INTM550050 - Hybrids: introduction: why was legislation introduced

In 2013 the OECD and G20 countries adopted a 15-point Action Plan to address Base Erosion Profit Shifting (BEPS). The Action Plan aims to ensure that profits are taxed where the economic activities generating the profits are performed and where value is created, and to counter aggressive tax planning aimed at base eroding a jurisdiction.

BEPS includes tax planning strategies that exploit gaps and mismatches in the tax rules of different countries, to

• make profits ‘disappear’ for tax purposes, or
• shift profits to locations where there is little or no real activity but where the tax rates are low, resulting in little or no overall corporate tax being paid

In response to Action Point 2, the OECD and G20 countries agreed a set of rules designed to ensure that multinational entities can no longer derive a tax benefit from mismatch arrangements, including those arising from hybrid entities or hybrid financial instruments.

Part 6A of TIOPA 2010 is based on the recommendations of Action 2 of the BEPS project – OECD (2015), ‘Neutralising the Effects of Hybrid Mismatch Arrangements’ and OECD (2017), ‘Neutralising the Effects of Branch Mismatch Arrangements’ but with some variation.

The legislation includes rules to tackle hybrid mismatch arrangements which involve permanent establishments. Permanent establishments of companies are often used as an alternative to hybrid entities in tax planning arrangements as they provide for similar mismatch opportunities. The measure covers such arrangements to ensure that groups cannot simply sidestep the OECD recommendations by using permanent establishments.

The UK government announced its intention on 5 October 2014 to introduce domestic legislation to give effect to the recommendations of Action Point 2, and a consultation document was published at Autumn Statement 2014. This legislation has been informed by consideration of responses to the consultation, by further engagement with stakeholders, and by publication of the final OECD report.

Who is likely to be affected by this legislation

Groups with a UK or overseas parent involved in cross-border or domestic transactions involving a mismatch in the tax treatment within the UK, or between the UK and another jurisdiction, which falls within the scope of the legislation.

Operative date

Part 6A applies to deductions arising or accruing on or after 1 January 2017 involving hybrid entities or instruments which give rise to a hybrid mismatch outcome. There are no grandfathering provisions, so deductions for payments or quasi-payments that arise or accrue after 1 January 2017 under instruments issued before that date are within the scope of Part 6A.

The commencement rules are set out at Part 3 of Schedule 10, Finance Act 2016, and include transitional rules for periods of account that begin before 1 January 2017 and end after that date (paragraph 24).

See INTM550070 for more details.