Australia's new rules to address hybrid mismatches continue to take shape.
Australian measures targeting hybrid mismatches will apply to income years beginning on or after January 1, 2019. However, measures targeting "imported" mismatches will have a delayed start-date and won't affect taxpayer income years beginning before January 1, 2020. This information was published in a new bill Australia has introduced to address hybrid mismatches and interposed entity financing transactions in low or no tax jurisdictions. The delayed start date for imported mismatches is a welcome development because of the potentially broad application of these rules, which may apply to hybrid mismatches that are not directly realized by an Australian entity.
Under Australia's proposed hybrid mismatch rules, certain entities with transactions that have resulted in a mismatch will be denied a deduction on otherwise deductible payments, or will be taxed on receipts that are usually non-taxable. Under the integrity rule, taxpayers may be denied their deduction on interest or derivative payments on financing arrangements that have been made using an interposed related entity in a jurisdiction with a corporate tax rate of 10% rate or less or with a territorial regime system of tax (such as Hong Kong or Singapore).
An imported hybrid mismatch is a hybrid mismatch which may not be realized directly by the Australian entity. For example, an imported hybrid mismatch could arise if an Australian company issues a non-hybrid debt to a foreign affiliate, and the foreign affiliate is taxable on the interest income, but is financed through a hybrid mismatch arrangement with another entity. Under the hybrid mismatch rules, Australia may deny the interest deduction to the Australian company, even though the company may not have any knowledge of its immediate lender's upstream financing arrangements.
Hybrid mismatch & integrity rules legislation
Australia released its initial draft legislation to counteract "hybrid mismatches" (including "imported" hybrid mismatches) on November 24, 2017. In spring 2018, it also proposed additional "integrity rules" to deal with multinational groups that structure out of the hybrid mismatch rules to achieve double non-taxation outcomes and included additional measures to address OECD recommendations for branch mismatch arrangements.
These proposed rules, subject to some clarifications, are now included in a bill.
What's changed recently?
Effective dates confirmed
A "safe harbor exception" for foreign bank branches
Under a new "safe harbour exception" Australia will not deem foreign banks to have created a mismatch if they adopt a recognized transfer pricing methodology when allocating expenditures and income between themselves and their branches.
The interposed entity financing integrity rule
The integrity rule can apply if the entity has entered into an arrangement "for the principal purpose" of obtaining an Australian tax deduction and a low or no tax foreign tax outcome. Among other guidance, the explanatory memorandum accompanying the bill notes that particular regard should be had to whether payments to an interposed entity instead of to an ultimate parent entity effectively replicate a deduction/non-inclusion outcome.
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Information is current to June 12, 2018. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500