UK’s ‘Diverted Profits Tax’ proposes a 25% tax rate for taxpayers but leaves open questions

Written by Axel Smits 19 January 2015


Background

On 10 December 2014 HM Revenue & Customs (HMRC) released the diverted profits tax (DPT) provisions within its draft Finance Bill 2015. Upon initial review, the new rules could affect many more companies than one might have anticipated.

Scope

The DPT is a new tax, with a 25% rate on profits that are considered to be artificially diverted from the United Kingdom. The legislation will apply to profits arising after 1 April  2015. Furthermore, if taxpayers potentially are within the scope of the tax, they must notify HMRC within three months of the end of the relevant accounting period. As this tax is not considered to be a corporation or income tax, it creates uncertainty about the availability of tax relief under existing double tax treaties. However, when computing taxable profits taxpayers may deduct any corporation tax paid on the ‘diverted’ profits. Multinational corporations should consider whether the DPT will be a creditable tax.

2 sets of conditions

There are two sets of conditions under which DPT would apply. Often both will apply to the same fact pattern:

1. a company that has UK sales made by a related non-UK company or Permanent Establishment (PE), and/or

2. a UK company/PE that has a significant transaction with a related company.

In either case, for DPT to apply, any related income must end up in a related company that has a low tax rate or receives concessionary tax treatment.

More info can be found here.

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