Do hybrid mismatch rules apply to your international transactions?
To our concern, many taxpayers that have international related party dealings are not aware of the hybrid mismatch rules.
What are the hybrid mismatch rules?
A hybrid mismatch broadly occurs where a global group seeks to exploit the tax laws of different jurisdictions to obtain a tax benefit (such as a double deduction on the same payment or a payment which is deductible in one country but not assessable in another).
The hybrid mismatch rules aim to neutralise these arrangements by cancelling deductions or including additional amounts in assessable income.
What do hybrid mismatch rules apply to?
These rules apply in situations where there are transactions between related parties over international borders that are:
- Tax deductible in one country but not included in assessable income in the other country;
- Deductible in two countries (that is, where both countries qualify for deductions);
- In relation to interest expenses where the foreign income tax paid by the foreign lender is less than 10%; or
- Indirectly sheltered from tax within the global group due to hybrid outcomes within the group linked to Australia through chains of transactions (i.e. covered by the imported hybrid mismatch rules).
Because there is no de minimis or materiality threshold within the legislation, these hybrid mismatch rules have wide application and can apply to any international transactions (regardless of the amount of money involved) between members of an international group.
No documentation means no deduction
Preparing and retaining the correct documentation for deductions arising from international related party transactions is particularly important. This is because the Australian Taxation Office have stated that no tax deduction should be claimed for international related party expenses unless appropriate documentation is held at the time of lodgement of the tax return.
Part of these documentation requirements include a taxpayer self-assessment of its risk in respect of the global group “importing” hybrid mismatches into Australia (see point 4 above). Such a review can be quite comprehensive, complicated and time consuming, and often includes a detailed review of the global group tax outcomes.
Taxpayers may also be subject to additional reporting in their tax return in relation to the hybrid mismatch rules including:
International dealings schedule (IDS): Taxpayers that have international dealings are generally required to complete the IDS as part of their compliance obligations. The IDS contains a specific section dealing with hybrid mismatches and completing these questions may require detailed data on the global group’s hybrid mismatches.
Reportable Tax Position (RTP) Schedule: Where a taxpayer is required to complete a RTP Schedule (i.e. a schedule disclosing the most contestable and material tax positions for companies), the risk assessment discussed above is required to be reported within this schedule. Failure to do such a risk assessment will also require the reporting of a higher risk category in the RTP schedule, which will flag the issue for a potential ATO review.
What you can do now?
Speak to our Tax Advisory team if you have international related party dealings
With experience in asking the right questions and gathering the required information and documentation, the Tax Advisory team can assist you with completing the IDS and analysing the risk of hybrid mismatch provisions applying to your international related party dealings. Contact our team today and find out how we can assist you in meeting your hybrid mismatch obligations.