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David Rosenbloom Comments on BEPS Action 2: The Hybrid Hydra

October 6, 2015, Tax Notes Today
Tax Notes Today summarizes and critiques the final action 2 report of the OECD  base erosion and profit-shifting (BEPS) with comments from H. David Rosenbloom during a discussion at Bocconi University's recent Global BEPS conference.  Also discussed were options for uniform interest deduction limitations for European countries such as, financial accounting and the worldwide debt/equity ratio.  For the complete article, please visit Tax Notes Today's website (subscription required).  To view previous coverage, please click on this link.
 
Excerpt taken from the article "BEPS Action 2: The Hybrid Hydra" by Lee A. Sheppard for Tax Notes Today.
 
Alternative Approaches
 
"I wonder if you would need this entire action item if you had appropriate limits on interest deductibility," said H. David Rosenbloom of Caplin & Drysdale Chtd. at the recent conference on BEPS at Bocconi University in Milan. (Prior analysis: Tax Notes, June 8, 2015, p. 1083 2015 TNT 109-3: News Stories.) Of course, multinationals can use rents and royalties for income stripping, but interest is the principal, easily manipulated tax planning tool that dovetails nicely with their cash management practices.
 
Here follows a list of simpler alternative approaches to anti-hybrid that would be good enough for the purpose:
 
Interest deduction denial. As Rosenbloom commented, interest deductions are the problem. The drafters should have taken advantage of the worldwide zero interest rate policy to eliminate or seriously restrict intragroup interest deductions. At this juncture, no multinational has any justification to be charging a borrower affiliate a high enough interest rate to strip out local earnings.
 
Ignore intragroup debt. A no-brainer. Generally accepted accounting principles ignore intragroup debt. International financial reporting standards, inexplicably, do not. As Rosenbloom noted, "intercompany debt does not exist." The final report recognized that payments between related companies are the problem. The report also recognizes that shareholder debt held proportionally to ownership is a problem, but doesn't recommend that every jurisdiction treat it as a contribution to capital.
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