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only. Intended differences should be accepted as they are an expression of sovereignty of countries. The fight against harmful tax competition, which BASF fully supports, should not though have within its scope the fight against any and all tax competition. In our view, a continued debate about what is harmful and/or intended double taxation and what is not would be a useful starting point in order to define the parameters for preventing double non-taxation.
Besides this more general view on the initiative to neutralize the effects of hybrid mismatches, we will hereinafter give you an overview of our comments on the content of the report. We expect that various difficulties will arise, mainly caused by the fact that the proposed recommendations to domestic law will in a lot of cases not align with principles in different countries which are deeply embedded in their tax regimes and jurisprudence, which we assume will lead to inconsistent implementation by the different countries. Thus the OECD may not reach its intended goal to avoid both double taxation as well as double non-taxation. The desire to eliminate double non-taxation should not lead to a creation of double taxation and more uncertainty for tax payers as potentially, as a likely result of the debate, some countries might introduce general treaty override rules in their local legislation.
Finally, we see significant room for conflict and overlap concerning various other BEPS action plan initiatives, including the points around treaty abuse, CFC rules, as well as interest deduction rules. In particular separate interest deduction limitations will again increase the risk of a multiple deduction denials [under one or more different local tax rules or BEPS action plan initiatives] in a chain of transactions in many cases, thereby resulting in economic double taxation.
1. Sovereignty of nations
BASF is of the opinion that it is not the role of the OECD to provide guidance to countries to change their domestic legislation. The domestic recommendations of the Discussion Draft conflict with the sovereignty of nations on national taxation. We do not expect countries around the world to be willing to give up their sovereignty, especially not in cases where local incentives are intended.
The recommendations can have a huge impact on strongly embedded principles in local law and jurisprudence. In a country with a general participation exemption method for example, the new principles can conflict with the principles behind that method. The denial of the participation exemption on hybrid financial instruments which are in principle treated as equity from a local tax perspective, would deny the principles and the background of the rules which such a country believes are the backbone of their tax system. These countries very often already have a sophisticated anti-abuse doctrine integrated in their local tax law, based on their own tax principles. For example, a participation exemption may be linked to a rule of non-deductibility of costs relating to the participation. By denying the exemption, further changes in local law would need to occur to eliminate a situation of being taxed on the participation income but being denied any corresponding expenses along with the introduction of a credit system to avoid an economic double taxation.
To be successful in neutralizing the effects of hybrid mismatches between different countries we therefore think that the OECD should focus on treaty issues and propose changes to the model convention as for example described in the Discussion Draft on Treaty Issues related to Hybrid Mismatch Arrangements as well as in the Discussion Draft regarding BEPS action 6.
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2. Inconsistent implementation and interpretation
As described above we do not think that the OECD should require legislative changes to local legislation. At a practical level, the recommendations for domestic laws, in order to prevent hybrid mismatches, could only work if every jurisdiction in the world would apply exactly the same rules in their local legislation and every jurisdiction around the world would interpret this legislation and associated definitions in the same way. Realistically, we do not expect this to be the case. Our expectation is that, not only will some countries be reluctant to implement the proposed rules at all, those countries which are willing to implement the rules, will need to implement the rules in line with the existing domestic legal framework and uniformity around the world is, in our view, an unrealistic expectation. Importantly, countries which do not implement the rules may profit to the detriment of those which implement the rules.
Most tax systems have detailed, well thought through definitions existing already. As an example we refer to the term “related persons”, on which in different countries several anti-abuse rules are based today. For these kinds of definitions we feel that it will be hard to align all countries.
The linking rules presented seem to eliminate the mismatch without firstly, indicating what that means for treaty application purposes, and secondly, considering whether a jurisdiction has actually lost tax revenue under the arrangement. In practice we assume that existing domestic law will be leading in implementing the rules, consequently leading to inconsistent results which might lead to double taxation e.g. for a country that usually applies tax exempt schemes, it will also need to provide sufficient tax credit possibilities if they include mismatch income in their tax base.
3. Complexity
It is not always clear how a certain transaction has to be treated locally. Now assume a hybrid financial instrument being issued by country A to country B, both having implemented the linking rules as proposed. It might be very well possible, that the tax treatment of the instrument is unclear in country A, or even worse, in both country A and country B. Based on the linking rules, country B should deny the participation exemption method if the payment were deductible in country A, but how can Country B apply the linking rules if country A does not even know yet how to treat the financial instrument and if they don’t know yet themselves whether or not the local participation exemption method is applicable in Country B. It is likely in our view that in such cases both countries may look to safeguard their own tax position, with a possible double taxation as a consequence.
Besides the above complexity we would like to point out the difficulties of the so called imported mismatch. This would mean that tax administrations in the importing country need to have knowledge about the tax systems of not only their own country, but also about the tax systems in two other countries. This in itself appears to be an unrealistic expectation of, and burden on, the tax administrations (or the tax payer in jurisdictions where the burden of proof lies initially with the tax payer).
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4. Application to non-related parties
We believe that any mismatch rules should not apply to any transactions between non-related parties. Hybrid instruments are widely used on capital markets and not only for tax optimisation purposes. In non- related party transactions it is often impossible to obtain information regarding the treatment of the instrument in the hands of an unrelated party. The complexity and administrative burden of obtaining such information would surely outweigh any risk of non-taxation which would in any case not be motivated by base erosion and profit shifting.
5. Overall conclusion
We are of the opinion that the absence of a harmonized global tax system means that the OECD should not promote the general idea of introducing local rules in a country inconsistent with their general tax system that allow a deviating tax treatment if another country provides a tax incentive. Instead we would recommend to limit the OECD initiatives to changes in the OECD model convention in order to try and avoid hybrid mismatches as well as improve the exchange of information between countries in order to assure that countries involved are aware of possible hybrid mismatches. This exchange of information should assist those countries to response appropriately based on their local law and jurisprudence as well as the treaty between countries.
There is a significant risk of inconsistent implementation and interpretation in different countries which will lead to a continuation of hybrid mismatches and/or uncertainties for tax payers. We therefore do not think that the design principle of being comprehensive will be met in practice. There should be very clear guidance on definitions and a requirement for consistent interpretation to be implemented by all countries. If not, hybrid mismatches will keep on existing. We believe though, that countries will not accept such consistent interpretation because of the consequent complications and disruption of existing law.
We advise to provide for a transition rule or a rule that respects existing situations.
We hope that our comments are useful. Please feel free to contact us with any questions you may have on the above.
Yours sincerely, BASF SE
Federation of German Industries ∙ 11053 Berlin, Germany Tax and Financial Policy Berthold Welling Head of Department 2nd May 2014 Page 1 of 4 Federation of German Industries Member Association of BUSINESSEUROPE Address Breite Straße 29 10178 Berlin Postal Address 11053 Berlin Germany Phone Contacts Tel.: +49 030 2028-1410 Fax: +49 030 2028-2410 Internet