The UK Diverted Profits Tax – a unilateral approach to an international problem
Given the publicity surrounding the practices of multinationals in structuring their affairs to minimise their tax liabilities, it is not completely surprising that the UK Government has chosen to act by introducing a new tax, called the Diverted Profits Tax (“DPT”), which applies at the rate of 25% (rather than the expected corporation tax rate of 20%). As announced in the Autumn Statement, the DPT is applicable to diverted profits on or after 1 April 2015 (with apportionment rules where the accounting period straddles that date).
The timing for the introduction of this new tax is questionable, given that it represents unilateral action by the UK Government at a time when the Base Erosion and Profit Shifting (“BEPS”) project is well underway and due to complete its recommendations by the end of 2015. One of the key messages of the BEPS project is that countries should work collectively to reform international rules, rather than adopt unilateral measures which could undermine the BEPS project. It is, therefore, disappointing that the UK Government has effectively “jumped the gun” and sought to introduce a new tax which introduces onerous burdens on large enterprises and which provides extensive discretion to HM Revenue & Customs (“HMRC”) as to the amount of tax applicable to its assessment of an enterprise’s diverted profits.
The DPT is intended to apply to two broad situations:
where a foreign company structures its arrangements to avoid creating a UK permanent establishment (“PE”) (“Situation 1 – Avoided PE Case”); and
where entities or transactions lack economic substance and either involve a UK resident company or a UK PE of a foreign company (“Situation 2”).
The rules are intended to apply only to large enterprises and not to small or medium sized enterprises (“SME”). SMEs broadly comprise enterprises employing fewer than 250 persons and which have an annual turnover not exceeding €50m and/or annual balance sheet not exceeding €43m.
The rules are not limited to transactions or arrangements with tax haven or low-tax jurisdictions, but can apply more broadly.
An open day is to be held by HMRC on Thursday 8 January 2015 to explain the technical aspects of the tax.
