Previous OECD work on hybrids concluded that hybrid mismatch arrangements:

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2 BEPS and Hybrids

3 Panelists Achim Pross, Head of International Cooperation and Tax Administration, OECD Martin Kreienbaum, Director General International Taxation, Germany Douglas Poms, Senior Tax Counsel, United States Treasury Timothy Tuerff, Managing Partner, Washington National Tax, Deloitte Tax LLP

4 Background Previous OECD work on hybrids concluded that hybrid mismatch arrangements: put the collective tax base of countries at risk even though it may not always be clear which jurisdiction has lost tax revenue under the arrangement have a negative impact on competition, efficiency, transparency and fairness Addressing the Tax Risks Involving Bank Losses (OECD 2010) Corporate Loss Utilisation Through Aggressive Tax Planning (OECD 2011) Report on Hybrid Mismatches (OECD 2012)

5 Background Responses considered: Harmonisation not considered a realistic option Limitations on the ability to use GAARs Specific anti-avoidance rules may have the indirect effect of addressing certain hybrid mismatches Recommended linking rules that target the double non-taxation outcome but otherwise do not disturb other tax or commercial outcomes. Addressing the Tax Risks involving Bank Losses (OECD 2010) Corporate loss Utilisation through Aggressive Tax Planning (OECD 2011) Report on Hybrid Mismatches(OECD 2012)

6 BEPS Action Plan Action 2 calls for the development of model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect of hybrid instruments and entities.

7 BEPS Action Plan Action 2 specifically calls for linking rules targeting two types of payment: payments that are deductible under the rules of the payer jurisdiction and not included in the ordinary income of the payee (D/NI outcomes); and payments that give rise to duplicate deductions for the same payment (DD outcomes).

8 Design principles Countries agree on need for rules that are: Comprehensive Automatic Minimise the disruption to existing domestic law Clear and transparent in their operation Workable for taxpayers and tax administrations Avoid double taxation

9 Discussion Draft Combination of: specific recommendations designed to reduce frequency of mismatches (such as improvements participation exemptions) hybrid mismatch rules (i.e. linking rules) that adjust the tax treatment of instrument or entity to align the tax outcomes in the other jurisdiction to the extent necessary to neutralise the hybrid effect.

10 Discussion Draft Application to entities and financial instruments Financial instruments includes both debt / equity and hybrid transfer arrangements Entities includes payments by and to entities that are transparent or opaque Addresses D/NI and DD outcomes arising from these arrangements with an imported mismatch rule designed to protect the integrity of the recommendations.

11 Discussion Draft Rules designed to be as specifically targeted as possible: Only operate to address mismatches caused by the hybridity (i.e. does not target other types of D/NI outcomes) Only neutralise the hybrid effect (i.e. does not impact on other tax or commercial outcomes) Only operate to extent necessary to neutralise the hybrid effect (e.g. duplicate deduction only denied to extent it exceeds dual inclusion income)

12 Comments Received Over 450 pages of submissions received. Key points include: Scope - bottom-up approach; threshold for related party; need for a purpose test. Transitional issues need to co-ordinate implementation with other countries and ensure consistency with other action items Potential for unintended impacts on certain transactions and markets (regulatory capital, market repo s and funds) Potential for conflict with deliberate tax policy settings such as the provision of tax deductions to REITs / RICs. Incorporating the impact of CFC rules

13 Expected Output Report due for release September 2014 Report will set out the framework for resolving hybrid mismatches including: - What arrangements are covered by the recommendations - What the recommended response will be - Rule order Commentary will provide guidance on detail, including co-ordination and transitional issues

14 BEPS and Hybrids US PERSPECTIVE Douglas Poms, Senior Tax Counsel, United States Treasury

15 BEPS and Hybrids GERMAN PERSPECTIVE Martin Kreienbaum, Director General International Taxation, Germany

16 German Perspective BEPS high on political agenda Hybrids key element of BEPS Top Down vs Bottom Up Treating symptoms vs eliminating causes Balancing interests

17 German Perspective Hybrids and European law COM ECJ Hybrids and German domestic law Art.8 para 1 KStG Art. 14 para 1 KStG

18 BEPS and Hybrids PERSPECTIVE FROM BUSINESS Timothy Tuerff, Managing Partner, Washington National Tax, Deloitte Tax LLP

19 Selected questions How can the rules be implemented and applied consistently?

20 Selected questions How will the hybrids recommendations interact with other Action Items?

21 Selected questions What do deductible and included in ordinary income mean?

22 Selected questions When do timing differences constitute a hybrid mismatch?

23 Selected questions Should the rules apply outside a controlled group?

24 BEPS and Hybrids Questions?