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February 25, 2021 The Tax Lawyer

Section 267A and the Taxation of Hybrid Mismatches Under the Code

Vol. 74, No. 2 - Winter 2021

by Shay Moyal


Hybrid mismatches arise because of differences in the tax rules of different countries. Such mismatches have allowed multinationals to minimize their tax liabilities. As tools for minimizing tax liability, hybrid mismatches have troubled tax legislators and tax scholars in many countries and have evoked intriguing intellectual discussions concerning both the legitimacy of using such tools and how countries should address the use of such tools. Indeed, the problem of hybrid mismatches encompasses many complex issues, including the differences between the legal and economic situations of taxpayers, corporate and individual taxpayers, international tax and international law, distinctions among different types of income, and more. These considerations are taken into account to address the conflict between the freedom of jurisdictions to tax their subjects as they wish and their efforts to prevent base erosion and tax competition to ensure their ability to redistribute wealth in their societies.

Recently enacted rules regarding hybrid mismatches in the U.S. were designed to disallow deductions from payments of interest, royalties, and dividends by or from foreign related parties if such related parties are not already taxed, or exempt, for these payments. The legislative intent, the structure of these rules, and their similarities to proposals offered as part of the Base Erosion and Profit Shifting project undertaken by the Organisation for Economic Co-operation and Development suggest that such rules have become customary international law. Thus, this Article seeks to analyze and improve the current law through the application of international tax principles and recent international tax trends and argues that a BEAT-like minimum tax approach to these hybrid mismatches would better prevent double nontaxation, de minimis taxation, and overtaxation. In addition, such an approach may reduce the complexity of the current law.

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