Following consultation, the Government has confirmed that there will be changes to some of the details of DPT, including a narrowing of the notification requirement and changes to the exclusions. Despite some calls for implementation of the measures to be deferred, though, the Budget has confirmed that DPT will come into effect on 1 April 2015 as previously announced. Final legislation is expected in next week’s Finance Bill.
The new diverted profits tax (DPT) was one of the centrepiece announcements in last year’s Autumn Statement and applies to both UK and non-UK resident companies from 1 April 2015.
DPT will be charged at 25%, with HMRC estimating the amount of “diverted profits” and issuing a charging notice with the tax due 30 days later. Unlike the normal corporation tax self-assessment mechanism, under DPT HMRC determines how much is charged and the group must pay first and can appeal later. Current thinking is that the first charging notices could be issued by 30th September 2015 (for 30 April year ends). In addition, groups are required to notify potential liability within 3 months of the end of the relevant accounting period, with tax-geared penalties for non-notification. A group which is potentially within the charge to this tax will, therefore, want to establish its position as soon as possible.
The draft legislation published in December is very complex. Although we may see some changes following consultation, we would not expect the final legislation to be simpler. Very broadly, DPT is intended to apply in the following situations:
Where a non-UK resident company which does not have a UK permanent establishment (PE) is making sales to UK customers, the legislation considers whether it has avoided a PE and if so, Diverted Profits Tax can be charged on that non-UK company. Representations to include examples in the guidance of situations not caught could assist taxpayers.
UK resident companies
Where a UK resident company makes a payment to (generally) a group company, the legislation considers whether a payment of that amount would be made if the recipient was not in a country with a lower tax rate than the UK (which is 20% from 1 April 2015). Diverted Profits Tax can be charged on an excessive payment.
Interaction with BEPS
The application of Diverted Profits Tax depends heavily on the application of transfer pricing, which is a key topic of the on-going work on Base Erosion and Profit Shifting (BEPS). Groups considering the impact of the DPT legislation need to ensure they bear in mind this wider context. In many cases, the Diverted Profits Tax is accelerating changes that are expected to come in under BEPS in due course (for example, the definition of Permanent Establishment is due to be extended under BEPS and there might then be no avoided PE). Any groups taking action to restructure as a result of DPT should consider the implications of BEPS.
What should we expect in the Budget?
Draft legislation was published for consultation in December; draft guidance was published at the same time. HMRC received extensive representations on this, and in particular the width of the requirement to notify, which currently appears to cover many companies who will not have a liability. We expect some changes to be made to the legislation in the Finance Bill. However, the Government’s policy objectives are clear and groups should not expect major changes.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.