The SH rules temporarily allow an MNE to avoid undertaking detailed P2 calculations in respect of low-risk countries in the initial P2 years by making use of its existing country-by-country report and financial accounting data with little to no modifications. The SH rules do not contain a provision equivalent to article 3.2.7 of the P2 model rules.

As the OECD became aware that HFAs were implemented by taxpayers during the SH period, it published the Guidance. Under the Guidance, a taxpayer must exclude expenses relating to HFAs from its SH income if such HFA was entered into after (in principle) December 15, 2022 (the release date of the OECD SH guidance). The Guidance lists three categories of HFAs: (i) deduction/non-inclusion arrangements (D/NI) (ii) duplicate loss arrangements and (iii) duplicate tax recognition arrangements. In this Snippet, we solely discuss D/NI.

A D/NI is defined in the Guidance as an arrangement whereby an entity makes a payment that is taken into account as an expense in its financial accounts without a commensurate increase in (a) the revenue in the financial accounts or (b) the taxable income at the level of the recipient. Therefore, it targets both mismatches between (i) the accounting treatment of both countries involved and (ii) the treatment for accounting and tax purposes. The use of a tax attribute (e.g., NOLs) to offset the income may also fall within the scope of the latter.

An example of a D/NI is a loan granted by a US parent entity (USCo) to its disregarded EU sub (DRE). The DRE will report an interest expense in its financial accounts with no commensurate increase in the taxable income of USCo due to the disregarded status of DRE for US tax purposes. This means that the expense will not be taken into account for purposes of the SH calculations of the jurisdiction of the DRE.

The fact that the deduction of the expense by DRE may be denied for tax purposes under the EU anti-hybrid rules (ATAD 2) does not change this conclusion since the ATAD 2 rules do not impact the financial accounts of DRE.

Want to know more about this topic? Reach out to one of our colleagues mentioned below.