Tax: Addressing the hybrids

©David Rooney

The global campaign will continue in 2014 to improve international tax rules, many of which were first designed over a century ago, and to make them fit for the era of globalisation and new technologies. In 2013 policy attention was focused on the problem of profit shifting by global firms and its negative effects on tax bases, with the OECD issuing its widely publicised 15-point Action Plan on Base Erosion and Profit Shifting (BEPS) to leaders at the G20 summit in September. A key action area in the plan concerns crossborder tax hybrid schemes, with an OECD report due to address the problem in 2014. How do they work? 

Taxpayers can sometimes claim a tax deduction for a payment that is either untaxed in the country of receipt of that payment, or for which a deduction has already been claimed in another jurisdiction. These so-called hybrid mismatch arrangements are in effect structured transactions, whose purpose is to lower the tax burden on cross-border investments by exploiting differences in the tax treatment of instruments or entities in different tax jurisdictions.

An OECD report called Hybrid Mismatch Arrangements published in 2012 concluded that although it can be difficult to identify which country has actually lost tax revenue under a hybrid mismatch arrangement, these arrangements pose a collective risk to the tax base of all countries by lowering the aggregate tax burden on taxpayers who use them. As well as raising BEPS concerns, the report concluded that the ability of cross-border investors to use sophisticated and often opaque hybrid structuring techniques to reduce their domestic tax liability can have a negative impact on both the efficiency and fairness of tax systems.

The 2012 report specifically recommended that countries consider introducing “matching” rules that align the tax treatment of instruments and entities in both jurisdictions in order to neutralise their hybrid effect. As part of the BEPS Action Plan, the OECD and G20 countries have taken this recommendation one step further by agreeing to formulate a set of recommendations, domestic rules and treaty provisions designed to eliminate hybrid mismatches. More progress is expected on this front in 2014. The OECD Committee on Fiscal Affairs (CFA) has formed a new working party to deal with aggressive tax planning and to help complete a report on eliminating hybrid mismatches in September 2014. The report will cover three main aspects: first, hybrid financing instruments, including sophisticated hybrid transfers; second, expenditures incurred by a hybrid entity that give rise to tax deductions under the laws of two or more jurisdictions (so-called double deduction structures); and third, hybrid structures that are designed to allow an investor to avoid tax on deductible payments made by a counterparty to the arrangement (so-called deduction/ no-inclusion structures).

The OECD-G20 work on hybrids is being undertaken in parallel with work being done by the European Union in relation to intra-EU hybrid mismatch arrangements. However, it has a broader scope and involves a wider range of countries than the EU work.

For John Peterson, who heads the aggressive tax planning unit at the OECD, the work on hybrids is an “interesting and challenging project with a very tight deadline.” Countries have set themselves the task of producing matching rules that are comprehensive, easy for tax authorities to administer, and clear and transparent in their operation, and which keep taxpayer compliance costs to a minimum. Their task is complicated by the need to ensure that the rules target the mismatch and do not disturb other commercial outcomes or result in unintended double taxation for taxpayers.

The first draft of the hybrid mismatch report is due to be released for public consultation at the end of the first quarter of 2014. “This is an ambitious target,” Mr Peterson admits, “but one that captures the importance that G20 and OECD member countries place on the need to urgently address gaps in the international tax architecture that are presently being exploited by these sorts of arrangements.”

OECD (2012), Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues, OECD Publishing.


© OECD Observer No 297, Q4 2013

Economic data


Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive print editions delivered to you directly

Online edition
Previous editions

Don't miss

  • IMF Finance and Development Magazine, December 2015

    Powering the Planet: The Quest for Sustainable Energy

    Read the magazine here
    Visit their website
  • In Iceland, geothermal power is being used for almost everything. Scientists and engineers from around the world are participating in a course at the United Nations University (UNU) to learn how to use geothermal energy in their own countries.
  • They are green and local--It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa.
  • Pole to Paris Project
  • Send a message from #EarthToParis.
  • From the World Bank: Managing the Impacts of Climate Change on Poverty
  • Black carbon causes millions of deaths every year and contributes to the warming of the planet. The United Nations Environment Programme explains how reducing black carbon can save lives and help combat climate change.
  • In order to face global warming, Asia needs at least $40 billion per year, derived from both the public and private sector. Read how to bridge the climate financing gap on the Asian Bank of Development's website.
  • How can cities fight climate change?
    Discover projects in Denmark, Canada, Australia, Japan and Mexico.
  • 10 climate-friendly habits everyone should adopt: Although the main aim of COP21 is to reach an international agreement on climate change between government stakeholders, it is also the perfect opportunity to remind citizens of how everyone can help to reduce greenhouse gas emissions in their day-to-day lives.
  • Climate: What's changed, what hasn't, what we can do about it.
    Lecture by OECD Secretary-General Angel Gurría, hosted by the London School of Economics and Aviva Investors in association with ClimateWise, London, UK, 3 July 2015.
  • Do you know the OECD’s web ending? Or which Serbian American engineer is famous for his electric cars? Try our latest OECD Observer crossword. It’s full of fun facts, simplex in style, and gives you the solution at the tip of a button. You can time yourself too.
  • French Economy Minister Emmanuel Macron came to the OECD on 18 September for a webcast discussion on economic reforms, inequality and the outlook, with OECD Secretary-General Angel Gurría. You can watch the event by clicking on the photo.

  • Climate change: “We should not disagree when scientists tell us we have a window of opportunity–10-15 years–to turn this thing around” argues Senator Bernie Sanders.

  • In the long-run, the EU benefits from migration, says OECD Head of International Migration Division Jean-Christophe Dumont.
  • Is technological progress slowing down? Is it speeding up? At the OECD, we believe the research from our Future of ‪Productivity‬ project helps to resolve this paradox.
  • An employee prepares breakfast in front of the Eiffel tower at the Parisian luxury hotel Le Plaza Athenee. Nowhere in the world has more accommodation available on Airbnb than Paris. Now the home-sharing website that has transformed budget travel is giving super-deluxe hotels a fright too.
    ©REUTERS/Stephane Mahe
  • Is inequality bad for growth? That redistribution boosts economies is not established by the evidence says FT economics editor Chris Giles. Read more on
  • Low interest rates here to stay for half a century, says OECD director Adrian Blundell-Wignall.
  • Bill Gates visited the OECD on 26 June. He met with the Secretary-General Angel Gurría to discuss areas of collaboration with his foundation and participated at a briefing session on official development assistance modernisation with OECD experts.
  • The People’s Republic of China decided to enhance longstanding collaboration with the OECD and to join the OECD Development Centre, in a historic visit by Chinese Premier Li Keqiang on 1 July to the OECD in Paris.
    Read about it on
  • Catherine Mann, OECD Chief Economist, explains on Bloomberg why "too much bank lending can slow economic growth".
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at .
  • Come va la vita in Italia? How's life in Italy? The OECD Better Life Index is an interactive online platform in seven languages that goes beyond GDP by offering important insights into measuring well-being and quality of life. Try it for yourself!

Most Popular Articles


What issue are you most concerned about in 2015?

Euro crisis
Global warming
International conflict

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2015