UK Diverted Profits Tax Update

Summary of events since my last blog:

DPT has come into effect (1 April 2015) . DPT is a 25% tax surcharge, and is here to stay. By an amendment, prior to the Finance Act being passed, it has been allowed that UK corporation tax (CT) and some other taxes may be allowed as deductions from the amount of DPT calculated as due. HMRC (the UK's tax authority) has drafted in from other of its departments over 40 of its international transfer pricing experts to raise the new tax. Amazon (its EU HQ is based in Luxembourg) has announced that it is now recording revenues in each of its subsidiaries rather than in Luxembourg. UK corporation tax is at a record low of 20%. It will reduce again to 19% in 2018 and then again to 18% in 2020. A new UK Patent Box regime is awaited. The existing 10% regime is operational for election until 30 June 2016, lasting until 30 June 2021. In what follows I have not gone into huge detail on DPT. That is for the experts, including my colleagues in our tax team, other tax advisers and the accountants. DPT is extremely complicated so I have included some of the provisions which most affect companies. These I have included in Italics. DPT is charged on a fictional profit proposed by HMRC.

Here is my take on the most ground breaking tax legislation I can remember. This blog does contain some crystal ball gazing.

It has been argued that DPT is in breach of EU law, and maybe puts the UK in breach of tax treaty obligations. These arguments do not assist a company that is in the position of trying to ascertain whether or not it falls within the ambit of the rules. Any challenge will take some years. There has been no public challenge to DPT so far as I can see. So in reality it's time for some honest appraisal of each group's tax structures now. The basis for a DPT charge is very wide indeed and all multinational operations with either (i) UK sales over, or close to £10m, or (ii) close to 1m in expenses, or (iii) having a group company in a low tax jurisdiction, need to consider DPT as a matter of urgency.

Having just come back from a US West Coast trip I have been conscious of a lack of knowledge within companies with offices on the West Coast of the wide scope and ambit of DPT. Whether HMRC uses the width of the scope and ambit of its new power to tax remains to be seen, but I expect they will.

Now for some of the heavy part (in italics in case you don't have time to read all this blog).

DPT applies in two distinct cases.

1. where a foreign company structures its affairs to avoid a UK taxable presence (an "avoided PE"); or

2. where a company which is taxable in the UK creates a tax advantage by involving entities or transactions with a lack of economic substance (the "insufficient...