Report on implementing OECD’s BEPS Action 2 to eliminate hybrid mismatch arrangements – report released with announcement to legislate

In the 2016-17 Federal Budget (on 3.5.16), the Government announced that it would implement the OECD’s rules in BEPS Action 2 to eliminate hybrid mismatch arrangements, taking into account the recommendations made by the Board of Taxation in its report on the Australian implementation of the OECD hybrid mismatch rules.

The report was announced on 3 May 2016 too.

On 12.5.15, Treasurer Hockey gave the Board terms of reference to advise on the implementation of the OECD’s hybrid mismatch rules, which were released on 5 October 2015. The Board issued a discussion paper on 20 November 2015 and after consultation went on to deliver its report on 31 March 2016 as requested (to allow their recommendations to be included in the 2016/17 Federal Budget). The new Treasurer gave the Board a further request to do additional work on how best to implement these rules in relation to regulatory capital as part of this measure. This was on 8 April 2016 and requested the further report be ready by the end of July 2016.

The Board’s released report made 17 recommendations (which are extracted in the related TT article). They include the following.

• that Australia adopt BEPS Action 2 report recommendations on hybrid mismatches, with some minor modifications;
• that pre-existing arrangements should, as a general rule, not be grandfathered. However, as the legislation is developed, the report said there may be certain categories of arrangements that may be appropriate for grandfathering (such as third party arrangements where there is significant detriment to investors arising from application of the hybrid mismatch rules);
• that the hybrid mismatch rules do not include a: (i) de minimis test; or (ii) purpose test. However, the Board noted as an observation that a de minimis threshold should be considered as an option for simplifying the application of the imported mismatch rule.

[Board’s website, re: Report] [Board’s Report] [TT article on Report] [Board’s Discussion Paper] [LTN 85, 5/5/16]

Terms of Reference – 12 May 2015

1. The Board of Taxation (Board) is asked to undertake consultation on the implementation of new tax laws to neutralise hybrid mismatch arrangements (anti-hybrid rules), pursuant to the recommendations of the G20 and OECD under Action Item 2 of the Base Erosion and Profit Shifting (BEPS) Action Plan.
2. Hybrid mismatch arrangements can be used to achieve double non-taxation, including long-term tax deferral. They reduce the collective tax base of countries around the world even if it may sometimes be difficult to determine which individual country has lost tax revenue. Under Action 2 of the BEPS Action Plan, the OECD has developed recommendations regarding the design of anti-hybrid rules.
3. Guidance on the practical operation of the rules and refinements on some outstanding issues will be released in a report in October 2015. The commentary will set out the principles underpinning the recommendations, agreed definitions and will include detailed examples of the practical application of the anti-hybrid rules.
4. The Board is asked to examine how best to implement anti-hybrid rules in the Australian legal context. In particular, the Board should identify an implementation strategy that has regard to:4.1. Delivering on the objectives of eliminating double non-taxation, including long term tax deferral;4.2. Economic costs for Australia; 4.3. Compliance costs for taxpayers; and 4.4. Interactions between Australia’s domestic legislation (e.g. the debt-equity rules and regulated capital requirements for banks), international obligations (including tax treaties) and the new anti-hybrid rules.
5. The Board should conduct targeted consultation with relevant parties. We ask that the Board utilise its extensive links with tax professionals and key business groups. The Board should also work closely with Treasury and Australian Taxation Office in preparing its advice.
6. Further, the advice should utilise and build upon the conclusions of the Board’s recent review of Australia’s debt/equity rules and its consultation with businesses about their perspective on the G20 / OECD BEPS Action Plan.
7. The Board is requested to report to Government by March 2016 to allow this issue to be considered as part of the 2016 Budget.

[2015 Treasurer’s letter]

Terms of Reference – 8 April 2016

1. The OECD released its final package of Base Erosion and Profit Shifting (BEPS) Action recommendations on 5 October 2015. As part of this package, the OECD released its Action 2 Report – Neutralising the Effects of Hybrid Mismatch Arrangements (Action 2 Report). The Action 2 Report sets out recommendations for countries to make changes to their domestic law to neutralise the effect of the hybrid mismatch arrangements and includes changes to the OECT Model Tax Convention to address such arrangements.
2. The Board of Taxation (Board) provided their report to Government on the implementation off the OECD hybrid mismatch rules on 31 March 2016. This report identified that deductible/frankable arrangements that arise in relation to regulatory capital result in a hybrid mismatch and recommended a subsequent process to consider the appropriate policy response given the complexities and interactions involved.
3. Consistent with the Board’s recommendation and the Government’s commitment to implementing the Action 2 Report, the Board is asked to further examine how best to neutralise the hybrid mismatch arrangement identified in the Action 2 Report.
4. In determining how best to neutralise the hybrid mismatch arrangement involving regulatory capital, the Board should identify an implementation strategy that has regard to:
   

   4.1 Delivering on the objectives of eliminating double non-taxation;
   4.2 Capital regulatory requirements as enforced and set by Australian Prudential Regulatory Authority;
   4.3 Fostering a level playing field internationally and within the Australian banking and insurance sector;
   4.4 Economic implications and potential market disruption;
   4.5 Compliance and administrative costs for taxpayers; and
   4.6 interactions between Australia’s existing domestic legislation, including with related tax laws.

5. The Board should conduct targeted consultation with relevant parties by drawing on its extensive links with tax professionals, key business groups and other relevant bodies. The Board should also work closely with Treasury and the Australian Taxation Office in finalising its advice.
6. Further, the Board’s advice should utilise and build upon the work done as part of the Board’s recent review of the broader Australian implementation of the hybrid mismatch rules.
7. The Board is requested to report to Government by the end of July 2016 to enable the commencement of the hybrid rules to deductable/frankable arrangements to align with the proposed commencement date of the hybrid mismatch rules in Australia.

[Treasurer’s 2016 letter]