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Published 26 February 2015
HM Government's new anti-avoidance proposal, in the form of the so-called ‘Google tax’ (formally known as Diverted Profits Tax (DPT)) encapsulated in the draft Finance Bill 2015 looks set to come into force from 1 April 2015. The purpose of DPT is to ensure that the level of tax payable by companies trading in the United Kingdom is determined by the level of profits generated, and to prevent companies from exploiting the tax regimes in different countries to minimise their global tax bill.
The DPT will apply a 25% tax on profits generated in the UK by large multi-national companies, who enter into ‘contrived arrangements’ to divert profits from the UK and avoid payment of UK Corporation Tax.
DPT will apply when a company does not have a UK taxable permanent establishment, yet supplies goods or services to British consumers. It will also apply in circumstances where the company does have a permanent presence in the UK, but avoids corporation tax by making inter-company transfers (often by way of loans) to overseas subsidiaries.
The ACCA has already voiced concern to the Treasury, seeking to ensure that the DPT does not discourage global businesses from doing business in the UK or make legitimate commercial structures unlawful. It is reported to have described the measure as highly aggressive, and has suggested that a better course might have been to wait for the OECD's forthcoming report on profit shifting before bringing forward legislation. The CBI has added its weight to those concerns, describing the UK's unilateral approach as potentially leading to a 'patchwork' of uncoordinated rules, undermining the OECD's unified approach.
In the short term, companies caught by the new regulations will need to consider how the DPT will affect their current arrangements and the taxation implications on their bottom line. Multi-nationals will need to consider whether they need to become more transparent or whether restructuring their group is appropriate.
The detail of the legislation is not yet final. At this stage, it appears that the measure will apply to profits earned from April 2015 only, and so there is time to ensure that steps are taken to avoid the potential increased tax exposure. However, if the recent report of the Public Accounts Committee is to be believed, just one firm of accountants had assisted nearly 350 multi-national clients which diverted profits to Luxembourg. If that example is indicative of the scale of such tax avoidance across the profession and across all jurisdictions, there may be many multi-national corporations needing to resolve their position in a short space of time. There accordingly may be cause for complaint either about advice previously given, or steps taken to avoid the DPT. Watch this space.