The UK has looked to confirm its self-proclaimed position of leading the international tax debate with its new diverted profits tax (DPT), set to be rushed through before Parliament is dissolved for the general election. Its philosophy is one that many support, which is that companies should pay UK tax that corresponds with the value added by their UK people. Why wait for the G20’s BEPS process when action can be taken which encourages taxpayers, through the higher 25% rate, to ‘do the right thing’ now? The Opposition’s cautious support is understandable and possibly necessary, given the political nature of the measure and its timing.
However, this measure could have far reaching consequences that the UK will come to bitterly regret. For central to the DPT is the UK’s position that it applies in the face of our unrivalled network of tax treaties, which are there to ensure that international trade is not harmed by profits being taxed twice. The result is the UK seeking to tax profits already taxed by foreign states, profits that the UK would assert taxing rights over were they in the shoes of that territory. The problem is that the DPT taxes profits by reference to where people are whilst traditional taxes, including those of the UK, tax income arising from assets. Unless every country moves to a substance based approach, profits get taxed twice.
The architects of DPT argue that it is aimed only at artificial arrangements that generate ‘nowhere’ income, known as an ‘effective rate mismatch’ to entities with little ‘economic substance’.
However, many advisers believe that the expansive language of the current draft will give rise to significantly more double taxation than it will tax ‘nowhere’ income, much of which is in reality attributable to US substance. And that is before other countries such as China, emboldened by the UK’s first move, enact similar measures that tax what they see as their fair share of profits relating to their substance, profits which the UK is happy to tax now.
It’s not just a question of the location of assets versus substance. The evolution of transfer pricing has shown that countries have a very different idea of how much of the overall global pie is attributable to them, rather like siblings fighting over an unexpected inheritance.
The new world of the DPT will amplify that disagreement and override the long-established manner in which such disagreements are resolved, the very reason that our government originally took the position that changing international tax rules was something countries needed to do together.
Ultimately, the introduction of the DPT is the UK saying that it will go its own way at the cost of other countries following suit, multiple claims on the same profits and no mechanism to avoid multiple taxation. The UK is a highly international economy that has championed free trade, but it risks introducing a measure that could cause considerable harm. What some in the US have called a ‘Google tax’ risks instead penalising the engine of our economy, both through how the measure takes effect and how other countries respond.
The UK has looked to confirm its self-proclaimed position of leading the international tax debate with its new diverted profits tax (DPT), set to be rushed through before Parliament is dissolved for the general election. Its philosophy is one that many support, which is that companies should pay UK tax that corresponds with the value added by their UK people. Why wait for the G20’s BEPS process when action can be taken which encourages taxpayers, through the higher 25% rate, to ‘do the right thing’ now? The Opposition’s cautious support is understandable and possibly necessary, given the political nature of the measure and its timing.
However, this measure could have far reaching consequences that the UK will come to bitterly regret. For central to the DPT is the UK’s position that it applies in the face of our unrivalled network of tax treaties, which are there to ensure that international trade is not harmed by profits being taxed twice. The result is the UK seeking to tax profits already taxed by foreign states, profits that the UK would assert taxing rights over were they in the shoes of that territory. The problem is that the DPT taxes profits by reference to where people are whilst traditional taxes, including those of the UK, tax income arising from assets. Unless every country moves to a substance based approach, profits get taxed twice.
The architects of DPT argue that it is aimed only at artificial arrangements that generate ‘nowhere’ income, known as an ‘effective rate mismatch’ to entities with little ‘economic substance’.
However, many advisers believe that the expansive language of the current draft will give rise to significantly more double taxation than it will tax ‘nowhere’ income, much of which is in reality attributable to US substance. And that is before other countries such as China, emboldened by the UK’s first move, enact similar measures that tax what they see as their fair share of profits relating to their substance, profits which the UK is happy to tax now.
It’s not just a question of the location of assets versus substance. The evolution of transfer pricing has shown that countries have a very different idea of how much of the overall global pie is attributable to them, rather like siblings fighting over an unexpected inheritance.
The new world of the DPT will amplify that disagreement and override the long-established manner in which such disagreements are resolved, the very reason that our government originally took the position that changing international tax rules was something countries needed to do together.
Ultimately, the introduction of the DPT is the UK saying that it will go its own way at the cost of other countries following suit, multiple claims on the same profits and no mechanism to avoid multiple taxation. The UK is a highly international economy that has championed free trade, but it risks introducing a measure that could cause considerable harm. What some in the US have called a ‘Google tax’ risks instead penalising the engine of our economy, both through how the measure takes effect and how other countries respond.
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