In March, the OECD released its discussion drafts in respect of Action 2: "Neutralise the Effects of Hybrid Mismatch Arrangements—Recommendations for Domestic Laws" and "Neutralise the Effects of Hybrid Mismatch Arrangements—Treaty Issues" and Action 6: "Preventing the Granting of Treaty Benefits in Inappropriate Circumstances."
Key recommendations with respect to Action 2 (Hybrid Mismatch Arrangements) are (i) to eliminate hybrid mismatches by including targeted anti-hybrid rules in domestic law with respect to hybrid instruments, tax ownership mismatches, and (reverse) hybrid entities, which link the domestic tax treatment to the tax treatment in other relevant foreign countries, and (ii) to add a specific anti-abuse provision to the OECD Model Convention.
Key recommendations with respect to Action 6 (Prevent Treaty Abuse) are to modify the OECD Model Convention to include (i) a reference in the title and the preamble to prevention of tax avoidance and the creation of opportunities for non-taxation or reduced taxation, (ii) a limitation on benefits provision ("LOB"), and (iii) a main purpose test or general anti-abuse rule.
The recommendations set forth in these reports are solely intended to provide stakeholders with substantive proposals for analysis and comments, but if they are widely adopted in their current form, they will have a significant impact on both multinational taxpayers and governments. The reports have received mixed responses. Concerns have been expressed that the recommendation will potentially give rise to uncertainty and overkill, particularly if the recommendations are not uniformly and broadly adopted. Final reports are scheduled to be released in September.
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