Browsing by Author "Tervo, Meeri"

Hybrid mismatch arrangements are arrangements that exploits the difference in the tax treatment of an entity or instrument under the laws of two or more jurisdictions to produce a mismatch in tax outcomes where the mismatch has the effect of lowering the tax burden of the parties to the arrangement. Hybrid entities are due to a classification conflict between two or more states involved. The classification methods used by states for the tax classification of entities established under the private law of another state are generally applied autonomously. The methods used in one country do not generally take in to account of the tax classification applied to the entity by another country. Thus the classification of entities can create asymmetrical situations and lead to double taxation or to double non- taxation, where the tax status given by one state is disregarded in the other state. Hybrid entity mismatch arrangements are widespread and result in substantial erosion of the taxable bases of the countries concerned. In addition, they have an overall negative impact on competition, efficiency, transparency and fairness. Hybrid entities are commonly used in tax planning since they allow the taxpayers additional degree of flexibility that is often re-quired in international transactions. By using hybrid entities, the taxpayers can for example create harmful double non-taxation situations, double deductions situations or long- term tax deferral. By using hybrid entities, the taxpayers can also shift profits to a more tax favorable country. Even though hybrid entity structures can be used to avoid taxation they also can create unwanted double taxation. In order to prevent base erosion and profit shifting the OECD introduced in September 2013 an action plan that consisted 15 actions against base erosion and profit shifting. One of the actions was aimed at neutralizing the effects of hybrid mismatch arrangements. The fight against the base erosion and profit shifting was also recognized within the EU and in 2016 the EU introduced the first anti-tax avoidance directive. In May 2017 the EU introduced a new anti-tax avoidance directive regarding hybrid mismatch arrangements with third countries. The hybrid mismatch rules in BEPS action 2 and ATAD 2 takes the form of linking the tax treatment in one country to anoth-er country. In addition, the rules are designed to apply automatically. As hybrid mismatch arrangements occurs only in cross-border context, it has been questioned, whether the rules treat cross-border structures differently than purely domestic structures and whether they would thus constitute an obstacle for the free movement rights. In order to be compatible with the EU law, the rules should not restrict any fundamental freedoms in EU and if such restriction would arise the rules should be justified in order them to be compatible with the EU law. The linking rules in ATAD II apply only between associated enterprises, between a taxpayer and an associated enterprise, between the head office and permanent establishment or between two or more permanent establishments of the same entity and under a structure arrangement. The requirement for associated enterprises is 50% ownership or voting rights or capital rights in hybrid entity situations. As the ATAD II neutralizes only hybrid entity mismatches in certain situation, it should be asked whether the ATAD II enough and whether there are any alternative ways to tackle hybrid entity mismatch-es.