1. HYBRID MISMATCH ARRANGEMENTS OMLEEN AJIMAL Director of International Tax 21 November 2014

2. A QUICK RECAP

3. 3 squirepattonboggs.com 3 WHAT ARE THEY?  “HYBRID”  “MISMATCH”  “ARRANGEMENTS” …..HYBRIDS ARE VERY HARD TO KILL

4. 4 squirepattonboggs.com 4 THE POSSIBILITIES ARE ENDLESS… Crafty tax types have been known to exploit mismatches in (virtually everything): identifying a payment; the character of a payment; the amount of a payment; Identifying the person making/receiving a payment; the timing of a payment; the classification of earning activities; the character of an asset; the ownership of an asset; and/or the tax residence of any, or all, of the persons involved in any, or all, of the above…

5. THE CURRENT ANTI- AVOIDANCE LANDSCAPE

6. 6 squirepattonboggs.com 6 ANTI-AVOIDANCE OPTIONS  SPECIFIC anti-avoidance rule?  TARGETED anti-avoidance rule?  GENERAL anti-avoidance rule? …..THERE IS NO UNIVERSAL POISON

7. 7 squirepattonboggs.com 7 EXISTING RULES – A BRIEF SAMPLING  UK RULES: on tax arbitrage  US RULES: on foreign tax credits and dual consolidated losses  GERMANY: on certain hybrid financing structures  FRANCE: on certain debt/equity hybrid instruments (and more?)  SPAIN: new anti-hybrid rules are on the horizon  EU MEASURES

8. THE FUTURE: GLOBAL COOPERATION? Death of the hybrid?

9. 9 squirepattonboggs.com 9 BEPS!! THE OECD’S ACTION 2 - overview  Recommendations for the design of DOMESTIC RULES: Hybrid Mismatch Arrangements rules: –The “Linking Rule” –The “Primary Response” –The “Defensive Rule” Certain specific rules for financial instruments.  Recommendations on TREATY ISSUES

10. 10 squirepattonboggs.com 10 squirepattonboggs.com THE OECD’S ACTION 2 – domestic rules (1)  “DEDUCTION / NO INCLUSION outcomes” Hybrid Financial Instrument

11. 11 squirepattonboggs.com 11 squirepattonboggs.com THE OECD’S ACTION 2 – domestic rules (2)  “DEDUCTION / NO INCLUSION outcomes” Hybrid Transfer

12. 12 squirepattonboggs.com 12 squirepattonboggs.com THE OECD’S ACTION 2 – domestic rules (3)  “DEDUCTION / NO INCLUSION outcomes” Disregarded payments by a Hybrid Entity

13. 13 squirepattonboggs.com 13 squirepattonboggs.com THE OECD’S ACTION 2 – domestic rules (4)  “DEDUCTION / NO INCLUSION outcomes” Payment to a foreign Reverse Hybrid

14. 14 squirepattonboggs.com 14 squirepattonboggs.com THE OECD’S ACTION 2 – domestic rules (5)  “DOUBLE DEDUCTION outcomes” Double deduction structure using a Hybrid Entity

15. 15 squirepattonboggs.com 15 squirepattonboggs.com THE OECD’S ACTION 2 – domestic rules (6)  “DOUBLE DEDUCTION outcomes” Dual consolidated companies

16. 16 squirepattonboggs.com 16 squirepattonboggs.com THE OECD’S ACTION 2 – domestic rules (7)  “INDIRECT DEDUCTION / NO INCLUSION outcomes” Importing a mismatch from a Hybrid Financial Instrument

17. 17 squirepattonboggs.com 17 squirepattonboggs.com THE OECD’S ACTION 2 – treaty issues  Treaty provisions for DUAL-RESIDENT ENTITIES: Residence to be decided on a case-by-case basis (Action 6)  New provisions for TRANSPARENT ENTITIES: Income of transparent entities to be treated in accordance with the principles of the OECD Partnership Report (The Application of the OECD Model Tax Convention to Partnerships, OECD,1999)  Interaction between DOMESTIC LAW CHANGES and TAX TREATIES…

18. 18 squirepattonboggs.com 18 squirepattonboggs.com THE EU WEIGHS IN… The Parent-Subsidiary Directive (2011/96/EU) has been amended. Article 4(1)(a) now states that the Member State of a parent company that receives distributed profits from an EU subsidiary shall: BEFORE : “refrain from taxing such profits…” AFTER : “…to the extent that such profits are not deductible by the subsidiary, and tax such profits to the extent that such profits are deductible by the subsidiary…”.

19. 19 squirepattonboggs.com 19 squirepattonboggs.com THE FUTURE?  Domestic anti-avoidance legislation has inherent limitations.  EU-wide measures are only EU-wide measures (and currently only intra-group).  Global measures very much depend on widespread, comprehensive and consistent implementation, and so could have limited effect. …..HYBRIDS ARE VERY HARD TO KILL!

20. HYBRID MISMATCH ARRANGEMENTS OMLEEN AJIMAL Director of International Tax 21 November 2014