On 24 May 2018, the Federal Government introduced wide ranging rules which seek to apply tough new measures on the tax benefits that may apply to Australian branches or companies of multinational groups who enter into so-called “hybrid mismatch” arrangements.
A “hybrid mismatch” arises if tax benefits result from the exploitation of differences in the tax treatment of an entity or a financial instrument under the laws of two or more countries.
Hybrid arrangements include financing instruments that may be treated as equity in one jurisdiction and debt in another jurisdiction or entities that may be treated as taxable in one jurisdiction but “flow through” in another.
These arrangements provide tax benefits to multinational groups because they result in payments that may be tax deductible in one jurisdiction and not assessable or assessable to lower tax in another jurisdiction or alternatively be deductible in both jurisdictions.
To neutralise these tax benefits the proposed rules intend to either remove the tax deductions for the Australian entity or to include an additional amount in the entity’s assessable income. The proposed rules may also remove the ability to apply Non-Assessable Non-Exempt treatment to recipients of hybrid branch or dividend income and may also deny the ability to frank or receive franking benefits from hybrid payments.
In anticipation of these rules being introduced, the Australian Tax Office has released its draft Practical Compliance Guideline PCG 2018/D4 which sets out the ATO’s draft views as to whether steps taken by taxpayers to comply with the hybrid mismatch rules will be seen to be low risk (eg simply removing hybrid arrangements) or high risk (eg replacing existing hybrid arrangements with new arrangements that comply with the proposed new laws but somehow preserve the tax benefit received under the former hybrid arrangements).
Please note that the proposed hybrid mismatch rules and the draft PCG 2018/D4 are both intended to apply to income years starting from 1 January 2019 with no grandfathering for existing arrangements.
If you are an Australian entity that operates within a multinational group, and has in place such hybrid instruments, or wishes to restructure such arrangements, you should carefully consider the proposed new legislation and ATO views.
