Preventing Tax Arbitrage via Hybrid Mismatches: BEPS Action 2 and Developing Countries

Abstract

The Organization for Economic Cooperation and Development (OECD) under Base Erosion and Profit Shifting (BEPS) Action 2 indicated that tax arbitrage via hybrid mismatch arrangements “result in a substantial erosion of the taxable bases of the countries concerned” and “have an overall negative impact on competition, efficiency, transparency and fairness.” The relevant action allowing for neutralising the effects of hybrid mismatch arrangements is therefore needed and justified. To achieve that purpose, the OECD developed different anti-hybrid rules under BEPS Action 2. In that regard, however, one may ask whether addressing tax arbitrage via hybrid mismatches as proposed by the OECD is of interest and relevance for developing countries. This paper aims to map that unexplored research area by means of a comparative analysis in four developing countries – Uruguay, Colombia, Brazil, and South Africa.

Keywords: Hybrids, BEPS, Action Item 2, Mismatch, Developing Countries, Tax Arbitrage, Tax Governance, Sustainability

JEL Classification: K33, K34, E62, E63, F62, H26, O23