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Diverted profits tax: are they serious?

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Hey, a new tax. As a tax adviser, that sounds like pretty good news. (Shame it is so bad for the country, but that's politics for you).

The idea is that next year, large companies will be subject to a new tax of 25% on profits which are artificially diverted from the UK. A similar charge will apply to foreign companies who have a UK turnover of more than £10m but have artificially avoided having a permanent establishment in the UK.

Space does not permit a detailed explanation of this new tax. In any event, the rules are so imprecise that any explanation would be lengthy and difficult. More importantly, the imprecision makes it virtually impossible for any taxpayer company to be able to determine whether or not they are liable to the tax or how much the tax might be. It is a self-assessment matter so the responsibility is entirely with the taxpayer. So the only safe course is to have everything done (or reviewed) by your friendly tax adviser.

HMRC will issue a notice for the tax which must be paid within 30 days. Appeal? Dream on. There is no right of appeal nor any right to postpone payment.

It seems likely that this tax will not be covered by double taxation agreements because most treaties apply to ‘identical or substantially similar taxes’ to income tax, corporation tax and capital gains tax.

But whether or not the diverted profits tax will be an identical or substantially similar tax, some interesting possibilities arise. Let us assume that a UK company within the scope of the new tax has diverted profits to another country (Europe) where the rate of corporation tax is 15%. If the diverted profits tax is not substantially similar to the main UK taxes then no credit will be allowed against the Europe corporation tax and the company will end up paying 15% in Europe and 25% in the UK on the same profit. This would obviously be intolerable and probably lead to a withdrawal of business activity in Europe.

However, if the diverted profits tax is found to be substantially similar to UK corporation tax then the UK tax would eliminate the whole of the Europe tax liability and the company's overall tax liability will be the same, except that it will all be payable to the UK. The Europe government would no doubt rejoice that the UK are taking such a firm stand against tax avoidance. Or maybe not. Perhaps instead they would enquire in robust terms why the UK is pinching their tax revenue.

I imagine that these proposals will provoke a degree of discussion and possibly some modification before the proposed tax comes into force on 1 April 2015.