On 9 December 2016, HMRC published draft guidance on the complex “hybrid mismatch” rules in force from 1 January 2017. The rules have been introduced in the UK as part of the Government’s commitment to following the recommendations of the OECD’s BEPS project. The stated aim of the new rules is to tackle “aggressive tax planning” by use of complex cross-border investment by multinational groups.
There is no “mismatch” between the complexity of the rules and that of the draft guidance (running to over 400 pages).
The new rules apply to payments which involve a “hybrid” entity (eg a partnership treated as tax transparent by one jurisdiction, but opaque by another) or a “hybrid” financial instrument (eg one allowing an interest deduction for the payer, but an exempt dividend in the hands of the payee), or a dual-resident company. The effect of the rules is to change the tax treatment of either the payment, or the receipt.
The new rules (broadly) target two types of “mismatch”:
• “mismatches” giving rise to a double deduction for the same expense. These arrangements involve hybrid entity payers or dual-resident companies. Here the UK will deny the deduction where the parent is a UK entity (the “primary” response) or, if that is not possible, deny the deduction for the UK hybrid (the “secondary” response)
• “mismatches” giving rise to deductions without any corresponding taxable receipt. These arrangements can involve hybrid instruments as well as hybrid entity payers or payees. In these cases, under the new rules the UK will disallow the deduction if the payer is a UK entity (the “primary” response). Alternatively, the UK may tax the payment receipt (the “secondary” response).
The draft guidance includes previously published examples and, helpfully, contains guidance on utilising HMRC’s clearance procedure.
The draft guidance can be found here.