INTM Guidance - GOV.UK

1 1 OFFICIAL INTM Guidance Hybrid and Other Mismatches The following Guidance is provided to assist understanding of the application of the hybrid mismatch legislation, which came into effect on 1 January 2017. Many of the examples are based upon a selection of those contained within the OECD Final Report on Neutralising the Effects of Hybrid Mismatch Arrangements , with additional examples dealing with hybrid transfers and permanent establishments. These pages form part of the International Manual. They contain Guidance prepared for HMRC staff and are published in accordance with the Freedom of Information Act 2000 and the HMRC Publication Scheme. You should not assume that the Guidance is comprehensive or that it will provide a definitive answer in every case.

2 HMRC will use their own reasoning, based on their training and experience, when applying the Guidance to the facts of particular cases. This Guidance is based on the law as it stood when it was published. HMRC will publish amended or supplementary Guidance if there is a change in the law or in the department s interpretation of it. HMRC may give earlier notice of such changes through a Revenue and Customs brief or press release. Subject to these qualifications you can assume the Guidance normally applies, but where HMRC considers that there is, or may have been, avoidance of tax the Guidance will not necessarily apply. Version August 2020 Forward to contents 2 OFFICIAL Contents INTM550000 Hybrids: Chapter 1 - Introduction INTM550500 Hybrids: Chapter 2 Definition of key terms INTM551000 Hybrids: Chapter 3 - Financial Instruments INTM552000 Hybrids: Chapter 4 - Hybrid Transfers INTM553000 Hybrids: Chapter 5 - Hybrid Payer INTM554000 Hybrids: Chapter 6 - Transfers by Permanent Establishments INTM555000 Hybrids: Chapter 7 - Hybrid Payee INTM556000 Hybrids: Chapter 8 - Multi-national Payee INTM557000 Hybrids: Chapter 9 - Hybrid Entity INTM558000 Hybrids: Chapter 10 - Dual Territory INTM559000 Hybrids: Chapter 11 - Imported Mismatches INTM561100 Hybrids: Chapter 12 - Adjustments INTM561200 Hybrids: Chapter 13 - Anti-Avoidance INTM597000 Hybrids.

3 Chapter 14 - Administration Return to contents 3 OFFICIAL INTM550000: Hybrids: Contents This Guidance aims to assist in understanding the application of the hybrid mismatch legislation (introduced by Finance Act 2016), which took effect from 1 January 2017. The Guidance largely follows the structure of the legislation. For each of the areas below the Guidance gives a general overview of the legislation and how it is intended to apply, followed by more detailed analysis, and specific examples where appropriate. INTM550010: Hybrids: Chapter 1 - Introduction: Contents INTM550500: Hybrids: Chapter 2 Definition of key terms: Contents INTM551000: Hybrids: Chapter 3 - Financial instruments: Contents INTM552000: Hybrids: Chapter 4 - Hybrid transfers: Contents INTM553000: Hybrids: Chapter 5 - Hybrid payer: Contents INTM554000: Hybrids: Chapter 6 - Transfers by UK permanent establishment of a multinational company: Contents INTM555000: Hybrids: Chapter 7 - Hybrid Payee: Contents INTM556000: Hybrids: Chapter 8 - Multinational payee: Contents INTM557000: Hybrids: Chapter 9 - Hybrid entity double deduction mismatches: Contents INTM558000: Hybrids: Chapter 10 - Dual Territory Double Deduction: Contents INTM559000: Hybrids: Chapter 11 - Imported mismatches.

4 Contents INTM561100: Hybrids: Chapter 12 - Other provisions: Adjustments in light of subsequent events: Contents INTM561200: Hybrids: Chapter 13 - Other provisions: Anti-avoidance INTM597000: Hybrids: Chapter 14 - Operational Guidance : Contents Return to contents 4 OFFICIAL INTM550010: Hybrids: Chapter 1 - Introduction: Contents INTM550020: Hybrids: Chapter 1 - Introduction: What is a hybrid or other mismatch? INTM550030: Hybrids: Chapter 1 - Introduction: Examples of hybrid mismatches INTM550040: Hybrids: Chapter 1 - Introduction: Scope of Part 6A, TIOPA 2010 INTM550050: Hybrids: Chapter 1 - Introduction: Why was new legislation introduced? INTM550060: Hybrids: Chapter 1 - Introduction: Overview of legislation INTM550070: Hybrids: Chapter 1 - Introduction: When does the legislation take effect?

5 INTM550080: Hybrids: Chapter 1 Introduction: Interaction with other legislation INTM550085: Hybrids: Chapter 1 Introduction: Interaction with transfer pricing legislation INTM550086: Chapter 1 Introduction: Examples: Contents - Interaction with transfer pricing legislation INTM550090: Hybrids: Chapter 1 Introduction: Summary of Part 6A INTM550095: Hybrids: Chapter 1 Introduction: Legislative changes since 1 January 2017 INTM550100: Hybrids: Chapter 1 - Introduction: Hybrid and other mismatch structures within Part 6A Return to contents 5 OFFICIAL INTM550020: Hybrids: Chapter 1 - Introduction: What is a hybrid or other mismatch? Part 6A of Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) addresses arrangements that give rise to hybrid mismatch outcomes leading to a tax mismatch.

6 The legislation is based on the Organisation for Economic Co-operation and Development (OECD) recommendations in relation to action 2 of the Base Erosion Profit Shifting ( beps ) project. The legislation is deliberately broader in scope than the OECD recommendations in some areas. Consequently, outcomes under this legislation may differ from those under the OECD recommendations. For example, the UK s hybrid mismatch legislation includes: rules to deal with mismatches involving permanent establishments, and rules that counter hybrid mismatches where a hybrid entity is in a territory with no corporate income tax. Mismatches can involve either double deductions for the same expense, or deductions for an expense without the corresponding receipt being fully taxed.

7 Hybrid mismatch outcomes can arise from hybrid financial instruments and hybrid entities, and from arrangements involving permanent establishments. They can also arise from hybrid transfers and dual resident companies. The legislation aims to neutralise the tax mismatch created under these arrangements by altering the tax treatment of either the deduction 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 rules based on the OECD recommendations, or just the UK. This legislation follows the OECD recommendations in providing alternative responses to mismatches which fall within the scope of the legislation. These are described as a primary response and a secondary response.

8 In the case of deduction/non-inclusion, the primary response is generally to deny a deduction to the payer. If this does not occur, the secondary defensive response is to bring the receipt into charge for the payee. In the case of double deductions the primary response is to deny a deduction to the parent or investor company. If this does not occur (because the tax law in the country in which the parent or investor company is resident does not 6 OFFICIAL provide for this), the secondary response is to deny the deduction to the hybrid entity or permanent establishment, as appropriate. Return to contents 7 OFFICIAL INTM550030: Hybrids: Chapter 1 - Introduction: Examples of hybrid mismatches Hybrid financial instrument An example of a hybrid financial instrument is an instrument giving rise to a payment which the law of the payer jurisdiction treats as deductible interest, by recognising the instrument as a debt instrument, but which the payee jurisdiction recognises as an exempt dividend in the hands of the payee since it sees the instrument as an equity instrument.

9 This would result in the payer getting a deduction, without the recipient being taxed on a receipt. Hybrid entity An example of a hybrid entity is a UK limited liability partnership (LLP) which is treated as transparent by one jurisdiction (the UK), but treated as opaque by another jurisdiction. The effect is that one jurisdiction applies its tax rules to the partnership, whilst the other looks through the partnership and applies its tax rules to the partners. In the case where a payment is made to an LLP with overseas members from a payer company, the UK would consider the receipt to be taxable on the LLP s members in the overseas territory but the overseas territory might consider the receipt to be taxable in the UK as it considers the LLP to be an opaque entity, with the consequence that the receipt would be untaxed in both territories.

10 Permanent establishments can be used in a similar way to generate mismatches. Hybrid transfer An example of a hybrid transfer is where a person sells shares to another party on condition that the shares will be returned 12 months later, during which time a dividend is paid in respect of those shares to the transferee. In form, the ownership of the shares has transferred and therefore the transferee is treated as the beneficial owner of the dividend. In substance, however, the transferor has not actually sold the shares and therefore may be treated as the beneficial owner of the dividend. This asymmetry presents opportunities for obtaining a deduction/ non-inclusion mismatch. Return to contents 8 OFFICIAL INTM550040: Hybrids: Chapter 1 - Introduction: Scope of Part 6A, TIOPA 2010 Part 6A targets hybrid mismatches in the following circumstances: Deduction/non-inclusion outcomes involving: Hybrid financial instruments Hybrid transfers Hybrid entity payers Hybrid entity payees Permanent establishments Double deduction outcomes involving: Hybrid entities Dual resident companies Permanent establishments The legislation also includes rules to deal with arrangements where a mismatch arises entirely outside the UK and is part of the same over-arching arrangement as a UK transaction: such arrangements are known as imported mismatches.