This report focuses on aggressive tax planning (ATP) schemes based on after-tax hedging. In general terms, after-tax hedging consists of taking opposite positions for an amount which takes into account the tax treatment of the results from those positions (gains or losses) so that, on an after-tax basis, the risk associated with one position is neutralised by the results from the opposite position. While after-tax hedging is not, of itself, aggressive – being generally a straightforward risk management technique – the report recognises that it can also be used as a feature of ATP schemes. ATP schemes based on after-tax hedging pose a threat to countries’ revenue base: empirical evidence suggests that hundreds of millions of USD are at stake, with a number of multi-billion USD transactions identified by certain countries. ATP schemes based on after-tax hedging originated in the banking sector, but experience shows that they are also used in other industries and, in some instances, also by medium-sized enterprises, thus generating an even bigger threat to tax revenue. It is therefore important that governments are aware of arrangements that use hedging for ATP purposes. The Report follows on from the 2011 OECD Report Corporate Loss Utilisation through Aggressive Tax Planning which recommends countries analyse the policy and compliance implications of after-tax hedges in order to evaluate the appropriate options available to address them. It was prepared by the ATP Steering Group of Working Party No. 10 on Exchange of Information and Tax Compliance of the Committee on Fiscal Affairs (CFA). The report builds on a number of country submissions to the OECD Directory on Aggressive Tax Planning where several ATP schemes based on after-tax hedging have been posted. After having discussed in general terms the notion of hedging as a risk management tool and the effect of taxation on hedging transactions, the report describes the features of ATP schemes based on after-tax hedging that have been encountered by a number of countries. In those schemes, taxpayers use after-tax hedging to earn a premium return, without actually bearing the associated risks, which is in effect passed on to the government. In all of these schemes there is generally no pre-existing exposure to hedge against but rather the exposure is created as part of the relevant scheme. ATP schemes based on after-tax hedging exploit the disparate tax treatment between the results (gain or loss) from the hedged transaction/risk on the one hand, and the results (gain or loss) from the hedging instrument on the other. In some of these schemes, the tax treatment of gains and losses arising from each transaction is symmetrical, while in others the tax treatment is asymmetrical. Other schemes rely on similar building blocks and are often structured around asymmetric swaps or other derivatives. ATP schemes based on after-tax hedging can exploit differences in tax treatment within one tax system and are in that sense mostly a domestic law issue. Any country that taxes the results of a hedging instrument differently from the results of the hedged transaction/risk is potentially exposed. The issue of after-tax hedging also arises in a cross-border context with groups of companies operating across different tax systems, which gives rise to additional challenges for tax administrations. The report describes the strategies used to detect and respond to these ATP schemes. Detection strategies used include advance ruling applications, audits, the ordinary dialogue between the tax administration and large businesses, and mandatory disclosure rules. Response strategies have focused on denying or limiting the tax benefits for which the schemes are used by invoking the general anti-avoidance provision, by introducing specific anti-avoidance legislation or by applying the arm’s length principle. In some instances a mix of strategies focusing on denying or limiting the tax benefit for which the scheme is used and on influencing taxpayer and promoter behaviour has been used. The report describes the following main challenges raised by after-tax hedging from a compliance and policy perspective: (i) the difficulty in drawing a line between acceptable and non-acceptable after-tax hedging; (ii) the difficulties in detecting ATP schemes based on after-tax hedging, especially cross-border schemes. These difficulties arise because often there is no explicit link between the hedged item and the hedging instrument or because there is no trace of them in the taxpayers’ financial statements; and (iii) deciding how to respond to ATP schemes based on after-tax hedging. Regarding (i) the report concludes that, in practice, the decision of where to draw the line will depend on a number of elements, including the facts and circumstances of each case, the commercial reasons underlying the transactions, and the intent of the applicable domestic law. Regarding (ii) the report underlines that, in order for tax administrations to be able to face the above challenges, it is important for them to ensure they have sufficient resources and expertise to understand schemes of this nature which are often very complex. A fair and transparent dialogue with the taxpayer, as part of discussions which take place under cooperative compliance programmes, has also proven to help tax administrations gain a better understanding. Finally, regarding (iii) the report shows that different response strategies have been used, including strategies seeking to deter taxpayers from entering into such schemes and/or promoters/advisors from promoting the use of such schemes. Building on the work of the ATP Steering Group, the report recommends countries concerned with ATP schemes based on after-tax hedging to: • Focus on detecting these schemes and ensure that their tax administrations have access to sufficient resources (in particular expertise in financial instruments and hedge accounting) to detect and examine in detail after-tax hedging schemes. • Introduce rules to avoid or mitigate the disparate tax treatment of hedged items and hedging instruments. • Verify whether their existing general or specific anti-avoidance rules are suitable to counter ATP schemes based on after-tax hedging and, if not, to consider amending those rules or introducing new rules. • Adopt a balanced approach in their response to after-tax hedging, recognising that not all arrangements are aggressive, that hedging in and of itself is not an issue and that ATP schemes based on after-tax hedging may necessitate a combination of response strategies. • Continue to exchange information spontaneously and share relevant intelligence on ATP schemes based on after-tax hedging, including deterrence, detection and response strategies used, and monitor their effectiveness.