Draft Finance Bill 2015 – HMRC releases new rules on diverted profits tax

December 12, 2014

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Watch our webcast looking at DPT and recently published OECD BEPS papers

By Stella Amiss

This week saw HMRC release the new diverted profits tax (DPT) rules within its draft Finance Bill 2015. The new rules will affect large international companies that are considered to be artificially diverting profits away from the UK. The legislation will be effective in relation to profits arising after 1 April 2015 - so just a few months away.

In an interesting move, the DPT is a new tax charged at 25%, so higher than the main corporation tax rate. More importantly, as it’s a new tax, tax relief under existing double tax treaties isn't obviously available - that said, the computation of profits to be taxed under these rules allow a deduction for any corporation tax paid on the ‘diverted profits’.

There are two sets of conditions where DPT would be applicable, and often both will apply to the same fact pattern. In summary, the DPT might apply to:

  • a company which has UK sales being made by a related non UK company or Permanent Establishment (PE), and/or
  • a UK company/PE which has a significant transaction with a related company

and, in either case, any related income ends up in a related company with a low tax rate/concessionary tax treatment.

In the first situation the diverted profits are the profits of the foreign company that would have been attributable to the PE which the legislation deems to exist.

In the second, the diverted profits are essentially additional profits that would have arisen to the company (or PE) if the actual arrangement (under which it makes a payment to the tax advantaged person) were replaced by what would most likely have happened in the absence of a tax mismatch.

Sound complicated? It is. Sound like there could be uncertainties in working out how these rules apply? There are.

The rules are complex to apply (they run to 28 pages) and there are a raft of points to work through. Further, as elements are subjective, this raises significant questions around how they’ll operate in practice. It’s the second situation that really gives rise to the main difficulties because it narrowly focusses on activities and functions. This means in practice it could be hard to assess the position and be confident as to whether or not the test is passed or failed.

Publicity around the introduction of this legislation was all about US high tech groups. But what is clear from the legislation is that it may potentially catch a wide range of business models.

From a policy perspective, this legislation represents an unexpected move ahead of the still developing BEPS agenda, and demonstrates that in this area the UK is not waiting for coordinated action. It will be interesting to see if other territories decide to adopt a similar approach - there are already indications that Australia is looking closely at the measure - and whether this gives rise to increased risk of double taxation.

And there’s an open question, I think, as to how DPT might develop as more of the OECD actions take hold. For example, what happens to the proposed DPT legislation if the domestic and treaty definitions of PE are extended?

All this means I’d encourage businesses to consider these changes as a matter of urgency as the 1 April effective date and tight notification and payment schedule leave limited time for what will be, for many, a complex review and analysis.

HMRC has invited comments on this draft legislation and we would strongly encourage taxpayers to engage in the consultation process. The deadline for this is February 4 so not much time once the holidays are over.

For more information about the possible impact of the rules for your company, or any of the other provisions in this year’s draft Finance Bill, please contact your usual PwC contact or myself.

Stella Amiss

[email protected] / (0)207 212 3005