UK diverted profits tax guidance | KPMG | GLOBAL

UK: Diverted profits tax guidance

UK guidance on diverted profits tax

HM Revenue & Customs (HMRC) updated its diverted profits tax guidance to clarify the tax authority’s interpretation of the legislation and proposed administrative practice.


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Some highlights from the revised guidance include:

  • Both the “insufficient economic substance condition” and the “design test” in section 86 FA 2015 (avoidance of UK taxable presence) require an element of contrivance. In relation to the design test in section 86, the arrangements must differ in some material way from those that would have been expected to be made had there been no consideration around the permanent establishment (PE) threshold.
  • In relation to sections 80 and 81 FA 2015 (involvement of entities or transactions lacking economic substance), even when there is an “effective tax mismatch outcome” and the “insufficient economic substance condition” is met, there will be taxable diverted profits only when either the transfer pricing is in dispute, or it is reasonable to assume, very broadly, that the material provision would not have been made in the absence of the “effective tax mismatch outcome.”
  • Although there is no clearance procedure for the diverted profits tax, HMRC may be able to provide its position as to whether transactions are likely to be subject to the tax. However, HMRC will do so only when there are particular reasons for expending the resources.
  • HMRC will carry out risk reviews of businesses it considers may fall within the scope of the diverted profits tax. Such risk reviews will consider challenges to structures that divert profits from the UK also for periods before diverted profits tax was effective—for example, challenges on the basis that there was an undeclared PE or that the transfer pricing was incorrect.


Read a December 2015 report [PDF 883 KB] prepared by the KPMG member firm in the UK: Weekly Tax Matters (4 December 2015)

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