The OECD today released a report setting out recommended changes for countries’ to adopt into their domestic laws to prevent multinational firm tax avoidance using “branch mismatches.”
The new report,“Neutralising the Effects of Branch Mismatch Arrangements,” follows up on recommendations agreed to by nations in Action 2 of the 2015 OECD/G20 base erosion profit shifting (BEPS) plan.
While the 2015 BEPS report did not directly consider branch mismatches, it discussed hybrid entries, which raise similar tax avoidance issues.
Branch mismatches occur when the countries where a multinationals’ head office and branch are located take different views as to the allocation of income and expenditure between the head office and branch.
These mismatches can allow a multinational group to take multiple tax deductions for a single expense or take tax deductions without corresponding taxation of the same payment.
MNEs use these mismatches to generate multiple tax deductions for the same expense or to take a tax deduction without corresponding taxation of the same payment in a different country.