Diverted Profits Tax

From a corporate tax perspective, the Diverted Profits Tax (DPT) was possibly the most dramatic change in the 2014 Autumn Statement and quickly became known in the press as the "Google Tax". Until actual legislation was published in the draft Finance Bill 2015 shortly before Christmas, however, little was known other than that it would be a "new tax to counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK" according to the Government.

The new tax is intended to apply to two different circumstances:

• "Avoided UK permanent establishment", i.e. situations where a foreign company has organised its affairs such that it is able to make supplies of goods or services to UK customers without any UK permanent establishment and either a "tax avoidance" or "mismatch" condition is satisfied. This is designed to combat arrangements put in place by companies such as Amazon and Google whereby goods or services are supplied in the UK without creating a UK permanent establishment (and therefore a taxable presence) of the entity actually supplying the goods or services.
• "Insufficient economic substance", i.e. situations where UK companies or UK permanent establishments of foreign companies have entered into arrangements with connected entities which give rise to tax mismatches and there is insufficient economic substance to the entity receiving payments.

The new tax is intended to be introduced with effect from 1 April 2015, with the legislation to be enacted by 30 March 2015. This leaves a very limited scope for taxpayer consultation and this is possibly one of the shortest time-frames in which a completely new tax has been introduced.

While the broad principles for the new tax are clear from HMRC and HM Treasury announcements, the drafting of the measure leaves considerable scope for uncertainty.

We have recently published a detailed briefing on DPT which you can read here.

Please click on the links below for the other articles in the February 2015 tax newsletter:

• Disguised investment management fees
• Project Blue: SDLT avoidance
• Hybrid mismatch proposals
• BEPS discussion draft on interest deductions
• Real estate investments in France