INTM489540 - Diverted Profits Tax: introduction and overview: who is affected
DPT is aimed at large groups (typically multinational enterprises) that use contrived arrangements to circumvent rules on permanent establishment and transfer pricing.
DPT addresses three situations
- a UK company uses entities or transactions that lack economic substance to exploit tax mismatches; or
- a foreign company with a UK-taxable presence (a permanent establishment) uses entities or transactions that lack economic substance to exploit tax mismatches; or
- a person carries on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a permanent establishment in the UK, and either the main purpose or one of the main purposes of the arrangements put in place is to avoid UK tax, or there are arrangements designed to secure a tax mismatch, such that the total tax derived from UK activities is significantly reduced.
Although in many cases the arrangements put in place to divert profits will involve non-UK companies, DPT may also apply in circumstances where wholly domestic structures are used if a UK tax reduction is secured.
The legislation contains some specific exemptions, including for small and medium-sized companies (SMEs), companies with limited UK sales or expenses, and where arrangements give rise to loan relationships only. The exemptions and the situations in which they apply are set out in INTM489580.
DPT addresses the erosion of the UK tax base by the diversion of profits that have been generated by UK economic activity. Profits which have been diverted from the UK are computed using the same principles which apply for corporation tax, including transfer pricing rules, except where the legislation requires them to be calculated by reference to the arrangements that it is just and reasonable to assume would have been made if tax on income had not been a consideration.
The Finance Act 2016 introduced changes to the rules in respect of the deduction of income tax from payments of royalties. To ensure that these changes cause no advantages to accrue to a person within the charge to DPT, the calculation of profits diverted from the UK may also include, for accounting periods ending on or after 28 June 2016, an amount equal to payments of royalties and other sums in respect of intellectual property that would have been subject to the deduction of income tax at source had an avoided permanent establishment (PE) been an actual permanent establishment in the UK.
Further information about the application of the DPT legislation, including the detail of the conditions which must be met, examples of the situations to which it applies, and the computation of diverted profits, is given in INTM489580.