Diverted Profits Tax And You: What Does It Mean?

A New Tax on doing business in or through the UK

The UK is on course to enact a new tax (the "DPT") with extraterritorial scope which will apply to profits arising on or after 1 April 2015 and will be applied at a rate of 25% (the UK's main rate of corporation tax is expected to be 20% from the same date). The UK Government considers the DPT to be an anti-avoidance measure aimed not only at raising revenue directly, but also at modifying taxpayer behaviour. The UK Revenue authority, HMRC, consider that double tax treaty protections will not apply in the context of the DPT. Whether this is right or not will depend on the applicable treaty wording and the success of any mutual agreement process between HMRC and their relevant counterpart - little comfort to potentially affected taxpayers.

What does the DPT apply to?

Aimed primarily at arrangements involving multinational enterprises with UK-linked profits and nicknamed "The Google Tax", the DPT arises in the context of high-profile media criticism of US-headquartered global businesses such as Google, Amazon and Starbucks. However, the draft legislation appears wide enough to catch a great many more enterprises and group structures which would traditionally have been seen as being "on the right side" of the tax planning/tax avoidance line, for example:

A foreign entity ("FE") selling data analytics services enters into a sales and marketing support agreement with a UK company in its corporate group ("UKE") under which UKE identifies and negotiates sales contracts up until the point of final approval and execution, whereon the relevant contracts are concluded by FE with the effect that FE is regarded as having no taxable presence (i.e. a permanent establishment) in the UK on which its profits could be subject to UK tax. FE has a UK subsidiary ("A") which is intended to engage in manufacturing activities, for which expenditure on plant and machinery must be incurred. FE incorporates and capitalises another subsidiary ("B") in a jurisdiction with no tax. B acquires the necessary plant and machinery and leases it to A, generating a tax deduction for A and profits for B which are not subject to tax. The draft legislation is deliberately cast wide enough to potentially catch arrangements wholly within the UK and so unless an exclusion clearly applies, all taxpayers with links to the UK are likely to have to consider the application of the new rules to some extent.

When will it apply?

The DPT...