In brief

The Board of Taxation (the Board) has released a consultation paper on the implementation of the anti- hybrid rules as developed by the Organisation for Economic Co-Operation and Development (OECD) as part of Action 2 of the Base Erosion and Profit Shifting (BEPS) Action Plan.

The consultation paper focuses on issues associated with the implementation of the anti-hybrid rules into Australian domestic law and not whether the rules should be adopted at all. The consultation paper has been developed, based on the terms of reference provided to the Board in July 2015 by the Australian Government, to facilitate public consultation and to inform its report due in early 2016.

The commencement date for these rules in Australia has not been made clear by the Government, and it seems likely a start date will be announced in May 2016. With this in mind, taxpayers should turn their mind to their structures and consider what the impact of the anti-hybrid rules may be.

In detail

The Australian Government asked the Board in the May 2015 Federal Budget to consult on the implementation of the OECD’s recommendations as outlined in the final Action Item 2 report released by the OECD on 5 October 2015. The final report on Action Item 2 includes recommendations, both at a domestic law level and at a treaty level, that are intended to neutralise hybrid mismatch arrangements.

For further details regarding the OECD’s recommendations, please refer to PwC’s global Tax Policy Bulletin.

On 14 July 2015, the Australian Government released the terms of reference for the Board’s review, asking them to examine how best to implement anti-hybrid rules in the Australian context having particular regard to:

  • delivering on the objectives of eliminating double non-taxation, including long term tax deferral
  • economic costs for Australia
  • compliance costs for taxpayers, and
  • interactions between Australia's domestic legislation (e.g. the debt-equity rules and regulated capital requirements for banks), international obligations (including tax treaties) and the new anti-hybrid rules.

The Board must report back to the Australian Government by March 2016 to allow the issue to be considered as part of the 2016 Federal Budget (expected to be 10 May 2016).

The Board released its consultation paper on implementation of the anti-hybrid rules as developed by the OECD on 20 November 2015. Unlike the OECD’s final report, the Board’s consultation paper is a much shorter document (24 pages) that has been developed to facilitate discussion on how best to implement these rules into the Australian domestic law and to identify any issues associated with implementation.

The consultation paper does not contain any options nor does it express the Board’s preliminary views as to how the Australian Government should proceed with these rules. However, it does provide a summary of the concepts and recommendations in the OECD report and identifies some Australian specific examples that will likely be caught should the rules be implemented (e.g. US general partnership with Australian partners, limited partnerships, redeemable preference shares, security lending arrangements).

There are 41 questions in the consultation paper, covering a range of general and specific queries on a variety of issues. The common themes include:

  • The costs and benefits of implementing the anti-hybrid rules - e.g. the advantages and disadvantages (economic, commercial, revenue or other) for Australia in implementing the anti- hybrid rules.
  • Interaction with Australian domestic law and other OECD BEPS action items – e.g. whether there are certain aspects of the anti-hybrid rules that should not be implemented and whether there are duplication/inconsistencies with Action Items 3 (CFC), 4 (interest limitation) and 6 (treaty abuse) of the OECD’s BEPS Action Plan.
  • Implementation timing and transitional issues – e.g. possible commencement dates for any changes , what transitional periods should apply and whether existing arrangements should be grandfathered.
  • Technical issues associated with the detailed recommendations relating to financial instruments, reverse hybrids, dual residency and deductible hybrid payments - e.g. whether there are particular concerns with adopting each of the recommendations, tracking of dual inclusion income, definition of ‘reasonable period of time’ , application to branches.
  • Adoption of an imported mismatch integrity rule – e.g. challenges faced with a rule that relies on the tracing of funding through multiple jurisdictions and whether an alternative should be considered.
  • Integration of OECD definitions into the existing Australian tax law - e.g. whether the OECD recommended definitions should be adopted for purposes of the anti-hybrid rule or whether existing definitions in the Australian Tax Law are sufficient (such as the financial instrument and structured arrangement definitions).
  • The inclusion of exceptions or carve outs from the anti-hybrid rules – e.g. the possibility of an exception for intra-group hybrid regulatory capital and regulatory capital issued to third parties by financial institutions.
  • Legislative design, compliance and administrative issues – e.g. how to implement the changes into Australia’s law, practical challenges for taxpayers in identifying arrangements and complying with the rules.

The Board acknowledges in the consultation paper the Australian Government’s commitment to eliminate tax advantages arising from hybrid arrangements whilst ensuring that investment activity in Australia is not compromised and that Australia remains an economically competitive place to do business. In our view, the impact of the anti-hybrid rules on investment activity in Australia is an integral policy question that will need to be carefully analysed.

The consultation paper notes the importance of implementing the anti-hybrid rules in a harmonised and consistent manner. Non-uniform adoption could result in double taxation and may impact investment decisions and so Australia should be careful not to take unilateral action.

The Board has requested submissions by 15 January 2016 to enable it to finalise its report to the Australian Government by March 2016. In the meantime, the Board have commenced consultation with stakeholders and will continue to do so over the coming months.

PwC will be preparing a submission to the Board. Please contact us if you would like to contribute to our submission or would like to discuss the impact of the rules.

The takeaway

Australia is still leading the pack, behind only the UK (expected to release draft rules in early December 2015 with application from 1 January 2017), when it comes to implementation of the OECD anti-hybrid rules. It is clear that Australia plans to adopt, at least in principle, the recommendations developed by the OECD.

The commencement date for these rules in Australia has not been made clear by the Government, and it seems likely a start date will be announced in May 2016.