On March 19 the OECD published draft proposals for tightening the taxation relating to “hybrid mismatch arrangements” of multinational concerns.This has nothing to do with saving the environment, merely saving the tax revenues of governments around the world.The OECD invited comments from the public, and a version of this article was submitted to the OECD.[email protected] Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.Israel joined the OECD in 2010.Background Some multinational concerns pay little or no tax anywhere by exploiting differences of approach in different countries regarding financial instruments, entities and group taxation.For example, a US limited liability company (LLC) is “a flow-through entity” that isn’t usually taxed in the US, but it is in most other countries. It is a hybrid entity. Non- US subsidiaries can also be turned into flow-though entities for US tax purposes Also, there are hybrid instruments that are treated as debt in some countries and equity in others. Consequently, at the international level, payments may be treated as an expense in some countries and as dividends in other countries. Not all countries tax dividends between related companies.If a holding company is debt-financed, it may set off interest expenses against dividends, interest or royalties received. And if the holding company is a flow-through for US purposes, its income may disappear into thin air in all relevant countries.Many countries have special tax rules for filing consolidated tax returns that offset profits of one company against the losses of another related company. Typically they also offset payments between them, too.So there are many hybrid tax-planning techniques. As a result, expenses in one country may be deductible more than once and/or not taxed as income anywhere else.There are primary rules if two countries adopt the same OECD recommendation and secondary/defensive rules if they don’t. Judgment is called for in a number of places as to whether tax avoidance is a main reason for the hybrid structure.Comments We believe the proposals presented in the public-discussion drafts will prove unworkable and will create uncertainty for many years for many multinational concerns, including Israeli ones.Numerous problems come to mind. First, the proposals are complex and subjective or judgmental in many respects.Second, tax administrations may not know which hybrid technique, if any, has been adopted and how it works.Third, if there are group counterparties in several countries, what happens? This is only answered in cases where the hybrid technique involves more than two countries.Fourth, won’t different countries choose whichever is better for them, primary or defensive? There is no system for coordination and resolving differences of approach.That will cause double or multiple taxation.Fifth, not all tax-planning techniques are caught by the proposals.Sixth, until the international banking system is better capitalized and fully recovered from recent credit-crunch and sovereign-debt crises, multinational concerns should be encouraged to finance themselves, not be penalized.Alternative proposals We propose simpler and more-certain tax rules for addressing hybrid mismatches, as follows: First, allow expense deductions if it is proven the payments concerned are subject to tax elsewhere within, say, two years before or after the tax year concerned.Such proof may take the form of tax assessments and/or parent-company auditor confirmations.Second, a modest withholding tax and/or VAT may be imposed in the payor country, say 5 percent to 10%. Since a withholding tax is a tax on gross income, the effective tax rate on net income (after expenses) is usually higher.Double tax relief should be available in the recipient country for such tax applying the credit or exemption method.Third, such rules are only needed for payments between related parties.Fourth, such rules should be incorporated in both domestic laws and tax treaties via the OECD model convention.Fifth, competent authority and arbitration provisions in tax treaties should be strengthened to ensure differences of approach are resolved within a prescribed period, say two years.Last but not least, there should be a system of international tax tribunals for hybrid mismatches and other matters.As always, consult experienced tax advisers in each country at an early stage in specific cases.