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U.S. Debt-Equity Regulations Problematic for BEPS Action 2

Earlier this year, the US Treasury Department issued proposed regulations under IRC 385 that would Jonathan Tiegerman profile picauthorise the IRS to recharacterize a lending arrangement between certain related parties as equity.

In developing a framework for neutralising mismatches from hybrid arrangements, the OECD in BEPS action 2 did not foresee that hybrid arrangements might be inadvertently forced on taxpayers because a jurisdiction’s laws compel a recast of an instrument that would not have given rise to mismatches in its original form.

In an article written for Tax Notes Today, we observe that if these proposed regulations are finalised, multinational companies in cross-border lending arrangements will face a greater risk of double taxation and higher costs in tax controversies because hybrid instruments (and the resulting mismatches) may be created by operation of law when no hybrid arrangement was intended by the parties.

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