Tackling Hybrid Mismatches from Hybrid Financial Instruments : Feasibility of the Recent EU and OECD Anti-Hybrid Rules

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Title: Tackling Hybrid Mismatches from Hybrid Financial Instruments : Feasibility of the Recent EU and OECD Anti-Hybrid Rules
Author: Stellato, Stefan
Other contributor: Helsingin yliopisto, Oikeustieteellinen tiedekunta
University of Helsinki, Faculty of Law
Helsingfors universitet, Juridiska fakulteten
Publisher: Helsingin yliopisto
Date: 2016
Language: eng
URI: http://urn.fi/URN:NBN:fi:hulib-201609222770
Thesis level: master's thesis
Discipline: Finanssioikeus
Fiscal law
Abstract: In 2013, the OECD initiated its very comprehensive and ambitious project against base erosion and profit shifting (BEPS). Largely inspired by the OECD, similar action to curb BEPS has been taken within the EU. An important part of these organisations’ measures concerns hybrid mismatch arrangements, commonly used by multinationals to achieve BEPS. Hybrid financial instruments, a form of hybrid mismatch arrangement, are financial instruments that bear characteristics of both debt and equity, which often leads to one country characterising the instrument as debt and another characterising it as equity. This difference in characterisation can be exploited to achieve double non-taxation. However, these instruments are not only used for tax arbitrage, but also for real business reasons. Various rules against mismatches from hybrid financial instruments have been proposed. As an example, the EU amended the Parent-Subsidiary Directive (PSD, 2011/96/EU) with the directive 2014/86/EU to obligate Member States to tax profit distributions that have been deductible by the distributing subsidiary. Wider action against mismatches from hybrid financial instruments has been proposed by the EU in directive proposal COM(2016) 26 final and by the OECD in Action 2 of its 15-point Action Plan against BEPS. Only one of these anti-hybrid rules, the PSD rule, has been implemented in national laws, although only recently. The other two rules are mere proposals, which together with the fact that countries have little previous experience of such rules makes a study on them motivated. This thesis examines the feasibility of the EU and OECD measures as one of the tools available to counter mismatches from hybrid financial instruments. It analyses and compares these three rules in order to make observations on their interpretation, problems and mutual compatibility, suggesting improvements where fit. The main research method of this study is the dogmatic method. However, even the comparative method is used when the study ventures into the national implementation solutions of the PSD rule in Finland, Sweden, Denmark and Germany. The rules are by no means unproblematic. Compatibility with EU primary law, chiefly the basic freedoms, is highly doubtful. There is thus a risk for these actions to be declared void within the Union. Further, these rules link the domestic tax treatment to that of another jurisdiction (linking rules), which causes complexity. This complexity together with sometimes even poorly drafted rules risks causing undesirable effects, such as mutual incompatibility, double taxation and undue compliance burden for the taxpayer. Therefore, care should be taken before introducing any of these rules.

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