The issue — After-tax hedging schemes
The report says the OECD recognizes that risk management and hedging are key issues in corporate management. Although after-tax hedging it not of itself aggressive, it may be used as a feature of schemes designed to allow taxpayers to achieve higher returns without actually bearing the associated risk, which in effect is passed on to the government through the tax system. The OECD states that these schemes originated in the banking sector but they are now used in other industries and also by medium-sized enterprises. As such, they pose a threat to countries' revenue bases.
The OECD recommends that countries concerned with aggressive tax planning schemes based on after-tax hedging should:
- Focus on detecting the schemes and ensure their tax administrators have access to sufficient resources to detect these schemes
- Introduce rules to avoid or mitigate the disparate tax treatment of hedged items and hedging instruments
- Verify whether existing general or specific anti-avoidance rules are suitable to address the schemes and if not, amend the rules or introduce new rules
- Adopt a balanced approach since not all after-tax hedging transactions are aggressive
- Continue to exchange information on aggressive tax planning schemes.
The report is organized into the following three broad categories:
- Aggressive tax planning schemes based on after-tax hedging
- Strategies used to detect and respond to aggressive tax planning schemes based on after-tax hedging
- Policy and compliance issues arising from after-tax hedging.
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