Finance (No. 2) Bill (151)

Section 23

SCHEDULE 7 Hybrid and other mismatches

Introductory

1 Part 6A of TIOPA 2010 (hybrid and other mismatches) is amended as
5follows.

Meaning of “tax” etc and treatment of cases where tax charged at a nil rate

2 In section 259B (“tax” means certain taxes on income and includes foreign
tax etc)—

(a) after subsection (3) insert—

“(3A) 10The payment of any withholding tax in respect of any
amount is to be ignored for the purposes of this Part.”, and”

(b) at the end insert—

“(5) In any case where—

(a) a person is resident in a territory outside the United
15Kingdom generally for the purposes of the law of the
territory or for particular purposes under that law,
and

(b) the law of the territory has no provision for a person
to be resident for tax purposes under its law,

20any reference in Chapter 8 or 11 to a person’s residence for
tax purposes in the territory is to be read as a reference to the
person’s residence as mentioned in paragraph (a).””

3 In section 259BC (meaning of “ordinary income”), in subsection (3), for the
words from “it is excluded” to the end substitute “—

(a) 25it is charged to the relevant tax at a nil rate, or

(b) it is excluded, reduced or offset by any exemption, exclusion,
relief, or credit—

(i) that applies specifically to all or part of the amount of
income (as opposed to ordinary income generally), or

(ii) 30that arises as a result of, or otherwise in connection
with, a payment or quasi-payment that gives rise to
the amount of income.””

4 In section 259FA (circumstances in which Chapter 6 applies), after
subsection (7) insert—

“(7A) 35For the purposes of subsections (6) and (7) any increase in taxable
profits or reduction of losses is to be ignored in any case where tax is
charged at a nil rate under the law of the parent jurisdiction.””

5 In section 259GB (hybrid payee deduction/non-inclusion mismatches and
their extent), in subsection (3)(b)(i), after “charged” insert “at a higher rate
40than nil”.

6 In section 259KB (meaning of “excessive PE deduction”), after subsection (4)

insert—

“(4A) For the purposes of subsection (4) any increase in taxable profits or
reduction of losses is to be ignored in any case where tax is charged
at a nil rate under the law of the parent jurisdiction.””

5CFCs and foreign CFCs: qualifying CFC amounts

7 (1) Section 259BD (chargeable companies in respect of CFCs and foreign CFCs)
is amended as follows.

(2) After subsection (12) insert—

“(12A) For the purposes of subsection (2)—

(a) 10a qualifying CFC amount arising to C is treated as an amount
of relevant income,

(b) a qualifying CFC amount arising to C, for a permitted taxable
period, is “under taxed” if the highest rate at which tax is
charged on the amount, taking into account on a just and
15reasonable basis the effect of any credit for underlying tax, is
less than C’s full marginal rate for that period,

(c) in determining C’s “full marginal rate”, the reference to the
taxable profits mentioned in subsection (9) includes any
qualifying CFC amount, and

(d) 20in determining a “credit for underlying tax”, the reference to
profits includes any qualifying CFC amount.

(12B) For the purposes of subsection (12A) a “qualifying CFC amount”
means an amount arising to C which is brought into account in
calculating chargeable profits for the purposes of a foreign CFC
25charge.

(12C) But an amount is not regarded for this purpose as brought into
account so far as—

(a) the amount is excluded, reduced or offset for the purposes of
the foreign CFC charge by any exemption, exclusion, relief or
30credit that—

(i) applies specifically to all or part of the amount (as
opposed to amounts brought into account for those
purposes generally), or

(ii) arises as a result of, or otherwise in connection with,
35a payment or quasi-payment that gives rise to the
amount, or

(b) the sum charged for the purposes of the foreign CFC charge
is, or falls to be, refunded (and section 259BC(6) and (7) apply
for the purposes of this paragraph with the necessary
40modifications).””

(3) In subsection (13), in paragraph (b) of the definition of “chargeable profits”,
after “Part” insert “(including any qualifying CFC amount within the
meaning given by subsection (12B))”.

Hybrid and other mismatches from financial instruments: qualifying capital amounts

8 In section 259CC (interpretation of section 259CB), at the end insert—

“(7) A qualifying capital amount arising to a payee is treated as an
amount of ordinary income of a payee and references to tax include
5any qualifying capital tax.

(8) For the purposes of case 2—

(a) a qualifying capital amount arising to a payee, for a
permitted taxable period, is “under taxed” if the highest rate
at which tax is charged on the amount, taking into account on
10a just and reasonable basis the effect of any credit for
underlying tax, is less than the payee’s full marginal rate for
that period,

(b) in determining the payee’s “full marginal rate”, the reference
to the taxable profits mentioned in subsection (4) includes
15any qualifying capital amount, and

(c) in determining a “credit for underlying tax”, the reference to
profits includes any qualifying capital amount.

(9) If the rate at which a qualifying capital tax is charged on a qualifying
capital amount of a payee exceeds the rate at which tax would be
20charged on an amount of income of the payee, the excess is to be
ignored.

(10) For the purposes of subsections (7) to (9) a “qualifying capital
amount” means an amount of a capital nature on which a qualifying
capital tax is charged.

(11) 25A qualifying capital tax is not regarded for this purpose as charged
on an amount so far as—

(a) the amount is excluded, reduced or offset for the purposes of
the tax by any exemption, exclusion, relief or credit that—

(i) applies specifically to all or part of the amount (as
30opposed to amounts of a capital nature generally), or

(ii) arises as a result of, or otherwise in connection with,
a payment or quasi-payment that gives rise to the
amount, or

(b) the tax is, or falls to be, refunded (and section 259BC(6) and
35(7) apply for the purposes of this paragraph with the
necessary modifications).

(12) For the purposes of subsections (7) to (11) a “qualifying capital tax”
means—

(a) capital gains tax or the charge to corporation tax in respect of
40chargeable gains, or

(b) any tax chargeable under the law of a territory outside the
United Kingdom that corresponds to a United Kingdom tax
mentioned in paragraph (a),

but does not include any tax chargeable at a nil rate.””

45Hybrid transfer deduction/non-inclusion mismatches: qualifying capital amounts

9 In section 259DB (meaning of “hybrid transfer arrangement”, “underlying

instrument” etc), at the end insert—

“(7) For the purposes of subsection (4) references to tax include any
qualifying capital tax within the meaning given by section
259DD(11).””

10 5In section 259DD (hybrid transfer deduction/non-inclusion mismatches:
interpretation of section 259DC), at the end insert—

“(6) A qualifying capital amount arising to a payee is treated as an
amount of ordinary income of a payee and references to tax include
any qualifying capital tax.

(7) 10For the purposes of case 2—

(a) a qualifying capital amount arising to a payee, for a
permitted taxable period, is “under taxed” if the highest rate
at which tax is charged on the amount, taking into account on
a just and reasonable basis the effect of any credit for
15underlying tax, is less than the payee’s full marginal rate for
that period,

(b) in determining the payee’s “full marginal rate”, the reference
to the taxable profits mentioned in subsection (4) includes
any qualifying capital amount, and

(c) 20in determining a “credit for underlying tax”, the reference to
profits includes any qualifying capital amount.

(8) If the rate at which a qualifying capital tax is charged on a qualifying
capital amount of a payee exceeds the rate at which tax would be
charged on an amount of income of the payee, the excess is to be
25ignored.

(9) For the purposes of subsections (6) to (8) a “qualifying capital
amount” means an amount of a capital nature on which a qualifying
capital tax is charged.

(10) A qualifying capital tax is not regarded for this purpose as charged
30on an amount so far as—

(a) the amount is excluded, reduced or offset for the purposes of
the tax by any exemption, exclusion, relief or credit that—

(i) applies specifically to all or part of the amount (as
opposed to amounts of a capital nature generally), or

(ii) 35arises as a result of, or otherwise in connection with,
a payment or quasi-payment that gives rise to the
amount, or

(b) the tax is, or falls to be, refunded (and section 259BC(6) and
(7) apply for the purposes of this paragraph with the
40necessary modifications).

(11) For the purposes of subsections (6) to (10) a “qualifying capital tax”
means—

(a) capital gains tax or the charge to corporation tax in respect of
chargeable gains, or

(b) 45any tax chargeable under the law of a territory outside the
United Kingdom that corresponds to a United Kingdom tax
mentioned in paragraph (a),

but does not include any tax chargeable at a nil rate.””

Hybrid payee deduction/non-inclusion mismatches

11 In section 259GB (hybrid payee deduction/non-inclusion mismatches and
their extent), after subsection (4) insert—

“(4A) In applying subsection (4)(b) in a case where the payee is a
5partnership, it is to be assumed that no amount of ordinary income
arises to the payee, by reason of the payment or quasi-payment, if—

(a) a partner in the partnership is entitled to the amount, and

(b) having regard only to—

(i) the law of the territory where the partnership is
10established, and

(ii) the law of the territory where the partner is resident
for tax purposes or, if the partner is not resident
anywhere for tax purposes, where the partner is
established,

15the payee would not be regarded as a hybrid entity.

(4B) In subsection (4A) “partnership” has the meaning given by section
259NE(4).””

Multinational payee deduction/non-inclusion mismatches

12 In section 259HB (multinational payee deduction/non-inclusion
20mismatches and their extent), after subsection (2) insert—

“(2A) The excess is to be taken (so far as would not otherwise be the case)
to arise for the purposes of subsection (1)(b) by reason of a payee
being a multinational company so far as it would not arise if it is
assumed—

(a) 25that the company is not regarded, under the law of the parent
jurisdiction, the PE jurisdiction or any other territory, as
carrying on a business in the PE jurisdiction through a
permanent establishment in that jurisdiction, and

(b) that, for tax purposes under the law of the parent jurisdiction,
30all amounts of ordinary income arising, by reason of the
payment or quasi-payment, to the company are regarded as
arising to it in that jurisdiction and nowhere else.””

Hybrid entity double deduction mismatches: use of restricted deduction

13 In section 259IC(4) (counteraction where the hybrid entity is within the
35charge to corporation tax), for the words from “unless” to the end substitute
“unless it is deducted from—

“dual inclusion income for that period, or

(d) section 259ID income for that period.””

14 After section 259IC insert—

“259ID 40 Section 259ID income for the purposes of section 259IC

(1) This section applies where—

(a) section 259IC applies,

(b) the restricted deduction exceeds the dual inclusion income of
the hybrid entity (if any) for the hybrid entity deduction
period, and

(c) conditions A to D are met.

(2) 5Condition A is that—

(a) the investor in the hybrid entity makes a payment to the
hybrid entity, and

(b) no amount is deductible, under the law of the investor
jurisdiction, from the income of the investor in respect of the
10payment.

(3) Condition B is that, as a result of the payment, an amount of ordinary
income arises to the hybrid entity for the hybrid entity deduction
period.

(4) Condition C is that the payment is made in direct consequence of a
15payment made to the investor by a person (“the unrelated party”)
who is not related (see section 259NC) to the investor or the hybrid
entity.

(5) Condition D is that, as a result of the payment made by the unrelated
party, an amount of ordinary income arises to the investor.

(6) 20For the purposes of section 259IC “section 259ID income” is an
amount of income of the hybrid entity equal to the lesser of—

(a) the amount of the payment made by the investor to the
hybrid entity, and

(b) the amount of the payment made by the unrelated party to
25the investor.””

Imported mismatches: dual inclusion income

15 In section 259K (overview of Chapter 11), after subsection (4) insert—

“(4A) Section 259KD provides for relief where an amount is deducted from
dual inclusion income.””

16 (1) 30Section 259KC (denial of the relevant deduction in relation to imported
mismatch payments) is amended as follows.

(2) After subsection (2) insert—

“(2A) But any reduction under this section has effect subject to section
259KD (deductions from dual inclusion income).””

(3) 35In subsections (4)(a) and (7)(a), for “subsection (6)(a)” substitute “section
259KA(6)(a)”.

17 After section 259KC insert—

“259KD Deductions from dual inclusion income

(1) If—

(a) 40section 259KA(6)(a) applies as a result of any of sub-
paragraphs (iii) to (vii), or

(b) section 259KA(6)(b) applies,

a reduction under section 259KC is not to exceed the relevant net
amount.

(2) For the purposes of this section “the relevant net amount” means—

(a) if section 259KA(6)(a)(iii), (iv), (v) or (vi) applies, the amount
5which, if Chapter 5, 7, 8 or 9 applied to the tax treatment of
any person in respect of the mismatch payment, could not be
deducted from that person’s income under that Chapter
(ignoring the effect of any of the carry-forward provisions),

(b) if section 259KA(6)(a)(vii) applies, the amount by which the
10dual territory double deduction of the company mentioned
in section 259KB(2) for a deduction period exceeds its dual
inclusion income for that period, or

(c) if section 259KA(6)(b) applies, the amount by which the
excessive PE deduction of the company mentioned in section
15259KB(4) for the permitted taxable period mentioned there
exceeds its dual inclusion income for that period.

(3) In subsection (2)(a) “the carry-forward provisions” means—

(a) section 259EC(3) (hybrid payer deduction/non-inclusion
mismatches),

(b) 20section 259IB(3) to (5) (hybrid entity double deduction
mismatches: investor within charge to corporation tax), and

(c) section 259IC(5) to (7) (hybrid entity double deduction
mismatches: hybrid entity within charge to corporation tax).

(4) In subsection (2)(b) “dual inclusion income” of a company for a
25deduction period (that is to say, a period for which the dual territory
double deduction is deducted as mentioned in section 259KB(2)(a))
means an amount that is both—

(a) ordinary income of the company for that period for the
purposes of a tax charged as mentioned in section
30259KB(2)(a), and

(b) ordinary income of the company for a permitted taxable
period for the purposes of a tax charged as mentioned in
section 259KB(2)(b).

(5) A taxable period of the company is “permitted” for the purposes of
35subsection (4)(b) if—

(a) the period begins before the end of 12 months after the end of
the deduction period, or

(b) where that period begins after that—

(i) a claim has been made for the period to be a permitted
40period in relation to the amount of ordinary income,
and

(ii) it is just and reasonable for the amount of ordinary
income to arise for that taxable period rather than an
earlier period.

(6) 45In subsection (2)(c) “dual inclusion income” of a company for a
period means an amount that is both—

(a) ordinary income of the company for that period for the
purposes of a tax charged under the law of the PE
jurisdiction, and

(b) ordinary income of the company for a permitted taxable
period for the purposes of a tax charged under the law of the
parent jurisdiction.

(7) A taxable period of the company is “permitted” for the purposes of
5paragraph (b) of subsection (6) if—

(a) the period begins before the end of 12 months after the end of
the period mentioned in paragraph (a) of that subsection, or

(b) where the period begins after that—

(i) a claim has been made for the period to be a permitted
10period in relation to the amount of ordinary income,
and

(ii) it is just and reasonable for the amount of ordinary
income to arise for that taxable period rather than an
earlier period.””

15Adjustments in light of subsequent events: accounting treatment

18 After section 259LA insert—

“259LB Adjustments in light of later treatment for accounting purposes

(1) This section applies where—

(a) a payment or quasi-payment gives rise to a debit of a
20company that is recognised for accounting purposes,

(b) a relevant deduction of the company in respect of some or all
of the debit is reduced by any provision of this Part,

(c) there is a reversal of some or all of the debit by a credit of the
company that is recognised for accounting purposes after the
25end of the payment period, and

(d) the credit is brought into account for corporation tax
purposes.

(2) Such consequential adjustments as are just and reasonable may be
made in respect of so much of the debit as gives rises to the relevant
30deduction and as is reversed by the credit.

(3) The adjustments may be made (whether or not by an officer of
Revenue and Customs) by way of an assessment, the modification of
an assessment, amendment or disallowance of a claim, or otherwise.

(4) The power to make adjustments by virtue of this section may be
35exercised despite any time limit imposed by or under any
enactment.””

Commencement

19 (1) The amendments made by paragraphs 2(b), 3 to 6 and 12—

(a) have effect, in the case of their application to Chapter 6 of Part 6A of
40TIOPA 2010, in relation to excessive PE deductions in relation to
which the relevant PE period begins on or after 1 January 2018,

(b) have effect, in the case of their application to Chapter 9 or 10 of that
Part, in relation to accounting periods beginning on or after that date,
and

(c) have effect, in the case of their application to any other Chapter of
that Part, in relation to—

(i) payments made on or after date, or

(ii) quasi-payments in relation to which the payment period
5begins on or after that date.

(2) For the purposes of sub-paragraph (1)(a), (b) and (c)(ii), where there is a
straddling period—

(a) so much of the straddling period as falls before 1 January 2018, and
so much of it as falls on or after that date, are to be treated as separate
10accounting periods or separate taxable periods (as the case may be),
and

(b) if it is necessary to apportion an amount for the straddling period to
the two separate periods, it is to be apportioned—

(i) on a time basis according to the respective length of the
15separate periods, or

(ii) if that would produce a result that is unjust or unreasonable,
on a just and reasonable basis.

(3) A “straddling period” means an accounting period or payment period (as
the case may be) beginning before 1 January 2018 and ending on or after that
20date.

(4) Part 6A of TIOPA 2010 has effect, and is to be deemed always to have had
effect, with the amendments set out in paragraphs 2(a), 7 to 11 and 13 to 18.

Section 24

SCHEDULE 8 Corporate interest restriction

25Part 1 Amendments of Part 10 of TIOPA 2010

Introductory

1 Part 10 of TIOPA 2010 (corporate interest restriction) is amended as follows.

Hedging of tax-interest expense amounts or tax-interest income amounts etc

2 (1) 30Section 384 (relevant derivative contract debits) is amended as follows.

(2) In subsection (3), for paragraph (c) substitute—

“(c) it is in respect of a risk arising in the ordinary course of a
trade (other than a risk arising in the ordinary course of a
financial trade) where the derivative contract was entered
35into wholly for reasons unrelated to the capital structure of
the worldwide group (or any member of the worldwide
group).””

(3) After subsection (3) insert—

“(3A) For the purposes of subsection (3)(c) a debit is in respect of a risk
arising in the ordinary course of “a financial trade” only so far as the
risk relates to an amount which is or is likely to be—

(a) 5a tax-interest expense amount, or

(b) a tax-interest income amount,

of the company in any relevant accounting period.””

3 (1) Section 387 (relevant derivative contract credits) is amended as follows.

(2) In subsection (3), for paragraph (c) substitute—

“(c) 10it is in respect of a risk arising in the ordinary course of a
trade (other than a risk arising in the ordinary course of a
financial trade) where the derivative contract was entered
into wholly for reasons unrelated to the capital structure of
the worldwide group (or any member of the worldwide
15group).””

(3) After subsection (3) insert—

“(3A) For the purposes of subsection (3)(c) a credit is in respect of a risk
arising in the ordinary course of “a financial trade” only so far as the
risk relates to an amount which is or is likely to be—

(a) 20a tax-interest expense amount, or

(b) a tax-interest income amount,

of the company in any relevant accounting period.””

4 (1) Section 411 (“relevant expense amount” and “relevant income amount”) is
amended as follows.

(2) 25In subsection (1)(e), for sub-paragraph (iii) substitute—

“(“iii) losses in respect of risks arising in the ordinary course
of a trade (other than risks arising in the ordinary
course of a financial trade) where the derivative
contract was entered into wholly for reasons
30unrelated to the capital structure of the worldwide
group (or any member of the worldwide group);”.”

(3) In subsection (2)(d), for sub-paragraph (iii) substitute—

“(“iii) gains in respect of risks arising in the ordinary course
of a trade (other than risks arising in the ordinary
35course of a financial trade) where the derivative
contract was entered into wholly for reasons
unrelated to the capital structure of the worldwide
group (or any member of the worldwide group);”.”

5 In section 412 (section 411: interpretation), after subsection (3) insert—

“(3A) 40For the purposes of section 411(1)(e)(iii) and (2)(d)(iii) losses or gains
are in respect of risks arising in the ordinary course of “a financial
trade” only so far as the risks relate to amounts which are or are
likely to be—

(a) relevant expense amounts, or

(b) 45relevant income amounts,

of the worldwide group for any period of account.””