New Hybrid and Branch Mismatch Rules
The Taxation (Neutralising Base Erosion and Profit Shifting) Bill also introduces rules to address hybrid and branch mismatch arrangements that arise with cross-border arrangements that exploit differences in the tax treatment of an instrument, entity, or branch under the laws of two or more countries.
A hybrid or branch mismatch arrangement can result in a deduction for the payer, but no corresponding taxable income for the recipient. For example, a hybrid entity is an entity which is “transparent” for tax purposes in the jurisdiction where the investor is a resident, but opaque for tax purposes in another jurisdiction. An interest payment from a hybrid entity to its investor will be deductible in the jurisdiction of its origin, but disregarded in the jurisdiction of the investor. This can result in a deduction/non-inclusion hybrid mismatch, and results in double non-taxation if the hybrid entity that makes the interest payment groups its tax loss with the income of another entity, whose income is not taxable in the country of the investor.
The new rules are in-line with the Organisation for Economic Co-operation and Development’s (OECD) recommendations in its BEPS action plan to help countries deal with hybrid and branch mismatches with some modification to for the New Zealand context – that is, the new rules will remove these unintended tax advantages (deductions denied or income that is not currently taxed will be taxed). The new rules will apply for income years starting on or after 1 July 2018.
Please contact your Findex adviser to review and assess the impact of the new rules on your hybrid financial instruments or structures.