Australia: Guideline on imported mismatch rule and compliance measures

ATO released for consultation a draft Practical Compliance Guideline

ATO released for consultation a draft Practical Compliance Guideline

The scope of the imported hybrid mismatch rule requires Australian taxpayers to understand arrangements outside of their domestic business.

The Australian Taxation Office (ATO) released for consultation a draft Practical Compliance Guideline 2021/D3: Imported mismatch rule – ATO’s compliance approach in relation to the application of the imported mismatch provisions in Subdivision 832-H of the Income Tax Assessment Act 1997.

Imported mismatch provisions

Broadly, the policy intent of the imported hybrid mismatch rule is to prevent taxpayers from making payments that fund an offshore hybrid mismatch that provides an overall tax benefit to a multinational group.

  • The imported hybrid mismatch rule operates to disallow Australian deductions for a range of otherwise deductible payments if the payments, directly or indirectly, fund foreign entities within the corporate group that are a party to a hybrid mismatch arrangement in an offshore jurisdiction.
  • Given the scope of the imported hybrid mismatch rule, compliance with the rule requires that Australian taxpayers understand arrangements outside of their domestic business, and necessitates a taxpayer seeking information from counterparts within its global group (or even external sources in the case of a “structured arrangement”) in order to obtain comfort that the imported mismatch rule does not apply.
  • In practice, this information gathering exercise has caused considerable practical difficulties for taxpayers when global businesses are not forthcoming with relevant information, or when insufficient information is available in relation to the offshore arrangements at the time of preparing the Australian tax return. 

Summary of PCG 2021/D3

PCG 2021/D3 sets out the ATO’s expectations on the steps to be taken by taxpayers, and the supporting information that taxpayers need to retain, to demonstrate compliance in assessing arrangements under the imported hybrid mismatch rule.

The guidance also sets out:

  • Recommended approaches that can be adopted by taxpayers and their key tax personnel
  • A risk framework to self-assess risk
  • The likely ATO response to taxpayers in the different “risk zones”

ATO imported mismatch rule compliance expectations

PCG 2021/D3 does not explore into the technical aspects of the application of the hybrid mismatch rules, or the operation of Subdivision 832-H specifically. Furthermore, the ATO clarified that PCG 2021/D3 does not limit or alter the operation of the imported hybrid mismatch rule. Instead, PCG 2021/D3 sets out the Commissioner’s expectations as to what a taxpayer is required to do to demonstrate that it has taken sufficient steps to obtain information to establish that the imported hybrid mismatch rule does not apply to its circumstances, or that it has correctly identified all imported hybrid mismatches and whether there is a denial of Australian deductions as a result.

To this end, the ATO outlines methodologies a taxpayer may use under certain circumstances to comply with the imported mismatch rule—depending on whether payments are made under a “structured” or “non-structured arrangement.”

Introduction of a risk framework

PCG 2021/D3 introduces a risk framework for taxpayers to self-assess their compliance risk and to assess the likelihood the ATO may undertake some form of assurance activity to test in-scope arrangements.

Taxpayers will be required to report the outcome of the self-assessment in the reportable tax position schedule, and the position taken is subject to ATO assurance and scrutiny that may involve requests for evidence to support the “risk zone” disclosed. If any offshore hybrid mismatches are identified in the global group, it is only possible to fall into a “low risk” zone if the taxpayer has either:

  • Not claimed a deduction for potential “importing payments” (when insufficient information is available to assess if the imported hybrid mismatch rule applies), or
  • Has claimed a deduction for potential importing payments, but is able to clearly demonstrate compliance with the ATO’s recommended approach including having documentation of all “relevant information” confirming that the offshore hybrid mismatch is neutralized by an equivalent provision of a foreign hybrid mismatch rule, or by dual inclusion income, at the time of lodging the Australian income tax return

When a taxpayer has identified that offshore hybrid mismatches exist in the global group and has taken a position that no importing payment has been made, directly or indirectly to the offshore deducting entity, the taxpayer will automatically fall in the “amber” (moderate to high risk) zone.

KPMG observation

Tax professionals view PCG 2021/D3 as evidence of the ATO’s clear expectation that taxpayers will not take a deduction for an otherwise deductible payment unless they have evidence to support a positive conclusion that the payment made by the Australian taxpayer is not linked with an offshore hybrid arrangement. Other impressions about the draft guideline include:

  • The expectations extend beyond taxpayers and local tax personnel, to the multinational’s offshore group entities and their qualified global tax personnel.
  • The ATO expects multinationals to have robust processes in place to identify hybrid mismatch outcomes, and that information must be readily available to the taxpayers and Australian tax personnel.
  • Unless a taxpayer is able to obtain sufficient information to support a conclusion that a deduction for a cross-border payment is not disallowed under the imported hybrid rule, a taxpayer must not claim an Australian deduction for the payment.
  • The expectations as to how a taxpayer demonstrates compliance with this provision, including that reasonable enquiries have been made, relevant information obtained and adequately assessed, are also included in PCG 2021/D3—particularly relevant when assessing the potential application of penalties under this measure.
  • While PCG 2021/D3 clarifies how the ATO expects taxpayers comply with the imported mismatch rule, the expectations (including documenting of “relevant information” to evidence compliance with the PCG) are extensive and would place a significant compliance burden on taxpayers.
  • In particular, it is clear that the ATO will not accept foreign members of a multinational group refusing to provide sufficient information to an Australian taxpayer and will expect that the Australian taxpayer will not claim a tax deduction when it cannot positively confirm the absence of hybrid mismatches, or if such mismatches exist, that they are either covered by corresponding hybrid mismatch provisions or neutralised by dual inclusion income.
  • This provision may continue to create challenges given residual technical uncertainty with the interaction of the Australian rules with rules of other jurisdictions, such as the U.S. dual consolidated loss rule.
  • If a deduction is claimed in these circumstances, the PCG indicates that the ATO may not consider the taxpayer to have taken reasonable care in complying with its tax obligations, when levying shortfall penalties.
  • While this may provide some leverage to Australian taxpayers when seeking information from their global tax and finance functions in relation to the potential application of the imported hybrid mismatch rule, it is evident that the compliance burden it creates is significant and will require sufficient supporting documentation to be retained to support a tax deduction.


For more information, contact a KPMG tax professional in Australia:

Denis Larkin | +61 2 9335 7171 |

Fabian Fedele | +61 3 8663 8067 |

Tammy Eccles | +61 2 9335 7506 |

Bevis Field | +61 2 9295 3920 |



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