The Irish Revenue has published guidance on Ireland's "anti-hybrid" tax rules.
The guidance explains the anti-hybrid rules included the first and second EU Anti-Tax Avoidance Directives (ATAD 1 and ATAD 2), which member states were required to adopt in January 2019 and January 2020, respectively.
These directives were drafted to implement recommendations from the OECD on tackling tax Base Erosion and Profit Shifting (BEPS), which were included in its BEPS Action 2 report.
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What are Hybrid Mismatch Arrangements?
Hybrid mismatch arrangements seek to exploit disparities in the tax treatment of certain financial instruments, payments, or entities in two (or more) jurisdictions to reduce exposure to tax.
Taxpayers can gain the following tax advantages from using a hybrid mismatch arrangement:
- A double tax deduction for the same expense;
- A deduction for payments that are not included in the taxable income of the recipient, or alternatively of the payer; or
- Double non-taxation.
For example, if country A considers an outbound payment to be of interest and country B, instead, considers the inbound payment to be dividends, a tax benefit will arise where country A considers the interest payment to be deductible for the payer and country B does not tax dividends. Specifically, this would give rise to a deduction for the payer but the payment would not be subject to tax for the recipient.
ATAD 1 required EU member states to introduce five anti-tax abuse measures aimed at tackling common tax planning schemes, including hybrid mismatch arrangements. ATAD 2 expanded on ATAD 1 to ensure that hybrid mismatches of all types cannot be used to avoid tax in the EU, even where an arrangement involves non-EU countries.
Ireland's anti-hybrid rules were added to Part 35C of the Taxes Consolidation Act 1997.
The Revenue has released Tax and Duty Manual Part 35C-00-01 to provide guidance on Irish law.
The manual sets out information on:
- the meaning of a mismatch outcome and the test for inclusion;
- how the anti-hybrid rules interact with Ireland's worldwide system of taxation;
- how the rules interact with other countries' worldwide tax systems, with a focus on the United States' tax system in particular; and
- provisions in Irish tax law regarded as having similar effect to the anti-hybrid rules.
The manual should be read alongside the OECD's BEPS Action 2 report, which the Revenue has said is authoritative. The OECD's report provides useful explanations and examples of how the rules should apply in practice, which Irish taxpayers should follow.
According to Revenue, its new guidance is intended to sit alongside that report and the EU legislation. Therefore, taxpayers should first familiarise themselves with the OECD's report and use the guidance released by Revenue to understand aspects of Irish legislation.
Impact on Irish firms
The guidance says that where an Irish entity obtains a tax deduction in respect of a cross-border payment it must then determine whether that payment has also given rise to a tax deduction in another territory against income that is not dual inclusion income; or whether a corresponding amount has been included in a payee territory.
In short, for payments made on or after January 1, 2020, an Irish entity must consider whether a hybrid mismatch arises in the course of its cross-border transactions. When determining whether a hybrid mismatch does arise, it is necessary for groups to compare the tax treatment of a payment in a number of territories.