INTM489740 - Diverted Profits Tax: application of Diverted Profits Tax: legislation – Finance Act 2015 – core provisions: the effective tax mismatch outcome
For section 80 or 81 to apply the material provision must give an effective tax mismatch outcome. Such an outcome is also one of the requirements of the mismatch condition at section 86 (“avoidance of a UK taxable presence”) see INTM489655. The detail of the calculation of taxable diverted profits in a section 86 case and the relevant section that applies, also depends on whether or not the material provision results in an effective tax mismatch outcome.
References to “first party” and “second party” below relate to the following for each of the situations described at INTM489595 and INTM489620.
| Situation | First Party | Second Party |
|---|---|---|
| UK resident company (section 80) | UK resident company (C) | Another person (P) |
| UK PE of non-resident company (section 81) | UK permanent establishment (C) | Another person (P) |
| Avoided UK taxable presence (section 86) | Foreign company | Another person (A) |
References to “relevant tax” are to corporation tax, surcharge on banking companies, oil and gas supplementary charge tax, income tax or any non-UK tax on income. Non-UK tax has the meaning at section 187 CTA 2010.
There is an effective tax mismatch outcome if the material provision results in the following:
- expenses of the first party for which a deduction is allowable for a relevant tax and/or a reduction in income that would otherwise have been taken into account by the first party in computing its liability for a relevant tax, and
- the reduction in the first party’s liability to a relevant tax exceeds any resulting increase in the relevant taxes payable by the second party for the corresponding accounting period, and
- the above results are not ”exempted”, and
- the second party does not meet “the 80% payment test”.
References in the DPT rules to “the tax reduction” (for example, in the insufficient economic substance condition) are to the amount of the excess of the first party’s tax reduction over the second party’s increased liability. It does not matter whether this reduction has occurred as a result of different tax rates, the operation of a relief, the exclusion of any amount from a charge to tax, or otherwise.
The rules concerning corresponding accounting periods are at section 113.
Because the test focuses on relevant taxes payable by the second party there are circumstances in which an effective tax mismatch outcome can technically arise although there has not actually been a tax reduction to the group as a whole. This may occur, for example, where the second party is part of a tax consolidation group or where its profits are subject to a particular regime such as the Non-Resident Landlords Scheme (see INTM489804).
However, the existence of an effective tax mismatch outcome will not in itself give rise to a charge to DPT. It is always necessary to consider the interaction between the effective tax mismatch outcome and the insufficient economic substance condition at section 110 (see INTM489765 onwards). The basis of that condition is whether it is reasonable to assume that arrangements were designed to achieve the tax reduction established by applying sections 107 and 108. Such an assumption is unlikely to be a reasonable one where it can be seen that there is no actual tax reduction to the group and there would have been no expectation of such a reduction. (See also INTM489950.)
If there is still any uncertainty around this for any reason it may be useful to move on to consider how the rules concerned with the consequences of sections 80, 81 or 86 applying would be expected to apply, should the effective tax mismatch outcome and insufficient economic substance conditions be met.