In the autumn statement the Chancellor of the Exchequer announced the introduction of a new Diverted Profits Tax (DPT). Against the context of international co-operation in the OECD-led consultation on ways to ensure profits are taxed where they are generated (the Base Erosion and Profit Shifting project (BEPS)), this unilateral action on the part of the UK government comes as a surprise.
Whilst cast as a new tax, DPT is in reality a modification to the corporation tax system. It has been cast as a new tax to minimise any risk of challenge on the basis that the tax is incompatible with the UK’s obligations under double tax treaties and EU law.
Draft legislation and guidance have now been published, and although this remains subject to consultation, it is anticipated that legislation to implement the tax will be introduced in the Finance Act 2015 in March before the United Kingdom general election in May this year. DPT will apply to profits accrued on or after April 1, 2015. There is no grandfathering for existing structures.
The DPT is introduced in addition to the specific legislation introduced in 2014 which restrict deductions for payments made under bareboat charters of rigs operating in the UKCS, where chartered from an associated company (the BBC Legislation). The UK Government is working with industry to ensure the compatibility of DPT with the BBC Legislation.
The change will affect multi-national groups with internal cross border leasing arrangements involving low tax jurisdictions. The intention appears to be that debt financing arrangements will not fall within the scope of DPT, but the exemption for debt funding arrangements is drafted in very narrow terms. This aspect is subject to consultation and it will only be possible to determine the impact on debt funding arrangements once the final legislation is available in March.