Further legislation to combat BEPS

15 July 2017

Recent weeks have seen the implementation of two key agreements which reflects the continuing commitment of the international community, including the UK, to the OECD Base Erosion and Profit Shifting (BEPS) project.

EU directive regarding hybrid mismatches with third countries

The EU Council signed new Directive 2017/952 on 29 May 2017, building on Directive 2016/1164, the EU’s response to the OECD’s BEPS recommendations . This new directive is aligned to BEPS Action 2, which aims to neutralise the effect of hybrid mismatch arrangements. 

The member states must transpose the directive into national law by 1 January 2020.

What is a hybrid arrangement?

A hybrid arrangement refers to either the hybrid nature of an entity or the hybrid nature of an instrument – ie an entity or instrument that is treated differently by different tax jurisdictions that have an interest in it . Due to the hybrid nature of the entity or instrument, the result is an effective tax mismatch – generally either a double deduction for the same expense, or a deduction for an expense with no corresponding taxable receipt, is achieved. 

Application to the UK

The UK implemented its own hybrid mismatch rules with effect from 1 January 2017. These new anti-avoidance provisions have no de minimis threshold, nor do they have a commercial purpose exemption. Consequently, if a UK deduction is within the scope of these provisions, that deduction can be denied in full in the hands of the UK company. 


UK businesses that are part of multinational enterprises need to review their position now and understand whether they are in the scope of these new rules, as it could mean expenses such as cross border interest payments, royalty payments and management charges are denied a corporate tax deduction. Furthermore, businesses need to understand what alternative structures may be viable.

OECD Multilateral Instrument

The Multilateral Instrument (MLI) was signed on 7 June 2017 on behalf of 68 countries, including the UK, with further jurisdictions expected to sign up in future. 

The MLI is the output of BEPS Action 15, and is intended as a practical mechanism to swiftly implement the various treaty related measures arising from certain other BEPS actions. This is in recognition of the material delay and lack of coordination that could otherwise arise if treaties were to be renegotiated on a treaty by treaty basis.

How will Multilateral Instrument work in practice?

Signatories to the MLI can choose which of their existing treaties are to be modified in accordance with the Instrument. These treaties are referred to as Covered Tax Agreements.

The MLI includes measures intended to implement BEPS minimum standards on dispute resolution and treaty abuse, but allows for jurisdictions to select from different alternative provisions for particular treaty articles in particular treaties , according to whichever are best aligned to the particular circumstances. The MLI also includes a number of articles which the signatories are not obliged to implement. The result is that, even within the scope of the MLI, we are likely to see a wide variation in how signatories give effect to the MLI.

Limitations of the MLI

Whilst many of the UK’s key global trading partners have signed the MLI - China, India, Japan, Canada and much of Europe, the US has indicated that it does not intend to sign the MLI.

This is because the US considers that its treaties already comply with the objectives of the MLI such that the MLI is unnecessary. Whether this notable absentee will undermine the long term effectiveness of the MLI remains to be seen.


Groups should review their structures to identify circumstances where reliance is placed on access to an existing tax treaty in order to secure the current treatment and assess whether any modifications made by the MLI could create a risk.

For more information please get in touch with Suze McDonald, Peter Coe or your usual RSM contact.