Branch Mismatch Structures

The BEPS Monitoring Group in September 2016 submitted its Comments on the OECD proposals on branch mismatch structures.

These responded to some specific questions in the OECD discussion paper. Howver, we also recalled that In our comments on the Action 2 proposals over two years ago, we commended the OECD for having produced a technically sophisticated analysis and solutions which were carefully and elegantly designed, but also pointed to their complexity and stressed the need to begin with an overview of the causes of the problems. Rules regarding hybrids are necessary purely because of the insistence on applying the ‘separate entity’ principle to entities which are under common control, instead of basing the taxation of multinational enterprises (MNEs) on the economic reality that they operate as unitary firms. The separate entity fiction is especially inappropriate when applied to branches, which even legally are not regarded as independent. This creates a strong incentive for MNE tax advisers to devise techniques such as the use of hybrids to exploit this basic flaw. While the sophisticated and complex counter-measures being proposed may patch up the system to some extent, the rules will be ineffective while the basic flaw remains.