Diverted Profits Tax
The Diverted Profits Tax (DPT) came into force on 1 April 2015. The DPT is an anti-avoidance measure that targets large multinational businesses that the government deem to be using contrived and artificial arrangements to divert profits overseasthereby paying less or no tax in the UK.
The DPT has been coined as the ‘google tax’ but the net is spread much wider than just technology companies. Companies that may fall within the tax charge will be spread across many industries. The tax rules have been drafted to exclude small and medium sized companies but multinationals could face the DPT at a rate of 25%.
Earlier this month, Diageo a FTSE 100 company issued a press release stating that it had been discussing its transfer pricing position and related issues with HMRC. Whilst these discussions were ongoing, Diageo was notified that HMRC intends to issue preliminary notices of assessment under the DPT regime. Diageo does not believe it is within the scope of the DPT and will fight this claim. However, under the legislation, the company is required to pay the enormous sum of £107 million demanded by HMRC up front and only then are they able to enter into discussions of whether this was justified.
It is expected to be at least a year before a resolution is reached although Diageo considers no provision is required in relation to the DPT. It will be interesting to see how this case develops and if any other company’s tax affairs are publicised in this way. HMRC refused to comment on the case.
As part of the Autumn Statement measures, the Chancellor announced the introduction of a new Diverted Profits Tax (DPT) to counter the use of aggressive tax planning to avoid paying tax in the UK. The DPT has been coined as the‘google tax’ but the net is spread much wider than technology companies. Companies that may fall within the tax charge will be spread across many industries. The new tax rules have been drafted to exclude small and medium sized companies.
Where multinationals use artificial arrangements to divert profits overseas in order to avoid UK tax, the DPT will be applied at a rate of 25% from 1 April 2015.
The charge will arise if either of two rules apply:
- The first rule is designed to address arrangements which avoid a UK Permanent Establishment (PE) and comes into effect if a person is carrying on activity in the UK in connection with supplies of goods and services by a non-UK resident company to customers in the UK, provided detailed conditions are met.
- The second rule will apply to arrangements which lack economic substance involving entities with an existing UK taxable presence. The primary function is to counteract arrangements that exploit tax differentials and will apply where the detailed conditions, including those on an “effective tax mismatch outcome” are met.
A charging notice issued by HMRC will require the payment of the diverted profits tax within 30 days and penalties will apply for late payment.
The introduction of the DPT was the subject of a recent Commons Debate. A number of issues were raised concerning the interaction of the DPT and the OECD’s work on Base Erosion and Profit Shifting (BEPS). There were also concerns on the speed at which the DPT is being introduced and the relatively low level of tax that will be raised given the scale of the issue.