The UK Government has reported that its tax on diverted profits has been successful in changing the attitudes of multinational taxpayers, with the levy garnering some £5 billion in additional corporate tax and value-added tax since it was introduced in 2015.
The Diverted Profits Tax (DPT)
The DPT applies to profits arising from April 1, 2015, and is focused on contrived arrangements designed to erode the UK tax base.
It is a measure introduced by the UK unilaterally and was not part of the package of measures proposed by the OECD to tackle base erosion and profit shifting (BEPS). However, HMRC has said the DPT has been revolutionary in countering arrangements used by some multinational corporations to shift their profits abroad and avoid paying tax in the UK.
The DPT addresses three situations:
- a UK company uses entities or transactions that lack economic substance to exploit tax mismatches; or
- a foreign company with a UK-taxable presence (a permanent establishment) uses entities or transactions that lack economic substance to exploit tax mismatches; or
- a person carries on activity in the UK in connection with the supply of goods, services, or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a permanent establishment in the UK, and either the main purpose or one of the main purposes of the arrangements put in place is to avoid UK tax, or there are arrangements designed to secure a tax mismatch, such that the total tax derived from UK activities is significantly reduced.
Its primary aim is to ensure that the profits taxed in the UK fully reflect the economic activity there.
The DPT is set at a higher rate than corporation tax to encourage those businesses with arrangements within the scope of DPT to change those arrangements and pay corporation tax on profits in line with economic activity. Further, the requirement to pay the tax "up front" is intended to provide a strong incentive for groups to provide timely information about high-risk transactions and how they fit into the group's global operations.
The legislation however does contain some specific exemptions, including for small and medium-sized companies (SMEs), companies with limited UK sales or expenses, and where arrangements give rise to loan relationships only.
The more than £5 billion ($6.5bn) in additional corporate tax and value-added tax were from instances where a business agreed with HM Revenue and Customs to stop diverting profits and calculate its profits for Corporation Tax differently leading to additional Corporation Tax for the past and the future. Often following that restructuring, additional VAT arose that was billed through UK companies, HMRC said.
HMRC said many businesses are choosing to cooperate with its investigations and to change their tax affairs, agreeing to pay UK corporate tax on their UK activities, rather than the higher rate of DPT.
Notable achievements for HMRC have included:
- over 60 investigations have been settled, securing additional corporation tax of over £2.2 billion;
- almost £2 billion in extra VAT has been secured from businesses restructuring their operations as a result of DPT investigations or the introduction of DPT; and
- in 2018 to 2019 alone, business restructurings were undertaken that will increase VAT billed through UK companies by around £1.8 billion.
- Claiming New Zealand's Research and Development Tax Incentive
- BEPS Changes to the UK-Canada Double Tax Agreement
- UK Government Rethinking Inheritance Tax
- The UK's Offshore Receipts in Respect of Intangible Assets Measure
Although the DPT is now firmly embedded into the UK's international tax architecture, HMRC is still undertaking considerable enforcement activities in this area, with about 100 ongoing investigations being undertaken into diverted profits arrangements by multinationals. The amount of tax under consideration as part of these ongoing investigations was £2.9 billion as at March 2019.
Companies can more quickly and efficiently restructure their tax affairs to avoid DPT liability through the Profit Diversion Compliance Facility (PDCF), which was launched in 2019.
As a tax in its own right, DPT has its own rules for notification, assessment, and payment. DPT is not self-assessed but companies are required to notify HMRC within three months of the end of an accounting period in which they are potentially within the scope of the tax and do not meet certain conditions for exemption. There is a tax-geared penalty for failure to do so.
DPT is brought into charge by a designated HMRC officer issuing a charging notice. There are a number of safeguards which provide companies with opportunities to demonstrate that they are not subject to DPT before a charging notice is issued. However, once a tax charge is raised, it must be paid within 30 days of the issue of the notice and payment may not be postponed on any grounds, whether or not the charge is subject to review or appeal. Further tax may become payable by virtue of a supplementary charging notice.
If a non-UK resident does not pay the tax due, it may be collected from a related party.