The government has today published the draft legislation for Finance Bill 2015, including on the new diverted profits tax (DPT) – nicknamed the ‘Google tax’ by many. This follows the announcement in last week’s Autumn Statement, of the new tax to ‘counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK’. The DPT will be applied from 1 April 2015 at a rate of 25%, with apportionment rules for accounting periods that straddle that date.
HMRC has released guidance on the tax, explaining that DPT applies in two situations:
first, where a foreign company exploits the permanent establishment rules; and
second, where a UK company or foreign company with a UK-taxable presence creates a tax advantage by using transactions or entities that ‘lack economic substance’.
Affected companies are required to notify HMRC within three months of the end of an accounting period ‘in which it is reasonable to assume diverted profits might arise’, with a tax-geared penalty levied for failure to do so.
Reaction
‘Spanning 552 pages including the explanatory notes, [the Finance Bill 2015] is not a short document and how much of the Bill is passed before the election will clearly be questionable’, commented Chris Sanger, EY’s head of tax policy. He said the new tax would ‘add to the armoury of tax inspectors in the UK but will further complicate the UK tax system, pre-empting the outcome of the OECD’s BEPS work. Whilst the tax will not apply to small and medium sized businesses, it appears to be a lot wider than the targeted tax change that was expected. The provisions released today could apply to a wide array of arrangements across multiple sectors including many not previously regarded as avoidance. This will raise questions as to how it interacts with the UK’s EU tax treaty obligations.’
John Cridland, director general of the CBI, agreed. ‘It is unfortunate that the UK has decided to go it alone with a diverted profits tax, outside [the OECD’s] process, which will be a real concern for global businesses,’ he said. ‘The legislation will be complex to apply, and if other countries follow suit businesses will have a patchwork of uncoordinated unilateral rules to navigate, which risks undermining the whole OECD approach.’
However, Ian Young, ICAEW international tax manager, said: ‘The chancellor is sending a further signal of his intention to lead the global fight against unacceptable tax avoidance practices by multinational companies. It is a ground breaking move for the UK, but it remains to be seen if other nations will follow suit. What’s more, with such a sizeable piece of legislation, it is likely it will not be afforded the scrutiny it needs if the target of taxing profits arising after April 2015 is to be met.’
John Mongan (tax partner at PwC) observed that the numerous conditions in the rules meant it was difficult to say at this point how many companies would be affected. He added: ‘For such detailed legislation to come ahead of the OECDs reforms is surprising, although the overall theme is consistent.’
Chris Morgan (head of tax policy at KPMG in the UK) said that the new tax was attempting to define the 'proverbial elephant' in law. '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, the new tax was 'a fairly narrow measure', he said.
Morgan questioned whether the tax gave HMRC too much discretion. '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.'
The government has today published the draft legislation for Finance Bill 2015, including on the new diverted profits tax (DPT) – nicknamed the ‘Google tax’ by many. This follows the announcement in last week’s Autumn Statement, of the new tax to ‘counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK’. The DPT will be applied from 1 April 2015 at a rate of 25%, with apportionment rules for accounting periods that straddle that date.
HMRC has released guidance on the tax, explaining that DPT applies in two situations:
first, where a foreign company exploits the permanent establishment rules; and
second, where a UK company or foreign company with a UK-taxable presence creates a tax advantage by using transactions or entities that ‘lack economic substance’.
Affected companies are required to notify HMRC within three months of the end of an accounting period ‘in which it is reasonable to assume diverted profits might arise’, with a tax-geared penalty levied for failure to do so.
Reaction
‘Spanning 552 pages including the explanatory notes, [the Finance Bill 2015] is not a short document and how much of the Bill is passed before the election will clearly be questionable’, commented Chris Sanger, EY’s head of tax policy. He said the new tax would ‘add to the armoury of tax inspectors in the UK but will further complicate the UK tax system, pre-empting the outcome of the OECD’s BEPS work. Whilst the tax will not apply to small and medium sized businesses, it appears to be a lot wider than the targeted tax change that was expected. The provisions released today could apply to a wide array of arrangements across multiple sectors including many not previously regarded as avoidance. This will raise questions as to how it interacts with the UK’s EU tax treaty obligations.’
John Cridland, director general of the CBI, agreed. ‘It is unfortunate that the UK has decided to go it alone with a diverted profits tax, outside [the OECD’s] process, which will be a real concern for global businesses,’ he said. ‘The legislation will be complex to apply, and if other countries follow suit businesses will have a patchwork of uncoordinated unilateral rules to navigate, which risks undermining the whole OECD approach.’
However, Ian Young, ICAEW international tax manager, said: ‘The chancellor is sending a further signal of his intention to lead the global fight against unacceptable tax avoidance practices by multinational companies. It is a ground breaking move for the UK, but it remains to be seen if other nations will follow suit. What’s more, with such a sizeable piece of legislation, it is likely it will not be afforded the scrutiny it needs if the target of taxing profits arising after April 2015 is to be met.’
John Mongan (tax partner at PwC) observed that the numerous conditions in the rules meant it was difficult to say at this point how many companies would be affected. He added: ‘For such detailed legislation to come ahead of the OECDs reforms is surprising, although the overall theme is consistent.’
Chris Morgan (head of tax policy at KPMG in the UK) said that the new tax was attempting to define the 'proverbial elephant' in law. '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, the new tax was 'a fairly narrow measure', he said.
Morgan questioned whether the tax gave HMRC too much discretion. '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.'
