UK and International Tax news

Finance Act 2015 And Diverted Profits Tax

Tuesday 31st March 2015

Following the recent Budget of 18 March 2015, the 2015 Finance Bill was published on 25 March and has now passed through Parliament without any amendments, being enacted after only one day on 26 March 2015 as the 2015 Finance Act. There are substantial changes made to the UK tax regime by the 2015 Finance Act including, in particular, the introduction of the new diverted profits tax [s.77 – 116 and sch 16] which will apply from 1 April 2015.

In the Autumn Statement 2014, the Government announced that it was introducing a new tax, the diverted profits tax, to counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK.

HMRC has recently published guidance on the DPT which runs to 88 pages and this guidance accompanies legislation, explanatory notes and the tax information and impact note which were published 24 March 2015.  The guidance explains how the new tax works by reference to practical examples and has been amended following consultation on the original guidance note issued on 10 December 2014.  

The latest guidance supersedes HMRC’s earlier note and will continue to be updated. It will, in due course, be incorporated into HMRC’s International Manual.

DPT is intended to deter and counteract the diversion of profits from the UK by large groups that seek to avoid creating a UK permanent establishment or use arrangements or entities which lack economic substance to exploit tax mismatches either through the creation of intra group expenditure or the diversion of income intra group where it is reasonable to assume that, in the absence of a tax benefit, the expenditure would not have been incurred or the income would have been within the charge to UK  corporation tax.

As well as preventing the erosion of the UK tax base, the legislation provides a strong incentive for groups to provide timely information about high risk transfer pricing transactions. It reduces the information bias inherent in complex cases and promotes full disclosure and constructive, early engagement with HMRC.

DPT is aimed at large groups (typically multinational enterprises) that use contrived arrangements to circumvent rules on permanent establishment and transfer pricing and addresses three situations:

· a person carries on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a permanent establishment in the UK, and either the main purpose of the arrangements put in place is to avoid UK tax, or a tax mismatch is secured such that the total tax derived from UK activities is significantly reduced.

· a UK company uses transactions or entities that lack economic substance in order to exploit tax mismatches, and

· a foreign company with a UK-taxable presence (i.e. a permanent establishment) uses transactions or entities that lack economic substance in order to exploit tax mismatches.

Profits which have been diverted from the UK are computed using the same principles which apply for corporation tax, including transfer pricing rules, except where the legislation requires arrangements to be recharacterised. Where it is necessary to recharacterise arrangements, the amount of diverted profit is calculated on a just and reasonable basis.

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