Make no mistake, the diverted profit tax is not one likely to worry many of the corporate clients of financial advisers. That is not meant to patronise by any means, just to reassure that these provisions are designed to apply to large multinationals, not UK-based small and medium-sized enterprises.
Still, I believe it is important to be aware of the provisions, if only in outline, as they represent further evidence of the Government’s commitment to closing the substantial tax gap by stemming what it considers to be unacceptable tax avoidance. Unlike the high profile exposure of rich and famous individuals, the spotlight here is on rich and famous multinationals. The tax has even become known as the “Google Tax”.
I have discussed the detail of when the tax should be applied in the articles leading up to this point. But once you have determined that, what exactly is it to be applied to? How do you quantify what diverted profits are?
The assessment predominantly relies upon transfer pricing principles. However, in certain circumstances, there is a requirement to recharacterise the relevant arrangements for tax purposes and determine the DPT charge by reference to the recharacterised arrangements.
Broadly, the taxable diverted profits in relation to arrangements lacking economic substance will apply:
- Where the arrangements are not recharacterised. In that case DPT will apply to the extent the arrangements are not on arm’s length terms for transfer pricing purposes.
- Where the arrangements are recharacterised the DPT charge will depend on how the transaction is recharacterised.
Where avoided permanent establishment arrangements are involved, transfer pricing principles are applied as if the avoided PE is an actual UK PE, with the profit attributable to that UK PE being subject to DPT.
In many cases, familiar transfer pricing principles are being applied and the DPT is acting as a further check on the application of these principles. However, in certain circumstances, where it is perceived there have been “inflated expenses”, the DPT imposes an override to usual transfer pricing computation methods to impose a fixed 30 per cent upfront deduction disallowance when calculating taxable diverted profits.
All pretty scary stuff. However, financial advisers should take heart and reassurance from the following facts:
- Small and medium-sized enterprises are not subject to the DPT.
- Certain loan relationships are not subject to the DPT.
- Where a mismatch arises solely due to persons being exempt from tax by reason of being a charity, pension scheme or having sovereign immunity, the DPT will not apply.
Like in many areas of financial planning, even though a legislative development may not apply to clients the planner should be fully aware of it. In relation to the DPT, even though it is highly unlikely to be relevant to many of their client companies, financial planners should know about it, if only to give informed reassurance as to why it does not apply. This reassurance could be immensely valuable.
Just as the majority of advisers did not recommend potentially aggressive tax avoidance plans for their individual clients, very few (if any) will consider aggressive planning for corporate clients. For those few that do it will be essential to ensure that clients (individual or corporate) undertaking any form of aggressive planning are made fully aware of the potential for attack and the strong likelihood of defeat these days. There can be no excuse for anything other than an “eyes wide open” basis of proceeding and every reason to limit planning to the tried, (recently) tested and non-aggressive. As I have said many times before, boring is the new exciting.
Tony Wickenden is joint managing director of Technical Connection