INTM489640 - Diverted Profits Tax: application of Diverted Profits Tax: legislation – Finance Act 2015 – core provisions: consequences of section 80 or 81 applying - section 84 - calculation by reference to the actual provision

If section 83 does not apply, section 84 applies where the actual provision condition is met (that is, both the material provision and the relevant alternative provision would have resulted in expenses of the same type and for the same purpose (even if paid to a different person) and also would not have resulted in relevant taxable income), but the relevant company, that is, the one making the payment, has not made the full transfer pricing adjustment.

Where section 84 applies, taxable diverted profits equal the amount which is chargeable to corporation tax by virtue of Part 4 of TIOPA 2010 (transfer pricing) or which, in a case where section 81 applies, are attributable to the UKPE under sections 20 to 32 of CTA 2009 (profit attribution to UK permanent establishments) less any adjustment in respect of these amounts that the relevant company includes in its corporation tax return by the end of the review period. The DPT legislation provides an additional opportunity for a company charged to DPT to amend its company tax return during the first 12 months of the review period (s101A Finance Act 2015). This is in addition to the period in which the company can amend its return under Para 15, Schedule 18, Finance Act 1998.

It follows that a charge under section 84 will only arise if the payments are excessive by reference to the arm’s length rate, and the company does not take remedial action under transfer pricing rules.

The actual provision condition avoids unnecessary complications in situations where the relevant alternative provision would not result in any greater level of reward to the UK than the actual provision priced on the basis of the arm’s length principle. For example, UK Company A’s business might depend on the use of an IP asset which is held by a group company (B) that has little substance in terms of functionality and which is resident in a low tax territory. If all the functions around development, enhancement and exploitation had been carried out by other non-UK resident group companies there might be considerable doubt as to the exact form of the relevant alternative provision, other than that it would involve the UK company in making payments of the same type and for the same purpose as the actual payments to the company that owns the IP. Under section 84 the issue is to determine the price that would have been paid by an unconnected party in the position of the UK Company A to the owner of the IP in the position of Company B, without hypothesising any changes to the structure of the arrangements. The contributions of the other non-UK group companies would be reflected in the value of what B provides to A.