The broad stated aim of the new DPT, which will be charged at the rate of 25%, is to prevent large multinational groups artificially diverting profits from the UK with the aim of reducing their UK tax liability.
For accounting periods ending on or after 1 April 2015, the complex DPT legislation can apply in two circumstances:
- to a UK resident company, or non-UK resident company trading in the UK through a permanent establishment, that enters into a transaction with a connected party that either itself lacks economic substance, or involves an entity that lacks economic substance (an “economic substance case”). This will look at the financial benefit of the tax reduction or the contribution of the economic value or
- to a non-UK resident company that supplies goods or services to UK customers in a way designed to avoid it having a taxable UK presence (ie a UK branch, or “permanent establishment”) (an “avoided PE case”).
The draft legislation published as part of last year’s Autumn Statement included a number of conditions required for the DPT to apply. For example, in an avoided PE case, a UK sales threshold of £10m applies (meaning no DPT charge if sales to UK customers by the non-UK company do not exceed this amount).
The concepts of an “effective tax mismatch” and “insufficient economic substance” are also crucial to the application of the DPT (except in an avoided PE case where DPT is charged due to a tax avoidance main purpose existing). In the original draft legislation:
- an “effective tax mismatch” existed where an increased tax liability of the second party to the arrangements is less than 80% of the reduced tax liability of the UK tax-paying party that is central to the arrangements
- the “unsufficient economic substance” condition would be met if the economic value of staff provided by a party to the arrangements was less than the economic value of the tax reduction.
The main changes to the DPT legislation as enacted by Finance Act 2015 are as follows:
- the benefit of the UK sales threshold, which can exempt arrangements from falling foul of an avoided PE case, has been broadened. UK sales made by companies connected to the nonUK company, and which have been taken into account in calculating UK tax, do not count toward the £10m threshold
- a further “exemption” has been added, so that no DPT charge will arise under an avoided PE case if UK expenses of the non-UK company (and connected companies) do not exceed £1m
- credit will be given against DPT that would otherwise be chargeable on a company (C) for any corporation tax (or equivalent outside the UK) paid by another company, or any charge under the UK’s CFC rules (or equivalent outside the UK), in respect of “diverted” profits of C
- improvements have been made to the provisions setting out how profits that might be subject to DPT are to be calculated, and when a company is required to notify HMRC of a potential DPT charge
- provisions have been added to confirm how DPT might apply to arrangements involving partnerships.