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Why linking rules not harmonisation will tackle double non-taxation


If tax authorities are to combat double non-taxation then the application of targeted linking rules, and not harmonisation, is the only realistic option.

While harmonisation of tax rules offers a theoretical solution to the problem, it is unlikely to happen anytime soon, meaning tax officials must make linking or matching rules their primary focus in tackling unintended non-taxation.

Senior tax officials from OECD member countries met in Canada this month, to discuss the most effective methods of combating double non-taxation arising from hybrid mismatch arrangements.

In its Hybrid Mismatch Arrangements report, endorsed by all 34 member countries, the OECD recognises that harmonisation of domestic tax laws would eliminate the possibility for companies to exploit mismatches between tax regimes. However, the report also says that such an approach is nigh on impossible in practice.

The European Commission launched a consultation on double non-taxation in the EU in February, which closes next week.

The consultation is looking to find solutions to the problem of taxpayers exploiting differences between member states’ tax laws to avoid tax, though it seems the Commission remains convinced that the common consolidated corporate tax base (CCCTB) would be the best solution.

In an interview with International Tax Review last month, Philip Kermode, Director for Direct Taxation in DG Taxation and Customs, said the most comprehensive way to tackle double non-taxation would be for member states to adopt CCCTB.

But CCCTB, which would be a big step towards harmonising member states’ tax systems, seems a remote possibility at present.

The UK, Ireland, Netherlands, Sweden, Poland, Romania, Malta, Bulgaria and Slovenia have all rejected the proposals on grounds of subsidiarity.

If the proposal were to be adopted under enhanced cooperation, it would create further mismatches in tax rules between the opposed member states and those operating under CCCTB. And CCCTB would do nothing to solve mismatches between countries outside the EU.

Harmonisation on a global level may never become a reality.

However, what the recent OECD meeting did show is that there is an emerging global consensus that double non-taxation due to hybrid mismatching is a policy issue which will require increased engagement between tax authorities to solve.

In wholly artificial cases of tax planning, countries are able to use general anti-avoidance rules to challenge them.

However, where taxpayers have arranged transactions with real substance, in such a way that they benefit from double non-taxation, countries must work together to address this.

And tax authorities are recognising that so-called linking rules are the most realistic and effective way to achieve this.

Linking rules fall short of harmonisation, but involve identifying categories of transactions which are using loopholes between two countries’ rules, and matching regulations to prevent it. This involves ensuring that dividends will no longer be tax exempt and interest will no longer be tax deductible in such instances.

Where this is happening it is becoming clear to taxpayers that some structures which take advantage of mismatches are no longer sustainable.

Disclosure initiatives, such as those introduced in the UK and US, are also enabling tax authorities to obtain information required for investigations far more quickly.

The OECD’s recommendations to tax authorities include greater focus on linking rules, continued sharing of intelligence on hybrid mismatch schemes and introduction of disclosure initiatives targeted at certain hybrid mismatch arrangements.

Kermode will develop a policy response on double non-taxation by the end of 2012, following the Commission’s consultation, and he may be well advised to share the OECD’s focus on this issue, rather than tie member states’ hopes to the uncertain future of the CCCTB.

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