Diversion of profits tax update

HMRC has provided an insight into its policy thinking and the implications of the proposed new “Google tax”.

It is easy to understand why a government might want to legislate against tax practices which it finds objectionable. This is, after all, a basic democratic right. But where legislation is directed too closely at a particular taxpayer’s circumstances it can create unexpected burdens for other businesses that may not have been the target of the policymakers. Following the announcement of the proposed Diverted Profits Tax (DPT) in December, there have been numerous doubts voiced; not about the aim of developing a fair and proportionate tax system itself, but whether the mechanics and timing of the DPT help to achieve this.

HMRC consult…

HMRC has subsequently held an ‘open day’, to discuss its policy thinking and the mechanics of the proposed legislation with representatives from business and the tax profession. The outcome will not make for comforting reading for many businesses.

HMRC was at pains to emphasise that the “Google tax”, as it has been dubbed, is targeted at aggressive tax avoidance. However, it was evident throughout the open day that the current drafting of the statute includes a number of subjective and unclear aspects that will mean that many  taxpayers will be unsure as to whether they fall within its scope. Add to that a self-notification requirement, mandatory payment of tax upfront and the lack of a clearance process, and you have all the ingredients for a sleepless night or two.

Unfortunately that is not the end of the uncertainty. HMRC considers that the DPT targets arrangements that, by their abusive nature, should not qualify for the benefits of double tax treaties and also that the tax is not a “substantially similar” tax to those covered by such treaties. This proved highly contentious and has worrying implications for groups seeking to claim double tax relief for UK taxes suffered.

The reaction of other countries

Apparently, there have been no major problems, even though the proposals are seen by many as potentially disruptive to the coordinated BEPS project being driven by the G20 and the OECD, which looks as if it will result in a sensible set of rules, balancing the need to encourage multinational activity with protection of the revenue base.

The US reaction was said to be “calm”. Overall HMRC appeared confident that the rules will not be challenged by the EU or tax treaty partners.

Will it come in to force?

The fact that the legislation was published in the Draft Finance Bill does not mean that it will necessarily become law – next year’s General Election will happen before the normal date for Royal Assent to the Finance Act. But any hopes that the proposals might be dropped during the transition to a new government were repeatedly dampened by HMRC, as there is, apparently, robust cross-party support for the proposed rules. It therefore seems highly likely that they will be enacted in some form.

We will update you as further developments take place. This is an ongoing consultation and there are likely to be a number of changes to the legislation before the Finance Act becomes law.

For further information on this issue please contact Baker Tilly’s specialist International Taxation team.


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