Anti-hybrid rule in IRC s. 267A (p. 624)
[S]ection 267A targets deduction/non-inclusion (D/NI) situations.
A broadly worded grant of regulatory authority giving the Secretary of the Treasury the power to issue any regulations or other guidance that might be necessary or appropriate to carry out the purposes of the section accompanies this simple rule.
Cross-border repo financing structure (p. 628)
A simple repo would involve a U.S. holding company selling special preferred shares in a subsidiary U.S. operating company to the U.S. group's foreign parent subject to a forward (re)purchase agreement under which the foreign parent would sell the preferred stock back to the U.S. holding company (or a disregarded LLC subsidiary). Under the substance-over-form principle, U.S. tax law would see this arrangement as secured lending by the foreign parent to the U.S. group giving rise to otherwise deductible interest. In Canada, the U.S. company's preferred shares would normally entitle a Canadian parent to dividends that can benefit from the exempt surplus dividend received deduction. However, prop. reg. 1.267A-2(a)(3) and Example 2 show that when (and if) the regulations become final, repo financings would give rise to nondeductible interest in the U.S.
Anti-hybrid rule in IRC s. 267A (p. 624)
The anti-hybrid rule in section 267A(a) simply states that the law will not allow a deduction for any disqualified related-party amount paid or accrued in accordance with a hybrid transaction or either by or to a hybrid entity….
In other words, section 267A targets deduction/non-inclusion (D/NI) situations.
A broadly worded grant of regulatory authority giving the Secretary of the Treasury the power to issue any regulations or other guidance that might be necessary or appropriate to carry out the purposes of the section accompanies this simple rule.
Adverse effect on tower structures (p. 629)
[T]he proposed regulations under section 1503(d) would adversely affect the tower’s double-dip structure.
U.S. financing structure using Lux Finco with MRPS (p. 629)
[O]ne simple structure that was very popular — at least until the start of the BEPS initiative — used a Canadian parent to fund a Luxembourg subsidiary with mandatorily redeemable preferred shares. Then, the Luxembourg subsidiary would make a loan at interest to the MNE's U.S. group. Subparagraph 95(2)(a)(ii) of the Income Tax Act (Canada) would deem the interest income of the Luxembourg company active business income that it could distribute as exempt surplus dividends to the Canadian parent. Reg. 1.267A-4 and Example 8 would adversely affect that structure. Further, these structures would expire on January 1, 2020, under the EU’s anti-tax-avoidance directive. …
Use of Hungary branch mismatch structure (p. 629)
[A] Canadian parent –would fund a third-country foreign affiliate that would set up a branch in yet another foreign country, which would extend an interest-bearing loan to a U.S. subsidiary. The structure was efficient as long as the foreign affiliate's country attributed the interest income to the branch while the branch either imposed a low corporate tax rate or only recognized a small portion (or none) of that income. The original branch mismatch structure used a Luxembourg company with a Swiss or Irish branch. When the countries amended the Luxembourg-U.S. tax treaty in 1996 to include an LOB that targets branch mismatches, many of the structures moved to Hungary since its treaty with the United States still does not have an LOB. Under prop. reg. 1.267A-2(e) and -4, this structure would no longer work.
Response to new Regs. under Code 267A (pp. 629-630)
[S]ome taxpayers may persist, exploring clever technical changes to their existing hybrid structures and diligently searching for any potential gaps in the proposed regulations. Still, this approach seems risky and may bump against the PPT antiavoidance rule in the proposed regulations. …
[O]ther MNEs based in Canada (and elsewhere) might opt for a third approach that relies on simpler, non-hybrid, third-country financing structures. Some countries that have tax treaties with the United States — for example, Bulgaria, Hungary, Ireland, and Switzerland — have been carefully preparing for a post-BEPS world and offer very competitive corporate tax rates around 10 percent that may bring in business. Trading a 21 percent rate for a 10 percent rate is likely to be an attractive option for many tax managers.
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