UK Parliamentary Hearing Held On BEPS Response
British Members of Parliament (MPs) have questioned the Government’s unilateral decision to push for the introduction of a Diverted Profits Tax (DPT) ahead of the completion of the Organisation for Economic Cooperation and Development’s (OECD’s) work on base erosion and profit shifting (BEPS).
In a debate held in Parliament on January 7, 2015, MP Shabana Mahmood said: “We anticipated that [the Government’s] preferred way of proceeding on BEPS would be to await the final reporting in September before thinking how to go further. They have of course moved a little more quickly with the diverted profits tax.”
“Was there a feeling that BEPS would not produce much of a result in relation to the relevant element of the international tax rules?” she asked.
Andrea Leadsom, Economic Secretary to the UK Treasury, in response, said: “The introduction of the [DPT] is entirely consistent with those principles and complements the ongoing international efforts in the BEPS project, which is looking to align taxing rights with economic activity.”
“The measure is targeted at contrived arrangements used to shift profits away from the UK in a manner that ensures they go untaxed or largely untaxed. The measure is designed to counter the erosion of the UK tax base as a result of complex structures that circumvent the international tax rules on permanent establishment and transfer pricing.”
She told lawmakers: “Specifically, the diverted profits tax applies in two situations. The first is where a foreign company carries out activities in the UK in connection with the supply of goods or services to UK customers in such a way that it avoids creating a permanent establishment, and the main purpose of that arrangement is to avoid UK tax, or a tax mismatch is secured such that the total tax derived from UK activities is significantly reduced. The second situation is where a UK company, or a foreign company with a UK permanent establishment, creates a tax mismatch by using transactions or entities that lack economic substance.”
“If a multinational company is found to be using those contrived arrangements to avoid tax in the UK, HMRC will issue a notice that requires the diverted profits tax to be paid up front. The legislation provides for a review period of up to 12 months, within which the multinational company will have the opportunity, among other things, to demonstrate that it was not liable for the charge or to provide information to HMRC to show that the level of disallowance of intra-group expenditure in computing the charge is wrong on normal transfer pricing principles. The measure is designed to complement our transfer pricing arrangements,” Leadsom explained.
While welcoming the general aim of the measure, MP Ian Swales criticized the Government for bringing uncertainty in the tax system through its proposed DPT. “Certainty is one of the functions of a good tax system, but with the [DPT] we are straying into an area of high uncertainty about how the tax will be assessed and paid,” Swales said. He also questioned the exclusion of transactions with offshore finance centers and excessive foreign interest payments from the purview of the DPT.
Leadsom said that work is ongoing to ensure fairness in the measures. She also addressed concerns about the compatibility of the DPT with EU law, stating: “The [DPT] has been designed to comply fully with our obligations under EU law. It is aimed at structures that are clearly designed to erode the UK tax base. As such, it is an appropriate response to those who abuse EU law to divert profits from the UK.”
Responding to a question from MP Nigel Mills about the DPT potentially overriding the agreements the UK has secured on the avoidance of double taxation, Leadsome added: “I can reassure him that that is not the case. The scope of the UK’s tax treaties is limited under UK law to income tax, capital gains tax, and corporation tax. The diverted profits tax is therefore not covered by those treaties, so, as a formal matter, there is no treaty override; and in fact the OECD, in the commentary on its model tax treaty, provides that states can deny the benefits of a tax treaty where arrangements have a main purpose of securing more favorable tax treatment in circumstances contrary to the object and purpose of that treaty.”