Aggressive tax planning – untaxed income, multiple deductions and other forms of international tax arbitrage – is a growing concern for all governments.
OECD’s new report Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues describes arrangements that exploit national differences in the tax treatment of instruments, entities or transfers to deduct the same expense in several different countries, to make income “disappear” between countries or to artificially generate several tax credits for the same foreign tax.
The report, which draws from the OECD Directory on Aggressive Tax Planning, concludes that these arrangements generate significant policy issues in terms of tax revenue, competition, economic efficiency, fairness and transparency. It notes that concerns about distortions caused by double taxation also apply to double non-taxation.
Anecdotal evidence shows that billions of dollars in tax revenues are at stake. New Zealand settled cases involving 4 banks for a combined sum exceeding NZD 2.2 billion. Italy recently settled a dozen cases involving hybrids for an amount of approximately EUR 1.5 billion. In the United States, the amount of tax evaded in 11 foreign tax credit generator transactions has been estimated at USD 3.5 billion.
“The OECD strives to eliminate double taxation and other obstacles to cross-border trade and investment,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. “At the same time, we are working hard to make sure that there are no tax loopholes between tax systems that would allow some taxpayers to gain an unfair competitive advantage over others”.