rules would involve a significant loss of tax sovereignty; they are based upon a view that companies as real and a final taxing point, rather than convenient point to facilitate collection from owners; one of the most curious features of the proposals is the attempt to solve every problem by denying a deduction, which seems a very indirect way of solving some of the problems; none of the problems take into account withholding tax effects which seems odd given that these taxes can significantly affect the size of the problem; and finally, it will be more than a little ironic if the agnostic approach being adopted creates mechanisms by which the anti-hybrid rule becomes the engine for the next BEPS strategies.
Keywords: Taxation, Base Erosion and Profit Shifting project, hybrid instruments and entities
JEL Classification: H20, H25, H26, K34
Suggested Citation: Suggested Citation