Strategizing Multinational Tax Risks

HMRC has published draft rules, entitled “Tackling aggressive tax planning,” to give effect to OECD’s BEPS Action 2 item, Neutralising the Effect of Hybrid Mismatch Arrangements.

The legislation will be effective as of 1/1/2017, preceded by this consultation paper, a summary of responses in summer 2015 and a second consultation on proposed draft legislation prior to its introduction in a future finance bill.  Interested parties have until 11 February 2015 to provide comments for this consultation.

The draft legislation is envisioned to follow the OECD guidelines, and commentary, that are due to be completed by September 2015.  A copy of the consultation paper is provided for reference:

Click to access tackling_aggressive_tax_planning_hybrids_mismatch_arrangements_consultation_final.pdf

Key observations:

• The primary and defensive rules, as provided by the OECD BEPS Guidelines will be followed.  The primary rule will be used to deny the payer’s deduction for a deduction/no income inclusion arrangement of a hybrid financial instrument or disregarded payment made by a hybrid entity, while the defensive rule would include taxing the income by the payee.  For a double deduction arrangement of a deductible payment made to a hybrid entity, the deduction by the investor’s parent jurisdiction is denied using the primary rule, while the defensive rule would deny the payer deduction.
• Rules will be considered to restrict the tax transparency of reverse hybrids.
• The UK anti-arbitrage rules will not likely be retained.
• The definition of an “arrangement” will not be the OECD version, as the existing UK definition would be used to achieve the same result.
• Timing differences are not included, unless it appears that they will not unwind within a reasonable (5 years) time period.
• The mismatch rules will apply for intra-UK and cross border situations.
• For mismatches as a result of both a hybrid financial instrument and a hybrid entity, the hybrid financial instrument rule applies first.
• Amended corporation tax returns and/or MAP procedures are permissible if the original mismatch no longer exists.
• Tax treaties will not prevent the application of the recommended domestic laws to neutralise the effect of hybrid mismatch arrangements, thus no treaty amendments are necessary to apply the mismatch rules.
• No grandfathering rules are envisioned, as the advance announcement of the UK rules will provide a transitional period to unwind structures.
• The hybrid mismatch rules will operate within the UK’s self-assessment regime.

As stated in the Foreword of the consultation document, the UK’s strategy is to create the most competitive tax environment in the G20 and has led the way, driving the international tax, transparency and trade agenda forward.

The consultation paper is comprehensive, with numerous examples provided to illustrate, and visualize, the impact of the proposed rules.  This proactive measure should be monitored to see how other countries follow the UK’s lead for taxing mismatch arrangements, including the timing and incorporation of the final guidelines by the OECD in 2015.