Policy paper

Corporation Tax: amendments to the hybrid and other mismatches regime

Published 22 November 2017

Who is likely to be affected

Large multinational groups with UK parent or subsidiary companies involved in cross-border or domestic transactions involving a mismatch in the tax treatment within the UK or between the UK and another jurisdiction.

General description of the measure

This measure introduces a small number of changes to the hybrid and other mismatches regime. These changes are designed to ensure that the regime operates as intended.

The changes are not intended to alter the overall scope of the hybrid and other mismatches regime, which is designed to tackle mismatches in tax treatment in relation to entities, permanent establishments and financial instruments.

Policy objective

The measure will ensure that the hybrid and other mismatch regime operates as intended.

Background to the measure

The hybrid and other mismatches regime is set out in Part 6A of Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), introduced by Schedule 10 Finance Act 2016, and deals with mismatches involving entities, permanent establishments and financial instruments.

The regime addresses arrangements that give rise to hybrid mismatch outcomes and generate a tax mismatch, and in doing so fully implements, and, as a matter of policy, in some areas goes further than, the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 2 recommendations. Mismatches can involve either double deductions for the same expense, or deductions for an expense without any corresponding receipt being taxable.

The UK regime neutralises the tax mismatches created by these arrangements by changing the tax treatment of either the payment or the receipt, depending on the circumstances. The rules are designed to work whether both the countries affected by a cross-border arrangement have introduced domestic hybrid mismatch rules based on the OECD recommendations, or just one.

This measure introduces a number of technical changes to the hybrid and other mismatches regime, which have been identified following extensive informal consultation with stakeholders. That consultation process involved detailed discussions of the practical impact of the regime, and the extent to which specific rules and conditions within the legislation might give rise to results which were out of line with the original policy intentions.

Detailed proposal

Operative date

The changes in relation to taxes charged at a nil rate, and the change in relation to multinational companies, will have effect from 1 January 2018. The remaining changes will have effect from 1 January 2017, which was the original commencement date of the regime.

Current law

The hybrid and other mismatch regime is contained in Part 6A of TIOPA 2010, and came into force on 1 January 2017.

Proposed revisions

Legislation will be introduced in Finance Bill 2017-18 to introduce the following changes to the hybrid and other mismatches regime:

• amend the definition of tax in Chapter 2 of Part 6A of TIOPA 2010 to make it clear that withholding taxes are to be ignored for the purposes of the regime
• amend Chapters 2, 6, 7 and 11 to disregard taxes charged at a nil rate
• ensure that capital taxes can be taken into account in relation to hybrid instruments, hybrid transfers and CFCs by amending Chapters 2,3 and 4 of Part 6A
• amend Chapter 7 of Part 6A to clarify the treatment of entities which are seen as hybrids by some investors, but as transparent by others - this change makes it clear that in such cases, any counteraction applied by the regime will be proportional
• amend Chapter 8 to clarify the scope of the legislation in relation to multinational companies
• amend Chapter 9 of Part 6A to take account of certain transactions which do not generate a tax deduction for the payer, but give rise to a taxable receipt for the payee - this amendment ensures that such transactions can be taken into account when quantifying certain mismatches
• confirm that in certain circumstances, income taxable in 2 jurisdictions (dual inclusion income) can be taken into account when applying the imported mismatch rules in Chapter 11 of Part 6A - this ensures that the imported mismatch rules are aligned with the other chapters of Part 6A
• amend Chapter 12 of Part 6A to take into account certain accounting adjustments which effectively reverse, or partially reverse, hybrid mismatches in earlier periods which have been counteracted by the application of Part 6A

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
nil	nil	nil	nil	nil	nil

This measure is not expected to have an Exchequer impact.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

This measure has no impact on individuals or households as it only affects corporate businesses.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

This measure does not impact on individuals. As such, no equality issues arise in relation to Section 149 of Equality Act 2010 (and relevant Northern Ireland legislation).

Impact on business including civil society organisations

This measure introduces a number of minor changes to the hybrid and other mismatches regime to ensure that the regime operates as intended. This measure is not expected to have any impacts on businesses or civil society organisations who are undertaking normal commercial transactions. It will only affect businesses with hybrid mismatch arrangements that arise from mismatches in international tax systems.

Operational impact (£m) (HMRC or other)

There will be no significant operational impacts for HM Revenue and Customs (HMRC) and additional costs are expected to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about these changes, please contact Mark Bryan on telephone: 03000 585607 or email: hybrids.mailbox@hmrc.gsi.gov.uk