This week’s Budget included a measure making a number of amendments to the diverted profits tax (DTP) legislation designed to close tax planning opportunities and to make clear diverted profits will only be taxed under either corporation tax or DTP
DTP is intended to counteract contrived arrangements used by large groups (typically multinational enterprises) to artificially divert profits from the UK. It was introduced in Finance Act 2015, when it attracted some controversy over the then Chancellor George Osborne’s decision to go ahead with a so-called ‘Google tax’ ahead of any internationally agreed approach.
The DTP rules counter two types of arrangements used by large groups. Firstly, situations where a company with a UK taxable presence uses arrangements lacking economic substance to artificially divert profits from the UK to low tax jurisdictions. Secondly, situations where a person carries on activities in the UK for a foreign company that are designed to artificially avoid creating a UK permanent establishment, and thereby a UK taxable presence, of that foreign company.
The new measure announced in the Budget has effect on and after 29 October 2018. It will close a tax planning opportunity, whereby corporation tax amendments can be made to a company’s return after the review period has ended and the DPT time limits have expired.
The changes will make clear that diverted profits will only be taxed under either the DPT or corporation tax rules, but not both.
It will extend the ‘review period’, the time during which HMRC and the company are encouraged to work collaboratively to determine the extent of diverted profits, from 12 to 15 months.
In addition the new measure extends a company’s right to amend their corporation tax return during the first 12 months of the extended 15 month review period, but only for the purposes of including the diverted profits into a corporation tax charge.
It also makes clear that diverted profits liable to DPT can be reduced by amendment to the company’s corporation tax return during the first 12 months of the review period.
Report by Pat Sweet