top of page
背景 2_edited.jpg
  • Writer's pictureAmedeo Montonati

Effects of Hybrid Mismatch Arrangements

Article - Effects of Hybrid Mismatch Arrangements
Download PDF • 219KB

The exploitation of different treatment regarding taxation on instruments, entities and international trade operations by different countries to double non taxation is defined as a hybrid mismatch arrangement. Theses mismatch arrangements results in reducing the tax and tax revenue loss, financial institutions and large companies get benefit which create non equal completion with local companies, it increases financial instability and individuals and businesses sets offshore companies in tax heavens to reduce or overall on payment of taxes, transparency of entities is compromised as well as there is an unfair treatment arises on capital investments.

Hybrid Mismatch Arrangement, what they are and why they are a concern in terms of BEPS.

In the following observational paper the terms BEPS and OECD refer to “Base Erosion Profit Shifting” and “Organisation for Economic Co-operation and Development”.

Neutralizing the effects of hybrid mismatch arrangement is the second action plan of OECD BEPS 15 action plans. This plan is a result of hybrid mismatch practices worldwide for base shifting due to varied tax laws in different countries.

Firstly let’s understand what Hybrid Mismatch Arrangements are:

“The exploitation of different treatment of tax on instruments, entities and international trade operations by different countries to double non taxation is what define a hybrid mismatch arrangement.”

Hybrid mismatch arrangements can be applied on and by hybrid entities, dual resident entities, hybrid instruments and hybrid transfers as these practices result in reducing the tax and tax revenue loss.

Because of what stated, financial institutions and large companies get beneficial tax arrangements which create a unequal completion with local companies and it result in an increases of financial instability pushing individuals and businesses to set-up offshore structures in the so called tax heavens to reduce or overall on payment of taxes. This situation further compromise the transparency of entities as well as an unfair treatment on capital investment over domestic labour.

To further simplify, hybrid mismatch arrangements are an extensive plan by professionals to benefit from loopholes in international tax treatments by different jurisdictions.

We have decided to take a minute to observe this topic as the world has transformed and connected like never before due to the Covid-19 (with further market trends aimed to decentralize transactional control) pandemic and the global market is steadily going towers automation and borderless economy with the advancement of technology and accessibility of information. We assume it will be possible that this further borderless economy will have more visible impacts on structuring a uniform and efficient global regime for each country to tackle mismatch arrangements.

We believe an increase focus should be applied on hybrid mismatch arrangement in the coming years aimed to harmonizing tax laws and developing fair strategies to optimize international tax treatment for hybrid entities, dual residents and hybrid instruments.

Measures proposed by the OECD and adopted by countries.

As briefly explained above, simply put, hybrid mismatch arrangements aims to reduce to almost 0 the tax payable by multinationals compared to small companies, creating an unequal competition in different jurisdictions. MNEs have been using these strategies to establish favourable tax frameworks to minimize and erode tax base applicable jurisdictions as a “tax saving tool” through double non-taxation and/or tax deferrals. OECD has been overseeing the issue since 2010 when it first highlighted its risks in the context of tax risks involving bank losses. A following assessment of different OECD member countries to identify the usage of hybrid mismatch arrangement in tax planning brought the OECD to formulate a report in 2012 on Hybrid Mismatch Arrangements: Tax Policy and Compliance issues. The purpose of the report was to find mismatch arrangements, their impact on government tax revenues and transparency and further competition, efficiency and fairness of business operations.

The OECD Action Plan, as the 2017 OECD’s report published on neutralizing the Effects of Branch Mismatch Arrangements highlight, focus on two key factors: tax differences arising from financial instruments and entities, and issues arising from branch structures. The OECD and G20 countries have been working to eradicate hybrid and branch mismatch practices through inclusive framework to establish constant, inclusive and coherent outcomes by applying new rules - inclusive countries have adopted rules to address these tax elusive arrangements since 2012. Examples of call to action by countries are jurisdictions such as United Kingdom, Australia and New Zealand, which have passed legislation dependable with the Action Plan. Further example is the US Treasury announcing rules clarifying the application of the hybrid mismatch rules established under the Tax Cuts and Jobs Act in 2019.

Regarding the EU members, the Council Directive (EU) 2017/952 came to be effective not later than the initial months of 2020.

OECD further address proposal concerning the Action Plan.

OECD is on its way to develop a uniform model treaty to minimize the effect of hybrid mismatch and to avoid double non taxation on hybrid instruments and entities.

The main objectives is to ensure change in OECD model convention to ensure these instruments and entities are not used to take unduly benefits from such treaties. Other objective are to establish law requirements to prevent exemption or non-recognition for payments that are deductible by the payer to ensure proper contribution to tax revenue in such particular region and further more to establish law provisions that prevent tax deductions of Controlled Foreign Regimes and laws that eroded tax deductions in different jurisdictions.

The objective of this action by OECD is to work on interest expense deduction limits, the effort on CFC rules, and treaty shopping. Despite all these efforts by OECD, there is still a lot to do on CFC rules.

The recommendations by OECD are not the basic standards rather a guideline that may help countries to adopt all or part of them. Additionally, entities may have to reflect prudently whether any of their current measures may be unfavourable. Companies and jurisdictions may find it difficult to follow all and there is always the risks of double non taxation in our constant raising borderless digital economy.

Conclusion and Opinion

We believe there is still a lot to do on this particular action as there is always variety and double approach methods in the treatment of taxation, especially when involved in international transactions, as different countries have different set of laws and regulations and it’s quite difficult to establish a uniform and harmonized approach globally.

There are no very clear pathways to minimize the effect of Hybrid Mismatch Arrangements if not by signing new treaties with multiple jurisdictions to tackle losses arising for these arrangements and further defining standardized rules in establishing hybrid entities and in transferring such instruments.

OECD has provided no only the guidelines but a platform for countries to sit together ad discuss their concerns in this regard to bring a solution or at least to agree on ways to eradicate double non taxation and minimizing hybrid mismatches. Countries can establish rules related to transparency and help and provide information to each other regarding instruments and entities in these arrangements as much as possible through bilateral talks.

For more information you can contact AOGB Professional Services Group at the link and emails here below.




• ,including%20long%2Dterm%20taxation%20deferral.





bottom of page