Indonesian Participation for BEPS on Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements

Aksi BEPS 2 menyerukan pengembangan ketentuan model perjanjian dan rekomendasi mengenai desain peraturan domestik untuk menetralisir dampak instrumen dan entitas hibrida. Pengaturan ketidakcocokan hibrid (HMA) digunakan dalam perencanaan pajak yang agresif untuk mengeksploitasi perbedaan dalam perlakuan pajak suatu entitas atau instrumen berdasarkan undang-undang dua atau lebih yurisdiksi pajak untuk mencapai non-pajak berganda, termasuk penangguhan perpajakan jangka panjang. Rekomendasi BEPS Aksi 2 menargetkan ketidaksesuaian akibat perbedaan perlakuan perpajakan terhadap instrumen atau entitas keuangan. Upaya mengatasi ketidakcocokan hibrid kemudian diperluas untuk menghadapi peluang serupa yang muncul melalui penggunaan struktur cabang, sehingga menghasilkan laporan OECD tahun 2017 Menetralkan Dampak Pengaturan Ketidakcocokan Cabang. [1]

Isu Hybrid Mismatch Arrangements sudah banyak beredar di dunia perpajakan internasional khususnya antar anggota OECD bahkan sebelum adanya Action 2 dari rezim internasional OECD/G20 Inclusive Framework on BEPS pada bulan Oktober 2015. Salah satu dokumen paling awal yang disusun oleh OECD sebagai referensi mengenai Hybrid Mismatch Arrangements merupakan laporan dengan judul serupa yang dirilis pada tahun 2012. Laporan ini terdiri dari 5 bab yang meliputi konsep utama Hybrid Mismatch Arrangements, Permasalahan Kebijakan, Opsi Kebijakan, Aturan Khusus Mengatasi Hybrid Mismatch Arrangements dan terakhir bab mengenai Pengalaman Negara dengan Penerapan Aturan Secara Khusus Mengatasi Pengaturan Ketidakcocokan Hibrid. [2]Selanjutnya, pada tahun 2015 OECD terus mengangkat permasalahan ini ke dalam salah satu tindakannya untuk rezim kerangka inklusif BEPS dan menjadikannya sebagai Aksi 2 berdasarkan dokumen yang berjudul identik dengan Aksi 2 yang disebutkan di atas. Berbeda dengan dokumen sebelumnya, dokumen final tahun 2015. laporan ini sebagian besar berisi rekomendasi kebijakan pada setiap isu mengenai Hybrid Mismatch Arrangement di setiap bab untuk dipertimbangkan dan diadopsi oleh negara-negara anggota rezim internasional. [3]

Pada laporan tahun 2012, OECD secara implisit mendefinisikan Hybrid Mismatch Arrangements sebagai Arrangement yang mengeksploitasi perbedaan perlakuan pajak terhadap instrumen, entitas, atau transfer antara dua negara atau lebih. Perbedaan tersebut sering kali mengarah pada “penghindaran pajak berganda” yang mungkin tidak dimaksudkan oleh kedua negara, atau sebaliknya dapat menyebabkan penangguhan pajak yang jika dipertahankan selama beberapa tahun secara ekonomi serupa dengan penghindaran pajak berganda. Berdasarkan laporan ini, konsep HMAs memiliki empat elemen yang harus diluruskan pada konsep ini yang terdiri dari entitas hybrid, entitas tempat tinggal ganda, instrumen hybrid, dan transfer hybrid: [4]

• Entitas hibrida adalah Entitas yang diperlakukan transparan untuk tujuan perpajakan di satu negara dan tidak transparan di negara lain.
• Dual residence entities are entities that are resident in two different countries for tax purposes.
• Hybrid instruments are instruments which are treated differently for tax purposes in the countries involved, most prominently as debt in one country but as equity in another country.
• Hybrid transfers are Arrangements that are treated as transfer of ownership of an asset for one country’s tax purposes but not for tax purposes of another country, which generally sees a collateralized loan.

In terms of the results hybrid mismatch arrangements aim at achieving, they generally fall within one of the following categories. First, Double deduction (DD) schemes or Arrangements where a deduction related to the same contractual obligation is claimed for income tax purposes in two different countries. Second, Deduction or No Inclusion (D/NI) schemes are Arrangements that create a deduction in one country, typically a deduction for interest expenses, but avoid a corresponding inclusion in the taxable income in another country. Conversely at last, foreign tax credit generators or Arrangements that generate foreign tax credits that arguably would otherwise not be available, at least not to the same extent, or not without more corresponding taxable foreign income.[5] All of these effects are the main focuses to be countered by member countries when they implementing the 2015 final report as extension for policy recommendations regarding this issue.

Therefore, in 2015 report Action 2 on Neutralising the Effects of Hybrid Mismatch Arrangements consist 12 recommendations for Domestic Law and 3 recommendations for treaty issues. The notable part of full version was put in the attachment while the simplified recommendations include: [6]

1. For Domestic Law
2. Hybrid Financial Instrument Rule
3. Specific Recommendations for the Tax Treatment of Financial Instruments
4. Disregarded Hybrid Payments Rule
5. Reverse Hybrid Rule
6. Specific Recommendations for The Tax Treatment of Reverse Hybrids
7. Deductible Hybrid Payments Rule
8. Dual Resident Payer Rule
9. Imported Mismatch Rule
10. Design Principles
11. Definition of Structured Arrangement
12. Definition of Related Persons, Control Group and Acting Together
13. Other Definitions
14. For Treaties
15. Dual-Resident Entities
16. Treaty Provision on Transparent Entities
17. Interaction between Domestic Law and Tax Treaties

On each recommendation consisting either rules, scope of the rule and/or just/also general definition that aimed to become reference for member states of BEPS Inclusive Framework to adopt in order to avoid mismatch between countries agreements. However, member states remain free in their policy choices as to whether the hybrid mismatch rules should be applied to mismatches that arise under intra-group hybrid regulatory capital. Where one country chooses not to apply the rules to neutralize a hybrid mismatch in respect of a particular hybrid regulatory capital instrument, this does not affect another country’s policy choice of whether to apply the rules in respect of the particular instrument.

The recommended primary rule is that countries deny the taxpayer’s deduction for a payment to the extent that it is not included in the taxable income of the recipient in the counterparty jurisdiction or it is also deductible in the counterparty jurisdiction. If the primary rule is not applied, then the counterparty jurisdiction can generally apply a defensive rule, requiring the deductible payment to be included in income or denying the duplicate deduction depending on the nature of the mismatch. The report recognizes the importance of coordination in the implementation and application of the hybrid mismatch rules to ensure that the rules are effective and to minimize compliance and administration costs for taxpayers and tax administrations. To this end, it sets out a common set of design principles and defined terms intended to ensure consistency in the application of the rules.[7]

Since announcement of the Action 2 recommendations, a number of Inclusive Framework member countries have rapidly adopted rules to address a comprehensive range of hybrid and branch mismatches. The United Kingdom, Australia and New Zealand have enacted legislation consistent with the common approach in Action 2 and, in 2019 the US Treasury issued regulations clarifying the application of the hybrid mismatch rules introduced under the Tax Cuts and Jobs Act. European Union Member States adopted Council Directive (EU) 2017/952 which requires hybrid and branch mismatch rules to be effective in member states no later than the beginning of 2020.[8]

The discussion regarding the hybrid mismatch arrangement is also considered in the Indonesian government although they do not bluntly mention mismatch arrangement rather the effect that might it caused such as but not limited to tax avoidance and double deduction. Indonesian government include the discussion of the action 2 of this international regime with releasing Government Regulation No.55/2022 which contains the handling of the hybrid mismatch arrangement. The government regulation might also at the same time might corresponds with other actions in OECD/G20 Inclusive Framework on BEPS such as but not limited to Action 6, 8-10, 14 and 15. On Chapter VII regarding Tax Evasion Prevention Instrument, this chapter addressing Tax Evasion related to deduction/no inclusion (D/NI) especially on article 32, 34, 43 and 44. Action 2 could also relate to Chapter VIII regarding Implementation of International Agreement on Taxation that addressing DD and/or D/NI in article 48-54.[9]

In conclusion, Action 2 of International Regime of OECD/G20 Inclusive Framework on BEPS is an effort to addressing the effect of HMAs that used in aggressive tax planning to exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term taxation deferral. There are two main document references with their own function. First, the 2012 report that mainly discussed about the concept, the four elements of hybrid mismatch and its effect toward tax implementation between countries. Second, the 2015 report that become the main reference of Action 2 recommendations consisting 12 recommendations for Domestic Law and 3 recommendations for treaty issues to be adopted by member states. Some countries already adopting the Action 2 in their domestic law including Indonesia as a member of this international regime also following to adopt it through Government Regulation No 55 of 2022 although it does not mention frankly the hybrid mismatch arrangement rather the effect that might it caused and at the same time correspond to the other actions.

 

TBrights is a tax consultant in Indonesia which currently is an integrated business service in Indonesia providing comprehensive tax and business services

By Olina Rizki Arizal
Partner

 

ATTACHMENT

A. For Domestic Law

1. Hybrid Financial Instrument Rule

The following rule should apply to a payment under a financial instrument that results in a hybrid mismatch and to a substitute payment under an arrangement to transfer a financial instrument:

1. The payer jurisdiction will deny a deduction for such payment to the extent it gives rise to a D/NI outcome
2. If the payer jurisdiction does not neutralise the mismatch then the payee jurisdiction will require such payment to be included in ordinary income to the extent the payment gives rise to a D/NI outcome.
3. Differences in the timing of the recognition of payments will not be treated as giving rise to a D/NI outcome for a payment made under a financial instrument, provided the taxpayer can establish to the satisfaction of a tax authority that the payment will be included as ordinary income within a reasonable period of time.
4. Specific Recommendations for the Tax Treatment of Financial Instruments
5. Denial of dividend exemption for deductible payments: In order to prevent D/NI outcomes from arising under a financial instrument, a dividend exemption that is provided for relief against economic double taxation should not be granted under domestic law to the extent the dividend payment is deductible by the payer. Equally, jurisdictions should consider adopting similar restrictions for other types of dividend relief granted to relieve economic double taxation on underlying profits.
6. Restriction of foreign tax credits under a hybrid transfer: In order to prevent duplication of tax credits under a hybrid transfer, any jurisdiction that grants relief for tax withheld at source on a payment made under a hybrid transfer should restrict the benefit of such relief in proportion to the net taxable income of the taxpayer under the arrangement.
7. Disregarded Hybrid Payments Rule

The following rule should apply to a disregarded payment made by a hybrid payer that results in a hybrid mismatch:

1. The payer jurisdiction will deny a deduction for such payment to the extent it gives rise to a D/NI outcome.
2. If the payer jurisdiction does not neutralise the mismatch then the payee jurisdiction will require such payment to be included in ordinary income to the extent the payment gives rise to a D/NI outcome.
3. No mismatch will arise to the extent that the deduction in the payer jurisdiction is set-off against income that is included in income under the laws of both the payee and the payer jurisdiction (i.e. dual inclusion income).
4. Any deduction that exceeds the amount of dual inclusion income (the excess deduction) may be eligible to be set-off against dual inclusion income in another period.
5. Reverse Hybrid Rule

In respect of a payment made to a reverse hybrid that results in a hybrid mismatch the payer jurisdiction should apply a rule that will deny a deduction for such payment to the extent it gives rise to a D/NI outcome.

5. Specific Recommendations for The Tax Treatment of Reverse Hybrids
6. Improvements to CFC and other offshore investment regimes: Jurisdictions should introduce, or make changes to, their offshore investment regimes in order to prevent D/NI outcomes from arising in respect of payments to a reverse hybrid. Equally jurisdictions should consider introducing or making changes to their offshore investment regimes in relation to imported mismatch arrangements.
7. Limiting the tax transparency for non-resident investors: A reverse hybrid should be treated as a resident taxpayer in the establishment jurisdiction if the income of the reverse hybrid is not brought within the charge to taxation under the laws of the establishment jurisdiction and the accrued income of a non-resident investor in the same control group as the reverse hybrid is not brought within the charge to taxation under the laws of the investor jurisdiction.
8. Information reporting for intermediaries: Jurisdictions should introduce appropriate tax filing and information reporting requirements on persons established within their jurisdiction in order to assist both taxpayers and tax administrations to make a proper determination of the payments that have been attributed to that non-resident investor.
9. Deductible Hybrid Payments Rule

The following rule should apply to a hybrid payer that makes a payment that is deductible under the laws of the payer jurisdiction and that triggers a duplicate deduction in the parent jurisdiction that results in a hybrid mismatch:

1. The parent jurisdiction will deny the duplicate deduction for such payment to the extent it gives rise to a DD outcome.
2. If the parent jurisdiction does not neutralise the mismatch, the payer jurisdiction will deny the deduction for such payment to the extent it gives rise to a DD outcome.
3. No mismatch will arise to the extent that a deduction is set-off against income that is included in income under the laws of both the parent and the payer jurisdictions (i.e. dual inclusion income).
4. Any deduction that exceeds the amount of dual inclusion income (the excess deduction) may be eligible to be set-off against dual inclusion income in another period. In order to prevent stranded losses, the excess deduction may be allowed to the extent that the taxpayer can establish, to the satisfaction of the tax administration, that the excess deduction in the other jurisdiction cannot be set-off against any income of any person under the laws of the other jurisdiction that is not dual inclusion income.
5. Dual Resident Payer Rule

The following rule should apply to a dual resident that makes a payment that is deductible under the laws of both jurisdictions where the payer is resident and that DD outcome results in a hybrid mismatch:

1. Each resident jurisdiction will deny a deduction for such payment to the extent it gives rise to a DD outcome.
2. No mismatch will arise to the extent that the deduction is set-off against income that is included as income under the laws of both jurisdictions (i.e. dual inclusion income).
3. Any deduction that exceeds the amount of dual inclusion income (the excess deduction) may be eligible to be set-off against dual inclusion income in another period. In order to prevent stranded losses, the excess deduction may be allowed to the extent that the taxpayer can establish, to the satisfaction of the tax administration, that the excess deduction cannot be set off against any income under the laws of the other jurisdiction that is not dual inclusion income.
4. Imported Mismatch Rule

The payer jurisdiction should apply a rule that denies a deduction for any imported mismatch payment to the extent the payee treats that payment as set-off against a hybrid deduction in the payee jurisdiction.

9. Design Principles
10. The hybrid mismatch rules have been designed to maximise the following outcomes: neutralise the mismatch rather than reverse the tax benefit that arises under the laws of the jurisdiction;
11. be comprehensive;
12. apply automatically;
13. avoid double taxation through rule co-ordination;
14. minimise the disruption to existing domestic law;
15. be clear and transparent in their operation;
16. provide sufficient flexibility for the rule to be incorporated into the laws of each jurisdiction;
17. be workable for taxpayers and keep compliance costs to a minimum; and
18. minimise the administrative burden on tax authorities.

Jurisdictions that implement these recommendations into domestic law should do so in a manner intended to preserve these design principles.

10. Definition of Structured Arrangement

Structured arrangement is any arrangement where the hybrid mismatch is priced into the terms of the arrangement or the facts and circumstances (including the terms) of the arrangement indicate that it has been designed to produce a hybrid mismatch.

11. Definition of Related Persons, Control Group and Acting Together
12. Two persons are related if they are in the same control group or the first person has a 25% or greater investment in the second person or there is a third person that holds a 25% or greater investment in both.
13. Two persons are in the same control group if:

(i) they are consolidated for accounting purposes;

(ii) the first person has an investment that provides that person with effective control of the second person or there is a third person that holds investments which provides that person with effective control over both persons;

(iii) the first person has a 50% or greater investment in the second person or there is a third person that holds a 50% or greater investment in both; or

(iv) they can be regarded as associated enterprises under Article 9.

1. A person will be treated as holding a percentage investment in another person if that person holds directly or indirectly through an investment in other persons, a percentage of the voting rights of that person or of the value of any equity interest in that person.
2. Two persons will be treated as acting together in respect of ownership or control of any voting rights

or equity interests if:

(i) they are members of the same family;

(ii) one person regularly acts in accordance with the wishes of the other person;

(iii) they have entered into an arrangement that has material impact on the value or control of any such rights or interests; or

(iv) the ownership or control of any such rights or interests are managed by the same person or group of persons.

12. Other Definitions including:

Accrued Income	Arrangement	Collective Investment Vehicle	Constitution
D/NI Outcome	DD Outcome	Deduction	Director
Distribution	Dual Inclusion Income	Equity Interest	Equity Return
Establishment Jurisdiction	Family	Financing Return	Hybrid Mismatch
Included in Ordinary Income	Investor	Investor Jurisdiction	Mismatch
Money	Offshore Investment Regime	Ordinary Income	Payee
Payee Jurisdiction	Payer	Payer Jurisdiction	Payment
Person	Taxpayer	Trust	Voting Rights

 

B. For Treaties

1. Dual-Resident Entities

• Action 2 refers expressly to possible changes to the OECD Model Tax Convention (OECD, 2014) to ensure that dual resident entities are not used to obtain the benefits of treaties unduly
• Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavor to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of the Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States

14. Treaty Provision on Transparent Entities

For the purposes of this Convention, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State.

15. Interaction between Domestic Law and Tax Treaties

• Rule providing for the denial of deductions
• Defensive rule requiring the inclusion of a payment in ordinary income
• Exemption method
• Credit method
• Potential application of anti-discrimination provisions in the OECD Model Tax Convention

[1] https://www.oecd.org/tax/beps/beps-actions/action2/

[2] Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues, 2012

[3] Proyek Erosi Basis dan Pergeseran Keuntungan OECD/G20: Menetralisir Dampak Hybrid Mismatch Arrangements, 2015

[4] Hybrid Mismatch Arrangements: Masalah Kebijakan dan Kepatuhan Pajak, 2012

[5] Pengaturan Ketidakcocokan Hibrid: Masalah Kebijakan dan Kepatuhan Pajak, 2012

[6] Proyek Erosi Basis dan Pergeseran Keuntungan OECD/G20: Menetralisir Dampak Hybrid Mismatch Arrangements, 2015

[7] Proyek Erosi Basis dan Pergeseran Keuntungan OECD/G20: Menetralisir Dampak Hybrid Mismatch Arrangements, 2015

[8] https://www.oecd.org/tax/beps/beps-actions/action2/

[9] Peraturan Pemerintah Indonesia No 55 Tahun 2022