Abstract
International tax and tax issues have been present over several decades. From a global perspective, international tax and tax issues rank amongst the highest issues on the political agenda and hence, stronger coordination and cooperation on tax issues was required. The Organisation for Economic Co-operation and Development (OECD) identified Base Erosion and Profit Shifting Schemes to be the most challenging, which resulted in tax losses, more than $240 billion annually. A project named the “OECD/G20 Base Erosion and Profit Shifting Project (BEPS)” was developed, which included 15 actions needed to tackle tax avoidance, to improve international tax rules, and to ensure a more transparent tax environment.
Amongst these actions, Action 2 sought to address the issue regarding hybrid mismatch arrangements. The OECD developed a report called “Neutralising the Effects of Hybrid Mismatch Arrangements” with a specific aim of neutralising the tax effect from these hybrid mismatch arrangements. The South African Revenue Service (SARS) performed its own evaluation of these arrangements and concluded that a substantial amount of revenue had been lost. To address this, s8F and s8FA were introduced into the Income Tax Act (ITA) to address hybrid debt instruments and hybrid interest.
The purpose of the study was to investigate whether the application of s8F and s8FA and the legislation applied by a sample of OECD member countries is consistent with the primary rule regarding hybrid mismatches provided in the report by the OECD.
iii
This study is conducted in the form of a literature review, which examines the recommendations, more specifically, the primary rule provided under Chapter 1 and 2 of the neutralising effects of hybrid mismatch arrangements in the report issued by the OECD. It further investigates the application of s8F and s8FA, as well as the prevalent legislation applicable of the sampled countries regarding hybrid debt instruments. It assesses whether the current legislation is aligned to the primary rule recommendation made by the OECD.
The consensus from the study is that the South African legislation and the selected sample of countries have taken the primary rule recommendation into consideration in their legislation. The South African legislation is comprehensive enough not only to address hybrid debt instruments, but also to identify any hybrid mismatch arrangements that might arise and that have been identified by the OECD report. From a global and sample perspective, countries have been making significant amendments to their legislation to ensure that their tax law is also aligned with the primary rule recommendation provided by the OECD. Overall, there is sufficient evidence that South Africa and the sample of countries have sought to address this issue by ensuring that at minimum, they have implemented the primary rule recommendation, as recommended by the OECD.