Canada - English

OECD Seeks Action on International "Hybrid Mismatching" Plans - by Brian Mustard, Walter Pela and Dan Vance 

Global Tax Adviser

March 13, 2012

Brian Mustard
Montreal, Transfer Pricing

Walter Pela
Vancouver, Canadian Corporate Tax

Dan Vance
Toronto, Canadian Corporate Tax


The Organisation for Economic Co-operation and Development (OECD) has released a new report on what the tax authorities consider the most common types of hybrid mismatch arrangements (i.e., arrangements that exploit differences in the tax treatment of instruments, entities or transfers between two or more countries). This 27-page report, Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues, summarizes the intentions of these arrangements, the tax policy issues they raise, and describes preventative policy options, with a focus on domestic law rules to deny benefits and countries' experiences applying these rules. The report also includes recommendations for tax administrations and tax policy makers.

The report, which draws from the OECD's aggressive tax planning division, concludes that these arrangements generate significant policy issues in terms of tax revenue, competition, economic efficiency, fairness and transparency. It notes that concerns about distortions caused by double taxation also apply to double non-taxation.


The OECD states that it is "working hard to make sure that there are no tax loopholes between tax systems that would allow some taxpayers to gain an unfair competitive advantage over others".



In summary, the OECD recommends that countries should:


  • Consider introducing or revising specific and targeted rules denying benefits for certain hybrid mismatch arrangements
  • Continue sharing relevant intelligence on hybrid mismatch arrangements, the deterrence, detection and response strategies used, and monitor their effectiveness
  • Consider introducing or revising disclosure initiatives targeted at certain hybrid mismatch arrangements.



The OECD notes that cross-border transactions have grown increasingly sophisticated over the years and constantly challenge revenue authorities and tax policy makers to keep pace with complex transactions. Timely, targeted and comprehensive information can help governments identify risk areas and quickly respond, thus providing increased certainty to taxpayers. As a result, several countries have introduced complementary disclosure initiatives to improve their capability to work in real time. The OECD says revenue authorities and tax policy makers also need to ensure that tax does not produce unintended and distortive effects on cross-border trade and investment.


Notably, the report does not address the tax treaty implications of hybrid mismatch arrangements, which the OECD says it will address separately.


Hybrid mismatching arrangements

The report contains five chapters:


  • Hybrid Mismatch Arrangements
  • Policy Issues
  • Policy Options
  • Rules Specifically Addressing Hybrid Mismatch Arrangements
  • Country Experience with the Application of Rules Specifically Addressing Hybrid Mismatch Arrangements.


The OECD says that hybrid mismatch arrangements are arrangements that exploit differences in the tax treatment of instruments, entities or transfers between two or more countries. The report says that hybrid mismatch arrangements often lead to "double non-taxation" that may not be intended by either country or, alternatively, a tax deferral which, if maintained over several years, is economically similar to double non-taxation. Issues raised by hybrid mismatch arrangements have been highlighted in earlier OECD reports, including Addressing Tax Risks Involving Bank Losses and Corporate Loss Utilisation through Aggressive Tax Planning.


The OECD says hybrid mismatch arrangements generally use one or more of the following underlying elements:


  • Hybrid entities - Entities that are treated as transparent for tax purposes in one country and as non-transparent in another country
  • Dual residence entities - Entities that are resident in two different countries for tax purposes
  • Hybrid instruments - Instruments which are treated differently for tax purposes in the countries involved, most prominently as debt in one country and as equity in another country
  • Hybrid transfers - Arrangements that are treated as transfer of ownership of an asset for one country's tax purposes but not for tax purposes of another country, which generally sees a collateralized loan.


Although there is no comprehensive data on the collective tax revenue loss caused by hybrid mismatch arrangements, the report says the amounts at stake in a single transaction or series of transactions are substantial. For example, the OECD says that the amount of tax evaded in the United States using 11 foreign tax credit generator transactions has been estimated at US$3.5 billion.


OECD report

Twenty countries participated in the focus group that drafted the report, including Canada, France, Germany, Japan, the United Kingdom, and the United States.



In the report, the OECD concludes that the same concerns over distortions caused by double taxation also applies to unintended double non-taxation. Several countries have recently introduced specific and targeted rules that link the tax treatment in the country concerned to the tax treatment in another country in appropriate situations. The OECD says that these rules hold significant potential to address certain hybrid mismatch arrangements.


The OECD also notes that some countries have had positive experiences related to the design, application and effects of specific and targeted rules denying benefits in hybrid mismatch arrangements. However, the OECD says that the application of the rules needs to be constantly monitored to ensure that the rules apply in appropriate circumstances and are not circumvented through even more complex arrangements.


For more information, contact your KPMG adviser.

KPMG Publications

Canadian multinational companies may be interested in these recent publications: