Hybrid Arrangements Face Tougher Scrutiny

The Australian Government has issued guidance on the application of its tough new measures designed to prevent exploitation of so-called ‘hybrid mismatches’.

Multinational groups operating in Australia face greater scrutiny for so-called ‘hybrid mismatch’ arrangements, following the introduction of tough new measures designed to prevent the exploitation of differences in tax treatment under the laws of two or more countries.

The Federal Government introduced the measures in May 2018 that will apply from 1 January 2019 to the tax benefits which can be utilised by with Australian branches or Australian-based companies to reduce corporate tax.

The new rules are based on the Organisation for Economic Cooperation and Development (OECD) rules designed to neutralise the effects of hybrid mismatches so that unfair tax advantages do not accrue for multinational groups compared to domestic groups.

What is a hybrid arrangement?

Hybrid arrangements include financial instruments or entities that may not be treated equally in different tax jurisdictions. So for example the financial instrument may be treated as equity in one jurisdiction but as debt in another or an entity that is treated as taxable in one jurisdiction is considered ‘flow through’ in another.

Hybrid arrangements provide multinationals with tax benefits because it may allow deductions to occur in one jurisdiction, but not be assessable or assessable at a lower tax rate in another jurisdiction. In some cases, payments may be deductible in both.

When can a ‘hybrid mismatch’ occur?

A “hybrid mismatch” arises if tax benefits result from the exploitation of differences in the tax treatment of an entity or a financial instrument under the laws of two or more countries.

What do the new rules mean for Australian entities or branches?

The Australian Government is seeking to neutralise the tax benefits to either remove the tax deductions for Australian entities or include an additional amount in their assessable income.

The new rules may also remove the ability to apply non-assessable, non-tax exempt treatment to the recipients of income from a hybrid branch, dividend income, and the ability to frank or receive franking benefits from hybrid payments. There will also be no grandfathering of the existing rules for hybrid arrangements.

When are the new rules due to apply?

The new rules were due to be applicable from 1 January 2019.

What should Australian entities with hybrid arrangements do?

The Australian Tax Office has issued its draft compliance guide that sets out the ATO’s views on the steps that Australian taxpayers take are likely to be seen as low or high risk.

For example, simply removing the hybrid arrangements is likely to be seen as low risk, whilst replacing them with new arrangements that comply with the new laws yet preserve the tax benefit are likely to be seen as high risk.

From our point of view, it’s important for Australian entities and branches to fully understand the new rules and the risks within their current structures and to review any such arrangements with a cross-border specialist to ensure they don’t fall foul of the ATO.

Talk to our International Tax Team

Contact us on 02 9957 4033 or email our International tax specialists for further guidance on how this may impact your organisation.

Last updated January 2019. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.