April 22, 2021
Australian Taxation Office issues draft guidance regarding the imported hybrid mismatch rule impacting large global groups
On 21 April 2021, the Australian Taxation Office (ATO) released Draft Practical Compliance Guideline PCG 2021/D3 Imported hybrid mismatch rule – ATO’s compliance approach (PCG 2021/D3).
The imported hybrid mismatch rule operates broadly to disallow a deduction for a payment if the income from such a payment is set-off, directly or indirectly, against a deduction that arises under a hybrid mismatch arrangement in an offshore jurisdiction, referred to as an “offshore hybrid mismatch” (i.e., a hybrid mismatch arrangement that is wholly between non-Australian entities).
PCG 2021/D3 provides a framework of eight color coded risk zones ranging from the white zone (where the ATO has provided clearance to the taxpayer), through green (low risk) to red (high risk). Taxpayers may be required to self-assess the risk of the imported hybrid mismatch rule within Australia’s hybrid mismatch rules applying to their related party arrangements where a Reportable Tax Position Schedule is required to be prepared. Where a taxpayer’s risk rating is outside of the white zone or blue (low risk) rating, there is no presumption that the arrangements do not comply with Australian tax law, but the ATO may be more likely to conduct some form of engagement and assurance activity to further test the taxation outcomes of the arrangements.
Other key observations from PCG 2021/D3 are:
Procedures to determine if there are offshore hybrid mismatches in the Division 832 control group include making written enquiries of the Global Head of Tax or other qualified personnel with a detailed list of the information to be obtained (including details of foreign hybrid mismatch calculations).
It is important to note that the compliance approach outlined by the ATO is very detailed and may require extensive analysis and information gathering which may be onerous for large global groups.
Based on the Reportable Tax Position Schedule 2021 instructions, once PCG 2021/D3 is finalized, taxpayers that have self-assessed a high risk zone or have not applied PCG 2021/D3 will be required to make a disclosure in their Reportable Tax Position Schedule to the extent they are required to file this schedule with their tax return. For future updates of the Reportable Tax Position Schedule, it is anticipated that risk categories, other than high risk, may also require disclosure.
Submissions in relation to PCG 2021/D3 are due by 21 May 2021. The final guidance will apply before and after its issue such that the guidance practically may apply from 1 January 2019.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Australia, Oceania Leader - International Tax and Transaction Services, Sydney
Ernst & Young Australia, International Tax And Transaction Services, Perth
Ernst & Young LLP (United States), Australian Tax Desk, New York
Ernst & Young LLP (United Kingdom), Australian Tax Desk, London