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UK Publishes Draft Guidance On Hybrid Mismatch Regime

by Jason Gorringe,, London

13 December 2016

The UK Government has published draft guidance on the application of the hybrid mismatch legislation introduced in Budget 2016, which is due to take effect on January 1, 2017.

Legislation was announced in the 2016 Finance Bill to replace the tax arbitrage regime in place since 2005. The legislation that is to take effect from next year is Part 6A of the Taxation (International and Other Provisions) Act 2010.

The legislation counters deduction/non-inclusion mismatches and double deduction mismatches involving payments or quasi-payments in connection with financial instruments; hybrid transfers; hybrid entities; companies with permanent establishments; and dual resident companies.

Mismatches can involve either double deductions for the same expense, or deductions for an expense without the corresponding receipt being fully taxed.

Hybrid mismatch outcomes can arise from hybrid financial instruments (both equity and debt) and hybrid entities, and from arrangements involving permanent establishments. They can also arise from hybrid transfers and dual resident companies.

The legislation aims to neutralize the tax mismatch created under these arrangements by altering the tax treatment of either the deduction, or the receipt, depending on the circumstances. Where applicable, the avoidance measure will either make a corporate tax adjustment to counteract a mismatch; disallow a claim for a deduction; or bring within the charge to tax in the UK an amount of income representing the mismatch amount.

According to the guidance, the rules are designed to work whether both the countries affected by a cross-border arrangement have introduced rules based on the OECD recommendations in Action 2 of its base erosion and profit shifting (BEPS) project – which the legislation intends to introduce into UK law – or just one.

TAGS: compliance | Finance | tax | investment | business | tax compliance | tax avoidance | revenue guidance | law | Organisation for Economic Co-operation and Development (OECD) | United Kingdom | tax authority | agreements | multinationals | legislation | tax planning | transfer pricing | tax reform | legislation amendments | trade | European Union (EU) | Europe | Other | Tax | BEPS

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