INTM489520 - Diverted Profits Tax: introduction and overview: overview

The Diverted Profits Tax (hereafter DPT) is an important tool to be used to counter profit shifting. It is a closely targeted measure which addresses certain specific arrangements and it should therefore be seen in the context of HMRC’s wider strategy to tackle international tax risk.

DPT applies to profits arising from 1 April 2015 and is focused on contrived arrangements designed to erode the UK tax base. Its primary aim is to ensure that the profits taxed in the UK fully reflect the economic activity here: this is consistent with the aims of the OECD Base Erosion and Profit Shifting project. Specifically, DPT aims to deter and counteract the diversion of profits from the UK by large groups that either:

• (i) seek to avoid creating a UK permanent establishment that would bring a foreign company into the charge to UK Corporation Tax, or
• (ii) use arrangements or entities which lack economic substance to exploit tax mismatches either through expenditure or the diversion of income within the group.

DPT is set at a higher rate than corporation tax to encourage those businesses with arrangements within the scope of DPT to change those arrangements and pay corporation tax on profits in line with economic activity.

The requirement to pay the tax “up front” provides a strong incentive for groups to provide timely information about high-risk transactions and how they fit into the group’s global operations.

It reduces the information bias inherent in complex cases and promotes full disclosure and constructive early engagement with HMRC.