An analysis of recent anti-hybrid measures and a study of the possible ways forward from a Maltese perspective

Abstract

This thesis addresses double non-taxation resulting from the application of hybrid mismatch arrangements. The researcher analyses BEPS Action 2 and the effectiveness of the recommendations proposed therein, with the most challenging obstacle being the OECD’s lack of power to enforce implementation of the recommendations it proposes with the aim of taxing income where the economic activity takes place. The thesis assesses the adequacy or otherwise, as well as the competence and restrictions of the EU and its measures in the fight against tax evasion, with the EU being an ideal forum for such discussions in light of the supreme nature of its laws and its mechanisms of enforcement. The researcher identifies the various means by which hybrid mismatch arrangements may be neutralised, concluding that specific anti-hybrid rules are a requisite. Comments are also made on the efficiency of re-characterisation rules, as suggested by the EU in its proposal for a directive, when compared to the linking rules recommended by the OECD, albeit the latter being the most comprehensive of the options available to the OECD. The researcher illustrates how anti-hybrid measures neutralise mismatches simply by taxing the income somewhere, thereby suggesting other potential alternatives, such as formulary apportionment and destination-based corporate tax. This study is also motivated by the question of what the impact of the above will be on the Maltese corporate tax system. It is concluded that although the Maltese system does not depend on hybrids and has never been classified as hybrid, the OECD’s wide definitions may have an impact on both the tax refunds and on the imputation credits. Should the EU obtain the requisite unanimity the Maltese legislator will also have to cater for re-characterisation rules for both entities and instruments, possibly worldwide. Nevertheless, one cannot assess the impact prior to implementation as states have the option to adapt the recommendations. The researcher therefore concludes by proposing ideas that the Maltese legislator should undoubtedly consider when seeking to introduce new incentives, or improving the obtaining ones, to ensure that our system remains competitive.