UK and International Tax news

Diverted Profits Tax Update

Thursday 18th May 2017

Diageo has recently announced in a press release that HMRC intends to issue preliminary notices of assessment under the new Diverted Profits Tax regime which came into effect from April 2015.

The DPT regime targets certain specific, although widely defined, circumstances in which it is considered that taxable profits have been diverted from the UK and are, therefore, not otherwise subject to UK tax. Exceptionally, the new tax has extra-territorial effect and can impose a UK tax charge on businesses that would not otherwise expect to be subject to UK tax.

The DPT has been described as the ‘Google tax’ since the government perceives that the type of tax planning principally targeted has been most effectively used by technology and web-based businesses. However, the DPT has a much wider scope and applies to all types of business that meet the relevant conditions. Common manufacturing/distribution models, insurance and reinsurance structures, fund management structures and real estate transactions have all been recognised as areas of potential concern.

DPT may apply in two situations:

  • Where a UK company has arrangements in place with a related overseas entity that reduce UK tax liabilities and those arrangements lack economic substance. A potential scenario would involve UK Co (or branch) which transfers IP to Overseas Co in a lower tax jurisdiction. UK Co then pays a UK tax deductible royalty to Overseas Co which does not have the technical or management capacity to develop, maintain and exploit such IP and the transfer is only being undertaken for tax purposes.
  • Overseas Co carries on trading activities in the UK but those activities are specifically designed to avoid creating a permanent establishment in the UK. Overseas Co makes sales to UK customers that are generated by the activities of UK based sales and marketing personnel, which exclude contract negotiation and conclusion in the UK, which would otherwise create a taxable permanent establishment in the UK of Overseas Co.

Where it applies, the DPT taxes diverted profits at a rate of 25% which is higher than the current UK CT tax rate of 19% and is intended to be a penal tax to encourage businesses to restructure relevant arrangements such that profits are not diverted from the UK but subject to the lower 19% CT rate.

In January 2017, Diageo reported its interim results for the six months to 31 December 2016 and also announced that it had been discussing its transfer pricing position and related issues with HMRC. Those discussions are ongoing.

Further to this, Diageo learnt on 10 May 2017 that HMRC intends to issue the preliminary notices which may require the company to pay additional tax and interest of approximately £107 million in aggregate for the financial years ended 30 June 2015 and 30 June 2016.

Diageo has indicated that does not believe that it falls within the scope of DPT and will challenge the assessments when they are received. In order to do this, it will be necessary to pay the full amount assessed up front and then continue to work to resolve this matter with HMRC. Diageo has added that the payment of this sum is not a reflection of its view on the merits of the case and, based on its current assessment, considers no provision is required in relation to the tax.

If you would like further information on DPT, please contact Keith Rushen on 0207 486 2378.

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