The United Kingdom recently released details of its proposed diverted profits tax in its 2015 Finance Bill.
The United Kingdom recently released details of its proposed diverted profits tax in its 2015 Finance Bill. The new tax will affect non-U.K. resident groups that make sales of more than Â£10 million to U.K. customers and companies that achieve an effective tax rate benefit through payments to group companies. The proposed "BEPS friendly" tax will apply to diverted profits that arise on or after April 1, 2015.
In particular, the new tax is intended to apply where a non-U.K. company "exploits" the U.K.'s permanent establishment (PE) rules or where a U.K. company or PE creates a tax advantage by using transactions or entities that lack economic substance.
The tax targets non-resident entities with substantial U.K. activities that deliberately avoid establishing a U.K. taxable presence.
The tax would also apply to companies making payments to related parties with a lower tax rate if it is reasonable to assume that the transaction was designed to secure the tax reduction.
The draft legislation includes some specific exemptions for small or medium-sized enterprises, companies with limited U.K. sales, and where arrangements only give rise to loan relationships.
The U.K.'s diverted profits tax appears to target companies that transfer assets out of the U.K. and subsequently enter into an arrangement to use those assets. Since the 25% tax rate is higher than the U.K's current 21% corporate tax rate, the proposed tax will likely impede tax planning of this type.
It also seems likely that the tax is intended to encourage groups to adopt a BEPS-compliant structure. Many groups will prefer to pay additional corporate tax under the normal mechanisms rather than risk attracting this tax, which could be applied with what appears to be a high-level of subjectivity, tight payment requirements (the U.K. issued a notice the tax must be paid in 30 days) and punitive tax rates.
For more information, contact your KPMG adviser.
Information is current to January 20, 2015.
The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
For more information, contact KPMG's National Tax Centre at 416.777.8500