In the first of a series of articles, we take a look at the impact of the UK’s new hybrid and other mismatch rules.
The hybrid and other mismatch rules have been introduced by the UK Government broadly in line with the recommendations of the OECD’s BEPS Action 2, although the rules go further in a number of areas. The new rules aim to counter mismatches in tax treatment arising from the use of hybrid entities, hybrid instruments, dual resident companies and permanent establishments, and apply from 1 January 2017 whatever a group’s year end. This week we introduce some of the key features of the rules and then, over the coming weeks, we will look at some of the practical situations which can trigger the application.
The hybrid mismatch rules can apply to restrict a UK deduction, or impute UK taxable income, where there is a ‘mismatch’ in tax treatment. For example, this can be relevant where the same item of expenditure is deductible in more than one jurisdiction or where expenditure is deductible but the corresponding income is not fully taxable (or the income is taxed at a beneficial tax rate or is deferred to a future period).
The scope is wider than intra-group transactions and covers all types of deductions, e.g. financing, intra-group fees and payments for goods.
The rules are most likely to apply to cross border transactions and the entire worldwide arrangements will need to be considered, not just transactions directly involving a UK company. For example, the rules may deny a deduction where a payment made by the UK is part of a wider series of arrangements that also includes a mismatch which is wholly outside the UK.
The rules must be self-assessed and there is no purpose or motive test, so wholly commercial arrangements can be affected.
Common examples of where the rules have been found to apply in practice include companies with a US parent or subsidiary, private equity funding, dual resident companies and countries with zero statutory rates, and those where low effective rates can be achieved via planning, tax rulings or allocations to branches.
There is no grandfathering of existing arrangements.
In order to assess whether the rules are relevant, it will be necessary to fully understand the chain of linked transactions and the overseas tax treatment throughout the chain. Businesses should therefore act now to ensure that they fully understand their global transactions, and to establish what the impact of the new rules on them may be. If you have any questions on the application of the hybrid mismatch rules to your business, then please get in touch with your usual KPMG contact or one of the named contacts below.
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