Mr. Pascal Saint-Amans:

I am not sure I would agree with the Deputy's assessment that neutralising schemes would impinge on sovereignty or would potentially be in conflict with protecting sovereignty. The area where such a risk could exist is that of tax co-operation, because tax co-operation means giving up something to another country which also gives it up in a reciprocal manner so that both countries can co-operate. In respect of neutralising schemes, a simple example may help members to understand what we have in mind. The example is a hybrid product between two continental European countries with high taxes. From my accent, members will know I am French, so I will take the example of a company with headquarters in France and a subsidiary in Germany. This French company has some cash, but the German subsidiary is making a profit and does not really need cash. The French company decides to lend money to its subsidiary through a hybrid product which is a bond convertible into a share which is designed to be a bond from a German domestic perspective and is, therefore, an interest-deductible, which is paid out of the German subsidiary, which counts as a deduction to the profit.

However, in France it has been designed to be a share, and therefore a dividend is perceived which is tax-exempt because of the apparent subsidiary exemption. As a result of that, between two high-tax countries we have, through the use of the hybrid instruments, a deduction in one country and no taxation in the other country, which is double non-taxation. The deductibility in one country can erase the profit in this country without augmenting the profit in the other country. This is a hybrid. We will include in the recommendation to be developed on hybrid mismatches, which is No. 2 or 3 of the action plan, that countries put in place legislation which would neutralise the hybrid mismatch. In other words, Germany examines what France is doing, and if France is exempting a product Germany would tax it and not allow deductibility of interest, or vice versa. We will develop that. Such a recommendation would not impinge on the sovereignty of France or Germany. We are restoring the sovereignties which were put at risk because of these gaps between sovereignties and the fact that the business operates globally and no longer only in one market.