The UK rules, in response to Action 2 of the OECD base erosion and profit shifting (BEPS) project, have been broadly worded and arguably go further than the OECD’s recommendations in the final report on Action 2. Many multinational groups will be affected. The impact on the UK tax profile will often depend on the nature of arrangements and transactions outside the UK.
In general, the new UK rules will apply to “hybrid mismatches” that involve a payment that gives rise to a deduction but no-inclusion of income outcome or a payment that gives rise to a double deduction, including the following situations:
The specific counteraction varies in each specific case. In general, the rules provide for the UK to impose additional taxable income when a UK corporate taxpayer receives a payment that would otherwise give rise to a mismatch; or for the UK to deny tax deductions or limit them when a UK corporate taxpayer makes such a payment.
Multinationals with a Swiss structure involving one of the feature listed above may be affected by these new rules. When this is the case, the rules could affect payments by a UK company to a Swiss company, in particular in the following situations:
In the event taxpayers are affected by the new rules, it may be possible to restructure the arrangements to mitigate the impact of the rules, in particular by eliminating the hybrid impact on the payment from a UK company. Negotiations with the Swiss tax authorities may be needed in certain of these scenarios.
The UK’s new anti-hybrid rules will be effective from January 2017. There is a short time frame for companies to assess the impact of these rules and to make any changes to remain compliant with the rules and to avoid a significant increase of the tax rate, and even worse, a double taxation of income.
The resulting implications of the UK’s new rules will obviously be dependent on the group’s specific facts. Companies that are potentially affected need to consider conducting an impact assessment to get clarity as to whether any of the UK’s hybrid rules may affect them and explore options to mitigate adverse implications.
Read an October 2016 blog discussion prepared by the KPMG member firm in Switzerland
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