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Global Tax Digest - G20/OECD BEPS project – United Kingdom Implementation of Hybrid Mismatch Rules

  • United Kingdom
  • Tax planning and consultancy


Action 2 (of 15) coming out of the G20/Organisation for Economic Co-operation and Development (OECD) project to tackle Base Erosion and Profit Shifting (BEPS) aims to prevent tax loss through hybrid mismatch cases.

The UK has enacted legislation to give effect to OECD recommendations which came into effect on January 1, 2017. Many other OECD countries either have enacted or are in the process of enacting similar legislation.

The legislation aims to tackle two main types of tax mismatch that typically arise in cross border transactions.

The first category involves cases where a payer in one country incurs a tax deductible expense, and a related payee of the expense payment in another jurisdiction is not required to bring the receipt into account for the purposes of computing its taxable profit, or has access to a favorable tax rate with regard to that type of payment (so that the receipt is undertaxed by reference to the “normal” tax rate applying to profits in its country). This result can happen in a number of ways and for a number of reasons. However, where such a transfer is identified in accordance with the legislation, the legislation prescribes a counteraction. This is referred to as a deduction/no inclusion.

The primary form of counteraction is to deny a deduction for the expense to the payer. However, if that has not happened, the tax authority of the recipient may treat the receipt as taxable where it otherwise would not have been. The UK applies the primary counteraction for preference, but if the payee is in the UK, and the payer jurisdiction does not deny the deduction, then it will apply the alternative treatment of recognizing the receipt.

A second category involves cases where two different taxpayers (typically related but in different jurisdictions) are able to claim a deduction for the same allowable expenditure. In such a case, the legislation determines which taxpayer normally entitled to the deduction should be denied the deduction. These are called double deduction cases.

The legislation also acts to deny a deduction to a permanent establishment (branch) in the UK if it might otherwise claim a deduction for a transfer (e.g., to its parent) that would not be recognized as income.

In general, any payments or transfers where there is this type of mismatch, even where the “mismatch” does not directly occur at the point of the cross-border payment (an “imported” mismatch), but somewhere else in the payment chain, is likely to be caught by this legislation. This is not always obvious where payment arrangements are complex – the UK’s tax authority, HMRC, has published draft guidance running to 400 pages to help interpret the legislation.

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