Global Tax Alert | 19 May 2014

OECD holds public consultation on BEPS action on hybrid mismatch arrangements

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Executive summary

On 15 May 2014, the Organisation for Economic Cooperation and Development (OECD) held a public consultation on one of its ongoing projects under the Action Plan on Base Erosion and Profit Shifting (BEPS): Action 2 on hybrid mismatch arrangements. This consultation was an opportunity for interested parties to engage directly with the OECD Secretariat and the country representatives who are responsible for the work on this action item. The OECD is expected to release its recommendations in this area by the target due date of September 2014.

Detailed discussion

On 19 March 2014, the OECD issued two discussion drafts addressing hybrid mismatch arrangements, one on recommendations with respect to domestic laws and one on recommendations with respect to treaty provisions.1 Comments on the hybrid discussion drafts were requested to be submitted by 2 May 2014. The OECD received almost 500 pages of comments which were posted on its website on 7 May 2014.

The 15 May 2014 consultation was a dialogue among country tax officials, stakeholders, and the OECD Secretariat on key issues raised in the comments that had been submitted on the hybrid discussion drafts. The consultation was hosted by OECD Working Party 11, which is a new subsidiary group with responsibility for the work on hybrids. Working Party 11 also has responsibility for several other elements of the BEPS Action Plan, including the work on controlled foreign company (CFC) regimes (Action 3) and the work on interest deductibility (Action 4).

Tax officials from 21 countries participated in the consultation, including China which is one of the G20 countries participating in the BEPS project together with OECD member countries. Business representatives from around the world participated and made presentations during the meeting, including representatives of EY. Non-governmental organizations (NGOs) and universities were also represented at the meeting. In addition, the OECD live streamed the meeting to make it more accessible to the public. A recording of the session will be available for replay on the OECD website.

The meeting began with opening remarks from the chair of the OECD's work on hybrids and from the OECD Secretariat. The chair described hybrid arrangements as a “classic source of BEPS” and emphasized that the work on hybrids is central to the OECD's BEPS agenda. The Secretariat noted that a decision had been made not to pursue either a purpose-based approach or a harmonization approach in the hybrid area. The Secretariat stressed the importance of input from the business community in order to develop an understanding of the marketplace and to translate the policy consensus in the OECD on the need for action on hybrids into rules that are workable and that minimize costs.

The first discussion session focused on implementation issues, including transition matters and the need for consistency and coordination with respect to countries' approaches for treatment of hybrids. The appropriateness of a grandfather rule was discussed, with differences drawn between related party and unrelated transactions. In this regard, it was noted that the standard for related party status, which was addressed in more detail in the next session, is relevant to the question of whether grandfather treatment should be applied to related party situations. Concerns were expressed by the business community about the complexity of the proposed approach and the significant uncertainty that is likely to arise in implementing such an approach. It was also noted that as the OECD goes forward with this work it is important that they make recommendations that will have widespread adoption. An NGO representative expressed the view that the issues with respect to hybrids arise from the separate entity principles of corporate taxation and advocated a proposal that would apportion group financing costs.

The second discussion session focused on the treatment of hybrid arrangements between related persons versus those between unrelated persons. The discussion drafts propose coverage of all related person hybrid mismatch arrangements and coverage of arrangements between unrelated persons that involve “structured” transactions. Business representatives stressed that the related person ownership threshold of 10% or greater is too low a standard. Concerns were expressed about the inability to obtain information regarding the tax treatment of the instrument to the other party in situations that do not involve a control relationship. Concerns also were expressed in the fund and investment vehicle context about the inability to know when this low an ownership threshold is reached particularly if amalgamation across all relationships is required for purposes of measuring ownership. The potential impact on the stock lending and repo markets was also discussed. Country representatives reiterated the need to cover “structured” transactions, indicating that an appropriate definition was still under development but that the presence of tax indifferent parties, which is identified as a potential factor in the discussion drafts, would not be too broad an element of such definition.

The third discussion session focused on issues for the financial services and funds industries. This session also covered other points with respect to domestic law matters that were raised in the comment letters submitted. There was an extended discussion of regulatory capital in the banking and insurance sectors, where regulators are now allowing the use of certain instruments with mixed debt and equity characteristics to satisfy specified capital requirements. The industry participants stressed the importance of ensuring that such instruments are not captured by the hybrids proposal, whether issued to the public or pushed down in a related party transaction to a lower-tier entity that is regulated. More broadly, business participants commented on the need to coordinate the work on hybrids with the work on other aspects of the BEPS Action Plan, particularly the work on interest deductibility under Action 2. It was noted that coordination also was needed between the proposed rules on hybrids and countries' general anti-abuse rules (GAAR) so that one country's GAAR cannot be applied after the fact in a way that disrupts the intended coordinated approach with respect to the treatment of the issuer and the holders of an instrument.

The final discussion session focused on the recommendations with respect to tax treaties that are set forth in the hybrids discussion draft relating to tax treaty recommendations. The Secretariat described the objective of ensuring that transparent entities cannot be used to get inappropriate treaty benefits. Concerns were expressed regarding the mechanics of the proposed approach, including the potential for inconsistent interpretations and issues with respect to the treatment of dual resident entities.

The consultation ended with a brief wrap up from the OECD Secretariat. The need for coordination with respect to the work on hybrid mismatch arrangements was acknowledged. The Secretariat also urged that any further input discussed during the consultation be provided as quickly as possible.


The discussion drafts on hybrid mismatch arrangements propose dramatic changes in the treatment of hybrids that would be implemented through changes in countries' domestic laws and tax treaties. OECD Working Party 11 is moving forward rapidly to refine the proposals and finalize them for approval by the OECD Committee on Fiscal Affairs at the end of June and after approval for release by the September 2014 target date set forth in the BEPS Action Plan. The discussion at the 15 May consultation underscored the importance of the work on hybrids to many of the participating countries. Moreover, countries have already begun proposing and adopting new rules on the tax treatment of hybrids, without waiting for recommendations from the OECD under this Action item.

Companies should evaluate how the OECD's proposed changes to the treatment of hybrid arrangements would affect their financing structures. Companies should also consider the perspectives on hybrids of the countries that are most relevant to their structures. Finally, companies should stay informed about the developments with respect to hybrid mismatch arrangements that will unfold over the next few months and beyond.


1. For more information, see EY Global Tax Alert, OECD releases discussion drafts on neutralizing hybrid mismatch arrangements under BEPS Action 2, dated 7 April 2014.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, Washington, DC
  • Barbara Angus
    +1 202 327 5824
Ernst & Young Société d'Avocats, Paris
  • Jean-Pierre Lieb
    +33 1 55 61 16 10

EYG no. CM4428