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UK's Diverted Profits Tax

Published on Sat, Mar 21,2015 | 12:47, Updated at Sat, Mar 21 at 12:48Source : CNBC-TV18 |   Watch Video :

It’s been dubbed the ‘Google tax’! Starting April 1st, the UK will levy a new ‘diverted profits tax’. This is the British government’s offensive against multinationals like Google, Amazon, Starbucks and others accused of shifting profits and avoiding tax. In doing so UK will become the first country to implement the OECD BEPS Action Plan ahead of the OECD itself!. Aayush Ailawadi reports on how this new tax will work and the precedent it will set for other countries.

The UK is the first to launch an offensive against large profit shifting multinational corporations!
Starting April 1st, UK will levy a new diverted profits tax on MNCs that do business in the uk but avoid paying tax!

The diverted profits tax, or DPT, acts by imposing a 25% tax on large MNCs in two situations – first on arrangements to avoid a UK permanent establishment.

The 25% DPT will also be levied on arrangements that lack economic substance involving entities with an existing UK taxable presence.

Economic substance is a hyper litigated concept in Britain and around the world. The application of a punitive tax surprisingly pre-empts OECD’s efforts in the same direction. It raises cross border issues as well.

The HMRC, UK’s tax and customs authority, says the new tax will apply on profits arising after 1 April 2015. The draft Legislation places an places an obligation on the MNCs to notify revenue if they may be subject to the tax. In many cases, the 25% tax has to be paid up front and cannot be postponed pending determination of any appeal.

UK’s tax department estimates this new ‘diverted profits tax’ will raise 300 million a pounds a year. That’s still just a fraction of the profits that MNCs are making in Britain. But, in an election year plugging the loophole sends out a strong message.

Nikhil Mehta
Barrister, Gray's Inn Tax Chambers

They avoided tax in two ways – the first being to avoid having a PE here but still generating UK business profits, there being a difference in UK business profits and taxable profits and the second was to have taxable operations in the UK, but to reduce your profits by ensuring that generous tax deductions were available by virtue of the tax entity in the UK making payments of royalties to affiliates located in offshore tax heavens. This is what the DPT expresses.

Chris Morgan
Head-Tax Policy, KPMG UK

Say a company that is selling a lot of goods and services in the UK and it has a lot of salesmen in the UK who are asking customers to enter into contracts but technically they don’t sign the contract in the UK, they do that somewhere else, overseas. Under existing rules you could argue that they don’t have any presence, but under the new rules, they could probably be caught if they did that.

Chris Morgan
Head-Tax Policy, KPMG UK

It’s the second part of the legislation which is much less clear! Because it requires a payment going to a company that lacks substance but lack of substance is defined as – being where the tax benefit is greater than any other benefit. So, if you think about that, you could have a company with people actually doing their job whatever it is, but if the tax benefit is greater than what they’re adding then you would be caught. And that’s very difficult to actually see, how do you do that balancing act – how do you say which is the greater benefit – the tax benefit or the other benefits that are produced by the structure, that’s where I think there’s a lot of uncertainty.

Chris Morgan
Head-Tax Policy, KPMG UK

There’s also another issue under European law if the other affected party was in the EU, because the EU has rules that say you can’t apply anti avoidance rules to a structure, unless it’s purely artificial. One of the big question marks over this legislation is it implies to structures which are not purely artificial.

Nikhil Mehta
Barrister, Gray's Inn Tax Chambers

My own view is that DPT will turn out to be a deterrent; my name for it is a ‘deterrent profit tax’, because the fact of the matter is, if you have MNC’s coming forward that come under DPT, that automatically would brand them as ‘profit diverters’, as far as the UK is concerned, and reputationally there is an issue here for them to be seen as paying their fair share of UK tax while at the same time exploiting tax advantages available in the UK.

Chris Morgan
Head-Tax Policy, KPMG UK

I think, in some ways that this is a tax which is designed never to be paid. So, it will mean that companies that have structures where there clearly would be caught, so if a company knows it has been structuring itself in a way to avoid having a taxable presence in the UK, they’d be very well advised now to restructure and make sure that they pay corporation tax at 20% and not DPT at 25%.

 
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