INTM489700 - Diverted Profits Tax: application of Diverted Profits Tax: legislation – Finance Act 2015 – core provisions: consequences of section 86 applying - section 88 - key definitions

Sections 89 to 91 employ concepts that are first introduced in section 88. The key terms are:

“The notional PE profits”

This means:

• the profits which would have been the chargeable profits of the foreign company, attributable in accordance with sections 20 to 32 CTA 2009, had the avoided PE been an actual PE in the UK through which the foreign company carried on the trade; and
• for accounting periods ending on or after 28 June 2016, any amount equal to the total of royalties or other sums which are paid by the foreign company during that period in connection with that trade, in circumstances where the payment avoids the application of Section 906 of the Income Tax Act 2007 (duty to deduct tax).

“The relevant alternative provision”

This means the alternative provision that it is just and reasonable to assume would have been made, rather than the material provision, as between the foreign company and any connected companies had tax on income not been a relevant consideration for any person at any time. The words “at any time” are designed to prevent companies from arguing that current (non-tax) synergies that were not anticipated when the structure was planned or implemented should be taken into account when determining whether the material provision in question would have been undertaken had tax not been a consideration. In other words, current unforeseen non-tax benefits cannot be used to justify historic and ongoing avoidance. In some cases, had tax not been a consideration, no transactions at all would have been undertaken. The legislation makes clear that this is to be treated as an alternative provision.

“The actual provision condition”

This is met if the material provision results in expenses of the foreign company for which (ignoring Part 4 of TIOPA 2010) a deduction for allowable expenses would be allowable in computing what would have been the notional PE profits for the accounting period and the relevant alternative provision would also have resulted in the foreign company having expenses that would (ignoring any transfer pricing disallowance) be allowable in its tax computation and the relevant alternative provision:

• would also have resulted in allowable expenses of the relevant company of the same type and for the same purpose as the actual expenses, and
• would not have resulted in “relevant taxable income” of a connected company.

So, for example, the actual provision condition would be met if the foreign company incurs an actual royalty expense for use of an asset and the relevant alternative provision would also have resulted in the company paying a royalty for the use of the same asset, even if the amount would have differed or not been payable to the same person. In addition, for this condition to be met, the relevant alternative provision must not have resulted in relevant taxable income of a company connected with the foreign company.

“Relevant taxable income”

This means income of a company connected with the foreign company which would have resulted from the relevant alternative provision and would have been within the charge to corporation tax less expenses that would have been incurred in earning that income.