Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

It might be useful to set out exactly what is meant by a hybrid financial instrument. This is an instrument that is characterised differently for tax purposes under the laws of two or more territories. For example, a financial instrument that is characterised as debt under the laws of one territory but as equity under the laws of another will be regarded as a hybrid financial instrument. A financial instrument, therefore, is only a hybrid financial instrument if different territories treat that instrument differently for tax purposes. While we know how a financial instrument is treated for Irish tax purposes, we would have to know how that instrument would be treated by the other territory or territories that are party to it to know if it is a hybrid financial instrument.

The challenges in identifying hybridity in the context of financial instruments were recognised by the OECD in the base erosion and profit shifting project. This recognised that due to the wide variety of financial instruments and the different ways that territories can treat them for tax purposes, it is almost impossible to identify and define all those situations where cross-border conflicts might exist. This explains why it is not possible to report the total number of yearly transactions that use hybrid financial instruments, nor their total annual value, as requested by the Deputy. On this basis, I do not propose to accept her amendment.

However, as she will be aware, the OECD's recommended approach to address these challenges was for countries to implement anti-hybrid rules. This is what Ireland did in the Finance Act 2019. The anti-hybrid rules address a range of mismatch outcomes, including mismatches that arise due to the hybrid nature of a financial instrument, which result in a tax deduction being obtained in one territory without a corresponding amount being included in another territory. The Irish anti-hybrid legislation contains two rules to neutralise these mismatches as follow. First, under the primary rule, an Irish corporate taxpayer making a payment under a hybrid financial instrument will be denied a tax deduction for the payment to the extent that a corresponding amount has not been included in another territory. Second, where an Irish corporate taxpayer receives a payment under a hybrid financial instrument and the payer territory has not denied the deduction under its own primary rule, the Irish corporate taxpayer is charged to tax on the amount of the deduction.

As these rules took effect from 1 January 2020, they will be reflected in the corporation tax returns for 2020 and later years. Corporation tax returns for 2020 are due to be filed by September 2021 at the latest. Where an Irish corporate taxpayer makes an adjustment under the anti-hybrid rules, it is obliged to disclose the relevant details in the hybrid mismatches section of its corporation tax return for the relevant period. In particular, taxpayers must indicate under which of the rules the adjustment is being made and the quantum of that adjustment. This means that once the corporate tax returns for 2020 and later years have been filed, Revenue will have information regarding the operation of the anti-hybrid rules and the quantum of any corporate tax adjustments required under those rules.

The reason I am not accepting the Deputy's amendment is that from a timing perspective, the information she is looking for will not be available to me by this point and any information that might be available will be incomplete. There is a case for monitoring the number of transactions that are availing of the anti-hybrid rules that I outlined but it will be another year until we have the information in place to allow that to happen.