Australia Moves on Cross-Border Tax Mismatch Arrangements

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By Peter Hill

Australia’s treasurer has issued exposure draft legislation designed to negate tax benefits arising from multinational companies’ use of cross-border “hybrid mismatch” finance arrangements.

Treasurer Scott Morrison said in a Nov. 24 news release announcing the proposal that such arrangements try to “exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions.”

The exposure draft (ED) legislation, Treasury Laws Amendment (OECD Hybrid Mismatch Rules) Bill 2017, seeks to insert hybrid mismatch rules, under new Division 832, into Australia’s Income Tax Assessment Act 1997.

The proposed new rules are based on recommendations made in March 2016 by the Board of Taxation, a non-statutory advisory body charged with assisting in improvements to the design and operation of Australia’s tax laws.

The board was tasked in 2015 with advising the government on how best to implement the OECD’s recommendations under Action 2 of its Base Erosion and Profit Shifting (BEPS) project, which seeks to neutralize the effects of hybrid mismatch arrangements.

The ED legislation follows the recommendations made by the board in its final report of March 2016 and as announced by the government in its 2016-17 federal budget.

What Are Hybrid Mismatch Arrangements?

Hybrid mismatch arrangements are used by MNCs “to exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions,” according to a Nov. 24 news release accompanying the release of the ED.

Morrison’s release included two examples of when a hybrid mismatch could occur: an instrument could be treated as debt in Australia, giving rise to tax-deductible interest, but treated in a foreign jurisdiction as equity, with payments treated there as exempt from tax. The release gave as another example a mismatch occurring “where a deduction is available for the same payment in two or more jurisdictions.”

According to the treasurer’s news release, the ED legislation contains rules “designed to prevent any double non-taxation benefits by either denying deductions or including amounts in assessable income. They will apply to payments between related entities and parties to a structured arrangement.”

Departure From OECD Recommendations

The draft indicates a major departure from the OECD’s recommendations, according to Grant Wardell-Johnson, a leader at KPMG’s Australian Tax Centre in Sydney, and member of the expert panel that advised the Board of Taxation on hybrid mismatch arrangements.

While the OECD had recommended that 12 months was a “reasonable period of time” for a payment under a financial arrangement to be returned as income as a safe harbor to avoid the application of a hybrid mismatch rule, the board recommended a three-year safe harbor period. A 12-month period “would be too short,” the board said.

In recommending this safe harbor, the board said that the U.K. had adopted a 12-month safe harbor but provided flexibility for a longer period “if taxpayers can provide HM Revenue & Customs with evidence to justify that the timing difference is reasonable.”

The board found that a unilateral three-year safe harbor would strike the right balance between reducing compliance costs and taxpayer uncertainty, while ensuring “long term deferral arrangements are no longer possible.” The board also considered that a three-year period would “relieve the administrative burden” on the Australian Tax Office (ATO).

Wardell-Johnson also understood that New Zealand will adopt the same three-year rule as Australia, rather than the OECD’s recommended 12-month rule. He said this was because both Australia and New Zealand prefer a simple “black letter law” rule of thumb rather than the adopting the uncertainty of the implication behind the OECD’s 12-month rule that sign-off from the relevant revenue authority could be obtained for longer periods.

Incentive for MNCs to Reorganize

The six-month delay in the application of the new rules will allow multinational corporations time to reorganize their finances, Wardell-Johnson said. The delay applies from the day the legislation receives Royal Assent.

He noted the legislation is intended to “drive good behavior,” in the same manner as the Multinational Anti Avoidance Law (MAAL) and Diverted Profits Tax law recently introduced in Australia.

Neil Billyard, a tax partner with BDO Australia in Sydney, agreed with that assessment. In an email to Bloomberg Tax Nov. 27, Billyard said the six-month delay was a fair position to enable MNCs to understand their position and unwind it. He added “the OECD is not trying to raise tax in Australia but merely eliminate global asymmetries.”

Problems in Practical Application?

Billyard also told Bloomberg Tax that “clearly” the ED legislation “appropriately addresses idiosyncrasies of Australian tax law, such as the single entity rule.”

But if all OECD jurisdictions introduced legislation along the same lines, “Who gets first go? You have a mismatch, but who gets the taxing right?” Billyard said. “Perhaps, we have to ponder whose rules created the mismatch and hence gets the opportunity to fix it,” Billyard said. He said otherwise, Australia will collect revenue that “rightly belongs to other countries—presumably not what the OECD was intending.”

Wardell-Johnson has a similar concern with the ED legislation introducing an “imported mismatch rule,” which, according to the board, is designed “to prevent taxpayers from entering into structured arrangements or arrangements with group members in jurisdictions that have not introduced hybrid mismatch rules.” According to Wardell-Johnson, KPMG’s submission on the ED legislation will argue that the implementation of the imported mismatch rule should be delayed until the 27 European countries working on similar legislation introduce their rules.

At present, “the ED contains the implication that Australian subsidiaries are fully aware of the arrangements being entered into up the chain of control, whereas this is not necessarily the norm.” New Zealand has already decided to delay its imported mismatch rule and will not be including it in legislation set to be released in mid-December, Wardell-Johnson said.

Further Legislation Expected

In the news release, Morrison warned of the government’s concern that MNCs investing into Australia may still seek to achieve double non-taxation outcomes by using structures not caught by the new hybrid mismatch rules. He gave as an example the use of interposed entities in zero-tax jurisdictions.

Accordingly, the treasurer said the government will be developing a “targeted integrity rule” to prevent arrangements circumventing the hybrid mismatch rules.

Consequently, he said the government will also implement the recommendation of the OECD’s latest report released July 2017—Neutralising the Effects of Branch Mismatch Arrangements—that countries address double non-taxation outcomes “which arise because of differences in the taxation treatment of dealings within the same legal entity (for example, dealings between a head office and a foreign branch) to bring the treatment of these arrangements in line with hybrid mismatch arrangements.”

Submissions on the just-released ED legislation will be accepted by treasury until Dec. 22.

To contact the reporter on this story: Peter Hill in Sydney at

To contact the editor responsible for this story: Penny Sukhraj at

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