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Australia’s hybrid mismatch rules include ‘imported mismatch’ rules, which may apply more broadly than OECD BEPS Action 2-compliant hybrid rules implemented in other countries.  On April 21, the Australian Taxation Office (ATO) released a draft practical compliance guideline (PCG 2021/D3), which provides guidance on how taxpayers practically should apply the imported mismatch rule and what documentation is required. 

The PCG provides guidance for taxpayers grappling with these rules in a self-assessment environment, but sets a high bar in terms of the information and documentation required to substantiate Australian deductions.  The PCG details the level of supporting information the Commissioner expects taxpayers to obtain prior to filing income tax returns and to sustain deductions for payments to offshore related parties. 

The takeaway: The draft PCG guidance will be important for taxpayers to consider, particularly for those preparing income tax returns for the second operational year of the Australian hybrid mismatch rules (e.g., years ended December 31, 2020 or ending June 30, 2021). Taxpayers are invited to provide comments by May 21.