Diverted Profits Tax - Update

UK DPT rules in force

The Diverted Profits Tax (DPT) was announced in the December 2014 Autumn Statement as a "new tax to counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK". Following an extremely short period of consultation, the DPT was introduced by the Finance Act 2015 and applies at a rate of 25 per cent on diverted profits from 1 April 2015.

Diverted profits can arise in two circumstances

• Where a foreign company carries on a trade and has organised its affairs such that it is able to make supplies of goods, services or other property without any UK permanent establishment (PE) and either a "tax avoidance" or "mismatch" condition is satisfied. For example, where a UK company provides sales support with sales actually being made by an offshore company in order to avoid the UK company being a PE of the offshore company. Where the offshore company carries out significant activity in the low-tax jurisdiction, rather than merely rubber-stamping contracts, such that the activities of each company support their commercial role in the group, HMRC guidance states that this may not be within the rules. However, the line between the two examples may not always be clear.
• Where UK companies or UK PEs of foreign companies have entered into arrangements with connected entities which lack economic substance and which give rise to tax mismatches.

Our recent briefing discusses these rules in more detail, with particular focus on how the legislation was amended following the consultation, and the recent HMRC guidance about the arrangements which may be affected by DPT.

Australian proposed DPT

Interestingly, Australia has also pre-empted the conclusions of the OECD's Base Erosion and Profit Shifting project in proposing similar legislation aimed at taxing "diverted" profits.

Australia's proposals widen its existing anti-avoidance rules to tackle certain arrangements under which multinationals engage Australian residents or an Australian PE to carry out activities in Australia in connection with a supply made in Australia from offshore in such a way that the profits from the supplies escape the Australian tax net.

The rules will apply to multinational groups with an annual turnover of AU$1bn or more where the group has an entity in a low-tax or no-tax jurisdiction to which the supply is (directly or indirectly) connected, and where a principal purpose of a person entering into the arrangements is to obtain a tax saving.

Most foreign investors, whose only activities in connection with Australia are carried on through subsidiaries or taxable branches there, should not be affected. The main impact will be for foreign investors with Australian activities that are carried on through Australian residents, e.g. operated by a subsidiary in Australia or an Australian resident individual/employee of a representative office.

Although the Australian Taxation Office is primarily targeting the technology and mining sectors, this new provision potentially catches other industries within its ambit, e.g. where research or marketing have been carried out in Australia but the ultimate transaction is booked overseas.

These rules are proposed to apply from 1 January 2016.

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

• Treaty abuse - OECD BEPS project
• Larentia + Minerva: VAT groups and holding companies
• Samarkand: film partnership scheme
• Southern Cross: compromise agreements with HMRC
• Price, Myers & Lucas: loss scheme using CGT options