Tax Journal

The diverted profits tax: two years on

22 June 2017

In April 2015, the UK introduced diverted profits tax (DPT). The UK government presented DPT as a mechanism for countering perceived large scale tax avoidance by multinationals, particularly arrangements to divert taxable profits from the UK. The legislation is both complex and broadly worded, and potentially applies to a wide range of industries and operational structures. Two years on, we are now seeing the impact of DPT in practice, including the challenges faced by multinationals in understanding and applying the legislation, complying with notification requirements and responding to HMRC enquiries. 

Mario Petriccione and Nick Gurteen (KPMG) consider the impact of DPT for multinationals operating in today’s global business environment and the need to comply with the increasing tax administrative burden.

It has now been over two years since diverted profits tax (DPT) was introduced into the UK tax code. It was hailed by the UK government as a mechanism for countering perceived large scale tax avoidance by multinationals. In this article, we consider the impact of DPT for multinationals balancing the challenges of operating in today’s global business environment with the need to comply with the rapidly increasing tax administrative burden.

A reminder of the DPT legislation

As a relatively recent addition to the UK tax code, we first provide a brief recap of the legislation and HMRC guidance.

DPT has been in force since 1 April 2015. It is intended to target companies (both UK and non-UK tax resident) that enter into arrangements that divert profits from the UK so that they are not subject to UK corporation tax. Very broadly, profits are considered to be diverted by either:

the avoidance of a UK taxable presence of a foreign company (often referred to as an ‘avoided permanent establishment’ or ‘avoided PE’), or by moving profits out of the UK into a company that pays tax at a low effective rate through deductible expenses; or foregoing the opportunity to earn income via arrangements that are designed to achieve that tax effect (‘insufficient economic substance condition’).

The rate of tax charged on diverted profits is 25%, i.e. a higher rate than the corporation tax rate. Furthermore, it is the company’s responsibility to notify ...

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