UK and International Tax news

OECD Issues Discussion Draft On Branch Mismatch Structures

Friday 23rd September 2016

The OECD has recently issued a discussion draft which deals with branch mismatch structures under Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements) of the BEPS Action Plan.

The Action 2 Report set out recommendations for domestic rules designed to neutralise mismatches in tax outcomes that arise in respect of payments under a hybrid mismatch arrangement. The recommendations in Chapters 3 to 8 of that report set out rules targeting payments made by or to a hybrid entity that give rise to one of three types of mismatches:

(a) deduction / no inclusion (D/NI) outcomes, where the payment is deductible under the rules of the payer jurisdiction but not included in the ordinary income of the payee;

(b) double deduction (DD) outcomes, where the payment triggers two deductions in respect of the same payment; and

(c) indirect deduction / no inclusion (indirect D/NI) outcomes, where the income from a deductible payment is set-off by the payee against a deduction under a hybrid mismatch arrangement.

The report includes specific recommendations for improvements to domestic law intended to reduce the frequency of such mismatches as well as targeted hybrid mismatch rules which adjust the tax consequences in either the payer or payee jurisdiction in order to neutralise the hybrid mismatch without disturbing any of the other tax, commercial or regulatory outcomes.

The latest discussion document identifies and analyses mismatches that can arise through the use of branch structures and sets out preliminary recommendations for domestic rules, based on those in the Action 2 Report, which would neutralise the mismatches in tax outcomes arising from the use of these structures.

Comments have been requested on the preliminary recommendations set out in the discussion document and on the “Questions for Consultation” highlighted at the end of each section in order to facilitate the analysis of the issues covered by the discussion draft .

If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.

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