FB 2018-19: hybrid and mismatch tax rules amended to meet ATAD

The government plans to amend the rules on the treatment of hybrid mismatches to ensure UK rules are aligned with the EU Anti-Tax Avoidance Directive (ATAD), with draft legislation set out in Finance Bill 2018-19

The draft legislation is set out in Finance Bill 2018-19 and will affect 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.

ATAD applies to all taxpayers that are subject to corporate tax in one or more EU member states.

As amended by Council Directive (EU) 2017/952, Articles 2, 9, 9a and 9b of ATAD contain detailed provisions in relation to hybrid mismatches. The policy objective of this measure is to ensure that the UK hybrid and other mismatch rules comply with the hybrid mismatch requirements set out in ATAD.

The rules will be adopted since the UK remains a full member of the EU, all the rights and obligations of EU membership remain in force. The implementation date for the majority of the ATAD minimum standards in relation to hybrid mismatches is 1 January 2020.

The UK already has comprehensive hybrid mismatch rules which were introduced by Finance Act 2016 and came into effect from 1 January 2017.

The majority of the existing UK rules meet or exceed the minimum standards set by ATAD. However, two changes are required to ensure that the UK rules are fully aligned with ATAD requirements. These changes relate to the minimum standards set out in Article 9 of ATAD. The UK hybrid and other mismatches regime is contained in Part 6A of Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).

Proposed revisions

The first change relates to the treatment of certain mismatches involving permanent establishments.

Section 259HA and s259HC in Chapter 8 will be amended to include specific provisions in relation to disregarded permanent establishments (cases where a permanent establishment of a company is recognised by the jurisdiction where a company is resident, but not recognised by the jurisdiction where the permanent establishment is located).

The amendment counteracts mismatches which fall within new sub-section 259HA(5)(b) by treating an amount equal to the mismatch as income arising to the UK resident multinational company in the UK. It means that mismatches which arise in relation to ‘disregarded’ permanent establishments are counteracted by bringing amounts back into charge for corporation tax purposes.

The second change relates to the treatment of regulatory capital. The exemption for certain regulatory capital provided by s259N(3)(b) will be amended to enable regulations to be made which will take into account the specific requirements set out by Article 9(4) of ATAD.

The draft legislation includes apportionment rules which deal with payment periods which straddle the commencement date of 1 January 2020. Such periods are dealt with by splitting the ‘straddling period’ into two separate periods, and apportioning amounts either on a time basis or, where appropriate, on a just and reasonable basis.

The minor changes to the UK hybrid mismatch rules included in this measure have not been subject to prior consultation.

Draft legislation was published for consultation on 6 July 2018. The closing date for comment is 31 August 2018.

HMRC Policy paper: Hybrid and other mismatches Anti-Tax Avoidance Directive

Draft legislation and explanatory note: Hybrid and other mismatches ATAD

Report by Sara White

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