HMRC consults on hybrid mismatch guidance

HMRC is consulting on draft guidance designed to assist understanding of the application of the hybrids mismatch legislation, introduced as a result of the OECD’s Base Erosion and Profiting Shifting (BEPS) project, which takes effect from 1 January 2017

The examples contained are based upon a selection of those contained within the OECD ‘Final Report on Neutralising the Effects of Hybrid Mismatch Arrangements’, with additional draft examples dealing with hybrid transfers and permanent establishments.

The hybrids legislation is at Part 6A of the Taxation (International and Other Provisions) Act 2010 (TIOPA 10). The legislation replaces the tax arbitrage regime that was in place from March 2005.

The legislation aims to neutralise the tax mismatch created from hybrid financial instruments and hybrid entities, and from arrangements involving permanent establishments these arrangements by altering the tax treatment of either the deduction, or the receipt, depending on the circumstances. The rules are designed to work whether both the countries affected by a cross-border arrangement have introduced rules based on the OECD recommendations, or just one.

HMRC says this legislation follow the recommendations in providing alternative responses to mismatches within the scope of the legislation. These are described as a ‘primary response’ and a ‘secondary response’. In the case of deduction/non-inclusion, the primary response is generally to deny a deduction to the payer.

If this does not occur, the secondary response is to bring the receipt into charge for the payee. In the case of double deductions the primary response is to deny a deduction to the parent or investor company. If this does not occur (because the tax law in the country in which the parent company is resident does not provide for this), the secondary response is to deny the deduction to the hybrid entity or permanent establishment, as appropriate.

The legislation also includes rules to tackle hybrid mismatch arrangements which involve permanent establishments. Permanent establishments of companies are often used as an alternative to hybrid entities in tax planning arrangements as they provide for similar mismatch opportunities. The measure covers such arrangements to ensure that groups cannot simply sidestep the OECD recommendations by using permanent establishments.

The draft guidance provides detailed examples for each category of potential mismatch identified in the OECD’s work.

The deadline for comments is 10 March 2017.

Hybrid and other mismatches - draft guidance is here.

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