Hybrid mismatch guidance gives priority to national taxes in foreign jurisdictions

HMRC will consider national taxes in other jurisdictions the closest to UK equivalents over provincial levies, guidance released on hybrid mismatches shows

The guidance on the application of hybrid mismatch legislation has been published HMRC, outlining through several examples, the intended function of the rules.

The legislation, which came into force on 1 January 2017, aims to neutralise the tax mismatch created from hybrid financial instruments and hybrid entities, and from arrangements involving permanent establishments of 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 one.

The 390-page guidance addresses the rules for financial instruments; hybrid transfers; hybrid payers; transfers by permanent establishments; hybrid payees; multinational payees; hybrid entities; dual territories; imported mismatches; adjustments; anti-avoidance measures; and administration.

The key highlight is the definition of foreign tax is HMRC’s view that, for example, US state taxes are not foreign taxes, despite the legislation stating that provincial or municipal taxes are foreign tax.

The guiding principle is that foreign taxes are taxes that most closely resemble UK taxes on domestic income. Therefore where a country has a national tax as well as municipal taxes, HMRC consider the national tax is the tax most closely aligned to UK tax on income.

Claire Lambert, senior director at Alvarez & Marsal Taxand said: ‘This will come as a major surprise to many multinational companies and advisers, who would have expected that a US state tax or Swiss cantonal taxes should have been sufficient to prevent the rules from applying.’

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