With effect from 1 April 2015, the UK Government introduced a new tax: the Diverted Profits Tax ("DPT"). The DPT is aimed at countering the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK and has been set at a deliberately punitive rate of 25% (compared to the prevailing 20% rate of UK corporation tax).
The background to this new tax was the at-times frenzied press coverage of the UK tax affairs of several well-known corporate groups: Google, Starbucks, Facebook and Amazon, to name but a few. The UK's Public Accounts Committee, with Margaret Hodge at the helm, became heavily involved in a wider campaign, seemingly supported by the UK public, to encourage multinationals to pay their "fair share" of tax.
That the perceived perpetrators of such invidious tax planning, and therefore the target of the DPT, were the largest multinational groups was underlined by the media response to UK Chancellor George Osborne's announcement of the measure – immediately dubbing it a "Google tax" (albeit the Chancellor himself was careful not to refer to any particular target by name, referring only to technology companies in general).
However, on closer inspection, it has become swiftly apparent that the DPT rules have been drawn so as to cast the net at a much wider group of prey than just the "big fish" of the technology world, such that virtually any company with UK links would be wise to sit up and take notice.
There are two types of charge. The first is on non-UK companies ("foreign companies") which are considered to have diverted profits from the UK by avoiding a UK taxable presence. The second is on UK companies (or existing permanent establishments of non-UK companies) which are considered to have diverted profits from the UK by involving entities or transactions lacking economic substance.
Companies are required to notify HM Revenue & Customs ("HMRC") that they may have a potential liability to DPT. HMRC may then issue a charging notice and the taxpayer must pay the tax charged before it can appeal. If no notification is made and DPT is chargeable, the company is subject to penalties.
This all seems fairly onerous; however, as with most anti-avoidance measures, there are several exclusions to consider. One of those most likely of relevance in an Isle of Man context is that applicable to small and medium sized entities ("SMEs"). An SME is a company which employs fewer than 250 employees and has an annual balance sheet total of €43m or less and/or annual turnover of €50m or less, with these thresholds being calculated on a worldwide group basis.
The other main category of entities which are likely to be able to rest assured that the DPT won't affect them are those which do not have any kind of UK presence, be that in the shape of a sister company, a subsidiary, a branch, an agent or whatever. For the avoidance of doubt, simply transacting with unrelated UK entities in a normal commercial manner will not in itself bring with it a DPT obligation.
Failure to meet any of these criteria is likely to necessitate a "deeper dive" into what are fairly complex and, in places, (deliberately?!) vague rules, with the potential for uncertainty which this brings. As an example of this uncertainty, HMRC's view is that the DPT cannot be avoided by reference to a double tax treaty ("DTT"), for example that in place between the UK and the Isle of Man, due to its (the DPT's) stated intent of only applying to the more aggressive, contrived situations which are themselves not generally protected by DTTs. However, this is a school of thought which is not universally subscribed to.
As ever, in the final analysis, the question of whether a company (or transaction) is caught by the DPT depends on facts of the particular case. Whilst smaller companies and groups are likely to avail themselves of the SME exemption, just because a larger business might not fit into the same bracket as those US corporate behemoths mentioned earlier, they shouldn't fall into the trap of assuming that they remain happily unaffected.
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