2.1.1. Neutralising the Effects of Hybrid Mismatch Arrangements (Action 2) 47
Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or an instrument under the laws of two or more jurisdictions to achieve double non-taxation. These types of arrangements are widely used by taxpayers and result in the shifting of considerable amounts of profits and the substantial erosion of countries’ taxable basis. Several OECD reports have identified hybrid mismatch arrangements as playing a major role in aggressive tax planning and highlighted the negative impact of such arrangements on tax revenues as well as competition, transparency and fairness
The Final Report focuses on three possible outcomes under a hybrid mismatch arrangement: a deduction/no inclusion outcome (D/NI outcome) 48 , a double deduction outcome (DD outcome) 49 or an indirect D/NI outcome 50 .
The OECD/G20 recommends aligning the tax treatment of an instrument or an entity in one jurisdiction with the tax treatment in the counterparty jurisdiction in order to neutralise hybrid mismatch arrangements. The recommended rules are divided into a primary response and a defensive rule, in the event that the primary response is not applied by the parent or payer jurisdiction according to the case. 51
