The OECD today released a draft report for countries that seek to improve their laws to counteract tax avoidance by multinationals through “branch mismatch structures.”
The draft targets situations where a multinational group arranges its affairs to reap tax advantages from locating its head office and its branch in different countries that have different views with respect to how to allocate of income and expenditure between a branch and head office. Included, for example, are situations where the branch jurisdiction does not treat the taxpayer as having a taxable presence in that jurisdiction.
Under such structures and as a result of these differences, the MNE is able to (1) take deductions in both the head office country and the branch country for the same payment, (2) take a deduction in one country for a payment made to a group member in the other country but not include any corresponding income from the payment in the other country, or (3) set off income from a deductible payment under a hybrid mismatch arrangement.
The report includes recommendations to governments on laws to reduce the frequency of such mismatches and proposes targeted rules to adjust the tax consequences to either the payer or payee jurisdiction to neutralize tax benefit from this kind of tax planning.
The guidance is patterned after the final report under Action 2 (Neutralising the Effects of Hybrid Mismatch arrangements) of the OECD/G20 base erosion profit shifting (BEPS) action Plan, issued last October.
Comments on the draft are requested by September 19.