Diverted profits tax
The Government has given details of the politically motivated diverted profits tax (DPT), elsewhere referred to as the “Google tax”. The DPT is aimed at the diversion of profits out of the UK by multinationals. It will apply to diverted profits arising on or after 1 April 2015 at a penal rate of 25%, which contrasts with the 20% rate of corporation tax, starting on the same day. There are two broadly drafted charges, with limited exclusions.
Firstly, it will apply where non-UK companies avoid UK tax on supplies of goods or services to UK customers by not having a UK permanent establishment. Additional conditions are that there is either a significant UK tax avoidance purpose or, where there is a lesser tax avoidance purpose, there is an arrangement between the non-UK company and an associated person, resulting in a reduction in UK tax for the non-UK company that is significantly greater than any increase in the associated person’s tax (an effective tax mismatch outcome) and there is a lack of economic substance.
Secondly, it will apply where there is an arrangement between a UK- resident company (or UK permanent establishment) and an associatedcompany that results in an effective tax mismatch outcome, a lack of economic substance, and the lesser degree of tax avoidance purpose exists. An example could be the deliberate location of intellectual property in a low tax rate jurisdiction and its leasing into the UK.
A major concern is the rapid introduction of this measure in the pre-election Finance Bill 2015 following limited consultation, when it currently appears to overshoot its aim significantly and raises questions on familiar financing structures. As a result of this initiative, multinationals will need to review a wide range of structures.
Restriction on bank losses
One of the bigger surprises in the Autumn Statement was the proposal to restrict the carry forward of losses in banks and building societies. The measure will apply to certain types of losses accrued before 1 April 2015 and will apply to profits accruing from that date. Losses accruing after 1 April 2015 will not be affected.
Broadly speaking, the restriction will prevent banks and building societies from using those losses to offset more than 50% of their profits (computed in the absence of thoselosses). The effect of this change should be to render profit from the banking sector subject to corporation tax at an earlier stage than it would otherwise have been. The Government’s concern is that these entities will have accumulated significant losses during the financial crisis and it is therefore “unfair” for them to use those losses to eliminate tax on recovering profits.
The rules are relatively detailed and include anti-avoidance measures to prevent the accelerated use of losses prior to commencement of the rules and to prevent the artificial enhancement of profit in affected entities.
Some financial institutions may need to look again at the value of their deferred tax assets.