Commenting on measures unveiled today by the Chancellor to charge a new 25 percent rate on multinational companies’ profits artificially diverted from the UK, Chris Morgan, head of tax policy at KPMG in the UK, said:
“This is a completely radical approach we’ve never seen before. The Chancellor has brought in a new rate for ‘artificially diverted’ profits. As this rate is higher than the prevailing rate of corporation tax (21 percent) this move totally removes any tax avoidance advantage achieved by diverting profits. As such it’s a very clever move.
“The Chancellor has repeatedly offered businesses operating in the UK a pledge to provide the most competitive tax system in the G20 provided they play by the rules. This ‘carrot’ is now balanced with an enormous stick.
“Details are sketchy at this stage but it appears that any amount perceived to have been diverted artificially will be deemed to be a profit which is taxable in the UK at the new 25 percent rate. Taxing a deemed profit rather than adjusting the profits of an existing UK taxpayer may enable HMRC to defend the tax charge from the argument that the profits are only taxable elsewhere under a double tax treaty.
“The reality is that this tax is unlikely to be paid since we expect that companies affected will restructure to ensure profits are not artificially diverted. They will then be taxed at the standard rate of corporation tax in the normal way. The on the ground effect is therefore likely to be that the kind of aggressive tax planning through artificial structuring that this measure targets will come to sudden and abrupt halt.
“However some companies may be concerned that legitimate commercial structures could be affected or other countries may jump on the bandwagon in an opportunistic way leading to a taxgrab. It’s vital therefore that there is proper consultation on any draft legislation.
“To employ a well-used analogy – like an elephant, you know artificial diversion when you see it. The difficulty is that the law has to be able to define it in order to tax it and as with defining the elephant, this can be tough to do.”
Margot Cowhig, KPMG Corporate Communications
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KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 11,500 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2013. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 155,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.