HYBRID MISMATCHES IN INTERNATIONAL TRANSACTIONS: PENALTY PROTECTION REGIME IN ITALY ​

With the increasing complexity of global commercial transactions and discrepancies in the tax treatment of cross-border income by different tax systems, the issue of double non-taxation and more specifically the so-called hybrid mismatches are now the central focus of international taxation studies. Generally, the double non-taxation gives rise to hybrid mismatch effects through the use of sophisticated structures, entities and financial instruments by multinational enterprises (“MNEs”) in order to reduce or, in a more absolute way, to eliminate tax burdens entirely. The hybrid mismatches are the intended outcomes from profiting from differences in the tax treatment by two or more tax jurisdictions that lead to inconsistent effects of deduction without inclusion (“D/NI”) and double deduction (“DD"). These tax avoidance practices are particularly harmful as they directly affect the functioning of the internal market. As a consequence, the OECD has taken the role of identifying the common features of hybrid mismatches and provided 12 recommendations for specific effects identified to the Member States. These recommendations were then introduced within the European Union as Anti Avoidance Rules (“ATAD”) Directive No. 1164 of July 12, 2016 (“ATAD 1”), subsequently amended by Directive No. 952 of May 29, 2017 (“ATAD 2”). The ATAD Directive shall be transposed within the domestic legislations of Member States in order to counter common forms of aggressive tax planning. This study aims to analyse the common issue of hybrid mismatches, and the underpinning solutions provided to tackle the problem. Furthermore, with a specific focus on the Italian legislation through the introduction of Legislative Decree No. 142/2018 (the “Italian ATAD Decree”), which transposed ATAD 1 and ATAD 2 into the Italian legislation without significant deviation. Another key focus of this study is the Italian Legislative Decree No. 209/2023 which introduced the penalty protection regime for hybrid mismatch arrangements. So far, these rules are applicable since fiscal year 2020, therefore, the application of the anti-hybrid rules by taxpayers and authorities is still enveloped in a cloud of mystery. The contributions on which this study is based rely on a qualitative approach in examining the various aspects of hybrid mismatches and their rules. The structural examination focuses mainly on the hybrid mismatch rules in the framework of international tax law, and then slowly moving to the Italian legislations.