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 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 came as a surprise.

Whilst cast as a new tax, DPT is in reality a modification to the corporation tax system. It has been presented 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 March in the Finance Act 2015, 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 change will affect multi-national groups which have a presence in the UK which falls short of a permanent establishment under the current rules. Whilst two of the existing ways of avoiding a permanent establishment – the UK entity being an ‘agent of independent status’ and there being ‘alternative finance arrangements’ between the non-UK company and the UK entity – will also prevent a DPT charge (subject to some slight changes), the group will not be able to prevent a DPT charge by arguing that the activities carried on in the UK are of a ‘preparatory or auxiliary character’ or that its representatives do not have the authority to conclude contracts here.