Further amendments have been proposed to the draft hybrid mismatch rules. The key changes introduced by these amendments fundamentally impact the scope of Chapter 6 (Deduction/Non-inclusion relating to Transfers by UK Permanent Establishments (PEs)), Chapter 8 (Multinational Payee Deduction/Non-inclusion mismatches), and Chapter 7 (Hybrid Payee Deduction/Non-inclusion mismatches). In addition, the amendments clarify the position in respect of timing mismatches and the interaction between the hybrid mismatch rules and the existing UK rules in relation to foreign PE losses, whilst also making a number of other technical amendments. Where assessing the impact of the draft hybrid mismatch rules on any cross border structure, careful consideration of these amendments will be required.
The key amendments are summarised below:
- Chapter 6 (Deduction/Non-inclusion mismatches relating to transfers by Permanent establishments) – The amendments limit the scope of Chapter 6 so that they only apply in relation to PEs where the UK is the payer jurisdiction. This ensures that the hybrid mismatch rules do not conflict with the UK foreign PE exemption rules.
- Chapter 7 (hybrid payee deduction/non-inclusion) - the amendments extend the scope of the rules to arrangements where a payment is made to a hybrid payee which has no territory in which it is resident for the purpose of a tax charged, unless the hybrid payee is a controlled foreign company (CFC) for UK or foreign CFC rules. This represents a significant departure from the final OECD Action 2 Report (Neutralising the effect of hybrid mismatch arrangements) as it means any mismatch may be within the scope of this rule regardless of whether it arose by virtue of the payee being a hybrid entity.
- Chapter 8 (Multinational Payee Deduction/Non-inclusion mismatches) - The amendments limit the scope of Chapter 8 so that they only apply in relation to PEs where the UK is the payer jurisdiction. In addition, when determining whether the mismatch has arisen by virtue of the payee being a multinational company for the purposes of Condition D of section 259HA(6), mismatches which arise because there is no corporate taxation in the PE jurisdiction are excluded.
- Chapter 10 (Dual Territory Double Deduction Cases) – the amendments limit the scope of the dual territory double deduction rules, so that overseas PE excess deductions can be used in the UK unless those deductions have also been used overseas against the profits of another person where there is a multinational company and the UK is the parent. This ensures that the hybrid mismatch rules do not override the existing UK rules in relation to the availability of overseas PE losses. However, if the deduction is subsequently used overseas against profits of another person, any deduction allowed against the profits of the UK company will be reduced accordingly.
- Timing differences –Timing mismatches which are reversed within the period which begins within 12 months of the period in which the mismatch arises are excluded from the scope of the legislation. In addition, if the mismatch is reserved after that period, the taxpayer can make a claim for a longer period to be disregarded. Such claims will be considered on a just and reasonable basis, with regard to the facts of each case.
- Chapter 3 (Hybrid and other mismatches from financial instruments) –The amendments insert a new subsection (4(A)) into section 259CB, which disregards certain UK tax provisions (including the loan relationship and derivative unallowable purpose rules, transfer pricing rules etc.) when applying the relevant assumption that a company is resident in the UK for the purposes of Chapter 3. This enables the hybrid mismatch rules to determine whether the mismatch has arisen by virtue of the terms, or any other feature, of the financial instrument, in isolation of other factors.
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