Dixcart Releases Guide On UK’s Diverted Profits Tax
Dixcart, an international business support services provider, has released a new guide on the UK’s Diverted Profits Tax, which was altered ahead of its introduction on April 1, 2015.
The DPT is intended to counter aggressive tax avoidance by multinational companies. It is charged at a rate of 25 percent (compared with a corporate tax rate of 20 percent) on all profits diverted from the UK. The guide points out that it is an entirely new tax, operating separate from corporation tax or income tax and, as such, losses cannot be set against the DPT.
Dixcart explains that companies are required to notify HM Revenue and Customs (HMRC) within three months of the end of an accounting period if they fall within the scope of the DPT. Penalties will apply for failure to notify within the necessary time frame.
The DPT will apply in two circumstances:
Where a foreign company structures its affairs to avoid the creation of a UK permanent establishment; or
Where a UK entity obtains a UK tax advantage as a result of transactions lacking economic substance.
The charge to tax is levied by HMRC issuing a notice to the taxpayer and payment of tax is due within 30 days of the date of the notice.
The rules are complex and examples put forward by Dixcart effectively illustrate the key points in relation to DPT. For instance, the DPT will apply in the case of avoidance of permanent establishment status. Its article uses the example of a foreign company in a lower tax jurisdiction that acquires widgets from a third party and sells them in the UK. The UK subsidiary of the foreign company manages the sales activity, but is careful to never form contracts with customers. This activity is always conducted by the foreign company. There is no commercial reason to divide the activity in this way other than to ensure that the foreign company does not create a permanent establishment in the UK and therefore under the current law avoids UK corporation tax.
DPT will be calculated on the amount that would have been chargeable profits for UK corporation tax purposes if the foreign company had been trading in the UK through a Permanent Establishment.
The second instance concerns transactions that lack economic substance. As an example, the DPT would apply to circumstances where a UK company wants to invest in new plant and machinery for the purposes of its UK trade, and the parent company establishes and funds a Special Purpose Vehicle (SPV) in a “tax haven,” which purchases the equipment and leases it to the UK company. The lease payments are deductible against the UK company’s taxable profits, but are not liable to tax in the tax haven where the SPV is located. This gives rise to a tax mismatch. Dixcart says, in such circumstances, DPT would be charged as if the UK company had purchased the plant and machinery itself. The lease payments would be disallowed but capital allowances would be available.
The guide goes on to discuss other circumstances where the DPT may apply, such as where a foreign company reduces profits subject to UK tax with a large royalty payment to a group intellectual property holding company in a lower tax jurisdiction. In such circumstances, royalties could be paid via another group company to avoid withholding tax. It then concludes with a discussion of possible instances of double taxation under the DPT regime and discusses the conditions under which either the Mismatch Rule or the Avoidance of Permanent Establishment Rule, or both, may be triggered.
