HMRC has made welcome changes to the new diverted profits tax, which takes effect from 1 April. As a result, the tax should not disrupt commercially based planning supported by economic substance, writes Shiv Mahalingham (Duff & Phelps).
On 19 March 2015, HMRC set out some revisions to the rules on the diverted profits tax (DPT), otherwise dubbed the ‘Google tax’. The revisions were in response to some concerns raised by businesses:
The changes impacting multinational business (summarised below) do attempt to address the first two points. They draw out some helpful clarifications and distinctions between acceptable and non-acceptable business restructurings; and confirm that the DPT will not apply where HMRC has already been advised of and reviewed the transaction. The notification requirement has been restricted only to where there is ‘significant risk’ and the timeline has also been relaxed. However, some businesses will still need to review whether the DPT applies to their transactions and inform HMRC if it does.
The key changes are as follows.
Targeting: The legislation is now solely targeted towards ‘contrived’ arrangements that lack economic substance. (The example provided is where an asset with an existing income stream is transferred from the UK to a tax haven with no income generation activity in that tax haven.) The introduction of another concept of planning arrangements (i.e. ‘contrived’) is confusing alongside other (case law) definitions such as ‘wholly artificial’. However, the above change is positive and HMRC has confirmed that a transfer of economic activity to a low tax location may not be covered by the DPT regulations.
Notification requirement: As mentioned above, the notification requirement has been narrowed to where there is ‘significant risk’ that a charge will arise and HMRC does not know about the arrangements. Once a company has notified for one period of account, there is no requirement to notify in the next period if there is no material change. This is an important change to the previously onerous self-assessment requirement that was affecting a wide array of transactions. APAs and informal agreements with HMRC will be exempted in the majority of cases. The definition of ‘significant risk’ will evolve from challenges and dispute resolutions going forward.
Timelines: The timelines have been relaxed so that a company with a 31 December 2015 year end will not have to notify until 30 June 2016. This gives impacted business a welcome grace period to become comfortable with the requirements and is another welcome change.
Calculating the charge: Traditional transfer pricing rules will be applied to compute any potential charge (but with an upfront payment of tax in most cases). The use of a recognised method will assist impacted business to estimate the potential costs.
Further points: HMRC has stated that it is ‘beyond doubt’ that DPT will not apply if a company decides to take advantage of lower tax rates in particular country by means of ‘a wholesale transfer of the economic activity needed to generate the associated income’. This ensures that commercially based business restructurings remain valid; however, the wording is at odds with the OECD intangibles guidance, as HMRC has specified that the economic activity performed in that country must be more than ‘holding, maintenance or legal protection of the asset’. (The OECD guidance for intangibles states that development, enhancement, maintenance and protection are the key economic functions relevant to intangible assets.)
There are also some other helpful changes:
In summary, this is a good effort from HMRC to improve the regulations and ensure that the DPT should no longer disrupt commercially based planning supported by economic substance.
HMRC has made welcome changes to the new diverted profits tax, which takes effect from 1 April. As a result, the tax should not disrupt commercially based planning supported by economic substance, writes Shiv Mahalingham (Duff & Phelps).
On 19 March 2015, HMRC set out some revisions to the rules on the diverted profits tax (DPT), otherwise dubbed the ‘Google tax’. The revisions were in response to some concerns raised by businesses:
The changes impacting multinational business (summarised below) do attempt to address the first two points. They draw out some helpful clarifications and distinctions between acceptable and non-acceptable business restructurings; and confirm that the DPT will not apply where HMRC has already been advised of and reviewed the transaction. The notification requirement has been restricted only to where there is ‘significant risk’ and the timeline has also been relaxed. However, some businesses will still need to review whether the DPT applies to their transactions and inform HMRC if it does.
The key changes are as follows.
Targeting: The legislation is now solely targeted towards ‘contrived’ arrangements that lack economic substance. (The example provided is where an asset with an existing income stream is transferred from the UK to a tax haven with no income generation activity in that tax haven.) The introduction of another concept of planning arrangements (i.e. ‘contrived’) is confusing alongside other (case law) definitions such as ‘wholly artificial’. However, the above change is positive and HMRC has confirmed that a transfer of economic activity to a low tax location may not be covered by the DPT regulations.
Notification requirement: As mentioned above, the notification requirement has been narrowed to where there is ‘significant risk’ that a charge will arise and HMRC does not know about the arrangements. Once a company has notified for one period of account, there is no requirement to notify in the next period if there is no material change. This is an important change to the previously onerous self-assessment requirement that was affecting a wide array of transactions. APAs and informal agreements with HMRC will be exempted in the majority of cases. The definition of ‘significant risk’ will evolve from challenges and dispute resolutions going forward.
Timelines: The timelines have been relaxed so that a company with a 31 December 2015 year end will not have to notify until 30 June 2016. This gives impacted business a welcome grace period to become comfortable with the requirements and is another welcome change.
Calculating the charge: Traditional transfer pricing rules will be applied to compute any potential charge (but with an upfront payment of tax in most cases). The use of a recognised method will assist impacted business to estimate the potential costs.
Further points: HMRC has stated that it is ‘beyond doubt’ that DPT will not apply if a company decides to take advantage of lower tax rates in particular country by means of ‘a wholesale transfer of the economic activity needed to generate the associated income’. This ensures that commercially based business restructurings remain valid; however, the wording is at odds with the OECD intangibles guidance, as HMRC has specified that the economic activity performed in that country must be more than ‘holding, maintenance or legal protection of the asset’. (The OECD guidance for intangibles states that development, enhancement, maintenance and protection are the key economic functions relevant to intangible assets.)
There are also some other helpful changes:
In summary, this is a good effort from HMRC to improve the regulations and ensure that the DPT should no longer disrupt commercially based planning supported by economic substance.
