Currently there are some financial instruments that, due to the differing tax treatment cross border a tax advantage, may be obtained. To align the current UK rules with the European rules two amendments are required. One of the amendments relates to permanent establishments which have also attracted a change in themselves to prevent abuse as directed by BEPS.
On the hybrid issue the exemption for hybrids that attract the regulatory capital exemption will be redefined within the regulations to align with the European definitions.
The permanent establishment amendment seeks to address the position where a permanent establishment in a jurisdiction is recognised as such by the country of the parent company but is not recognised as a taxable presence in the jurisdiction where the permanent establishment is situated, thus creating the ability to escape in both jurisdictions. Going forward the permanent establishment will be brought into charge in at least one of the jurisdictions.
The other permanent establishment amendment, as highlighted by BEPS, relates to the abuse by groups of companies segregating their activities in the UK to claim the auxiliary activities exemption. Going forward taxable and non-taxable activities of commonly controlled permanent establishments will be amalgamated in the UK to determine the correct taxable profits of foreign companies here in the UK.
These changes largely affect large multi-national groups of companies trading cross border. The UK is seeking to ensure that its tax base is not eroded by groups using hybrid instruments or segregating its activities in the UK.