Diverted Profits Tax – Attempting to define the ‘elephant’ in law

Diverted Profits Tax – Attempting to define the

Chris Morgan, head of tax policy at KPMG in the UK, comments on today’s draft Finance Bill

Also on KPMG.com

Commenting on legislation in today’s draft Finance Bill giving further details on the Chancellor’s measure 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:

“Diverted profits are like the proverbial elephant; you know it when you see it but it’s difficult to define. Today’s draft legislation is a 70 page plus document that attempts to define this ‘elephant’ as it were. In reality what is actually a fairly narrow measure by the Chancellor, the Diverted Profits Tax has two broadly defined aims:

“The first of these looks to prevent an overseas entity with substantial UK activities deliberately avoiding establishing a UK taxable presence. For firms purposely structured in this way, this will certainly be a worry and could result in them considering changes to their structure to create a permanent establishment in the UK which will pay UK Corporation Tax (at 21 per cent currently) rather than pay the25 per cent rate.

“The second applies to UK companies or UK permanent establishments which reduce their corporation tax by making payments to related parties with an effective lower tax rate – for example by paying royalties which end up in a low tax country. However, this only applies if the payment would not have been made at all were it not for the tax benefit in doing so. To this extent, the rules appear to be aimed at companies which have transferred assets out of the UK in order to then charge them back in.

“HMRC is effectively able to make an estimated assessment and the company has to then pay the tax within 30 days. After this there is a one year review period to determine if the assessment was correct and only then can the company appeal to the courts in the normal way. This process – pay now, argue later - together with the 25 per cent rate, appears to be aimed at changing companies’ behaviour. A concern is, does this give too much discretion to HMRC?

“Notwithstanding the Government’s reasons for wanting to do this, the UK has, in some ways, jumped the gun in terms of the Base Erosion and Profit Shifting (BEPS) project. Our latest Tax Competitiveness Survey shows that companies value ‘stability’ and ‘simplicity’ above all else in terms of tax legislation. The Diverted Profits Tax rules tick neither box. However, in a small nod to simplification, these rules do not apply to companies whose UK revenue is less than £10 million per year.

“Overall it would have been better to wait for the outcome of the BEPS process in a year’s time.




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About KPMG

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff.  The UK firm recorded a turnover of £1.9 billion in the year ended September 2014. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 162,000 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.

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