On August 22, 2016 the OECD released a discussion draft on branch mismatch structures (Action 2 of the BEPS Action Plan). The OECD invites interested parties to provide comments on the discussion draft. Comments should be submitted by e-mail. Comments should be submitted by September 19, 2016 at the latest and should be addressed to the International Co-operation and Tax Administration Division, OECD/CTPA.
The discussion draft released on August 22, 2016 identifies and analyses mismatches that can arise through the use of branch structures. These branch mismatches occur where the residence and the branch jurisdictions (i.e. the jurisdictions in which the head office and branch are located) take a different view as to the allocation of income and expenditure between the branch and head office and include situations where the branch jurisdiction does not treat the taxpayer as having a taxable presence in that jurisdiction. According to the OECD branch mismatch arrangements can be used to produce the same types of mismatches that are targeted by the recommendations in the Action 2 Report. For example:
(a) a deductible payment made to a branch may not be brought into income in either the branch or residence jurisdiction (a D/NI (Deduction/No Inclusion) outcome analogous to that described in Chapters 4 and 5 of the Action 2 Report);
(b) a branch may make (or be treated as making) a deductible payment to the head office that is not taken into account in calculating the net income of the head office under the laws of the residence jurisdiction (a D/NI outcome analogous to that described in Chapter 3 of the Action 2 Report);
(c) the same item of expenditure may be treated as deductible under the laws of both the residence and the branch jurisdictions (a DD (Double Deduction) outcome analogous to that described in Chapters 6 and 7 of the Action 2 Report); or
(d) the income from a payment may be offset against a deduction under a branch mismatch arrangement (an indirect D/NI (Indirect Deduction/No Inclusion) outcome analogous to that described in Chapter 8 of the Action 2 Report).
Branch mismatches arise where the ordinary tax accounting rules for allocating income and expenditure between the branch and head office result in a portion of the net income of the taxpayer falling out of the charge to taxation in both the branch and residence jurisdiction. In the discussion draft five basic types of branch mismatch arrangements are identified by the OECD:
(a) Disregarded branch structures where the branch does not give rise to a permanent establishment (PE) or other taxable presence in the branch jurisdiction;
(b) Diverted branch payments where the branch jurisdiction recognises the existence of the branch but the payment made to the branch is treated by the branch jurisdiction as attributable to the head office, while the residence jurisdiction exempts the payment from taxation on the grounds that the payment was made to the branch;
(c) Deemed branch payments where the branch is treated as making a notional payment to the head office that results in a mismatch in tax outcomes under the laws of the residence and branch jurisdictions;
(d) DD branch payments where the same item of expenditure gives rise to a deduction under the laws of both the residence and branch jurisdictions; and
(e) Imported branch mismatches where the payee offsets the income from a deductible payment against a deduction arising under a branch mismatch arrangement.
In the Sections 2 – 5 of the discussion draft preliminary recommendations for domestic rules that according to the OECD would neutralise the mismatches in tax outcomes arising from the use of these structures are set out.
The discussion draft discussed a.o. the following topics:
· Branch payee structures that give rise to D/NI outcomes
o Disregarded branch structure
o Diverted branch payment
o Recommended Rules
§ Limiting the scope of the branch exemption
§ Branch payee mismatch rule
· Deemed branch payments
o Recommended branch mismatch rule
§ Definition of deemed payment
§ No mismatch if the deduction is set-off against dual inclusion income
§ Denial of the deduction in the branch jurisdiction
§ Include the payment in income in the residence jurisdiction
· DD branch payments
o Application of Recommendation 6 to DD branch payments
o Further guidance on the application of Recommendation 6 to DD branch outcomes
· Imported branch mismatches
o Imported mismatch rule should apply to branch mismatches
o Application to structured arrangement and members of the same group
Click here to be forwarded to the discussion draft: “BEPS Action 2 – Branch Mismatch Structures” as available on the website of the OECD, which will open in a new window.
Are you looking for other BEPS documents then have a look at International Tax Plaza’s BEPS LIBRARY, which is very complete.
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