INTM489801 - Diverted Profits Tax: application of Diverted Profits Tax: examples and particular situations: interaction between Diverted Profits Tax and the oil contractor ring fence (Part 8 ZA CTA 2010)
The legislation at Part 8 ZA CTA 2010 (see OT50000) operates to restrict allowable deductions for the hire of certain types of mobile assets (‘relevant assets’) for the purpose of calculating a contractor’s ring fence profits (those from its oil contractor activities). The amount of the hire cap is set at 7.5% of the total recognised cost of the asset. Amounts in excess of the cap can be set against profits arising outside the contractor ring fence or by surrender as group relief.
Whether any arrangements for leasing assets that are subject to the hire cap also give rise to a DPT charge will depend on the specific facts and circumstances of each case. The sort of considerations suggested above on all mobile tangible assets will be important in determining this. The tax effect of the hire cap also needs to be taken into account, as can be illustrated by using the example at INTM489783 as if it involved the leasing of an asset that was subject to a restriction of allowable deductions under Part 8 ZA CTA 2010 with the following amounts:
- Total recognised cost of asset: £1bn
- Lease expense between associated persons: £120m
- Relevant percentage at 7.5% of £1bn: £75m
- Available for relief other than against contractor ring fence profits: £45m
(All profits are charged at the main corporation tax rate of 20%)
If the just and reasonable assumption under section 85 is that there would have been no provision between the UK resident company (B) and the asset owning company (C), the annual lease expense of £120m would not have been paid. Company B would have been entitled to capital allowances on its acquisition of the asset. In this case there would be no allowable financing costs as the actual purchase by Company C did not involve any such costs.
For a full 12-month accounting period the maximum taxable diverted profits in relation to the asset would be £120m less the value of notional capital allowances. These allowances would be based on the lower of cost or market value of the asset at the beginning of the first accounting period for DPT (subject to the commencement and transitional provision at section 116).
However, the amount of the additional profits in relation to those in the relevant corporation tax return would depend on the extent to which the £45m hire cap restriction has been tax effective.
If the £45m had all been relieved against other profits in the return or surrendered as group relief then the additional profits would be the £120m less notional capital allowances. If £25m had been relieved against other profits in the return or surrendered as group relief then the additional profits would be £100m less notional capital allowances (as £20m has been disallowed in the return).
If none of the £45m could be relieved against other profits in the return or surrendered as group relief then the additional profits would be the £75m restricted charter expense less notional capital allowances.
In more complex circumstances (for example if all or part of the £45m was relieved at a lower rate than that which Company B was subject to on the profits derived from the use of the asset) then it would be necessary to take account of the tax effect of the hire cap restriction through section 100 (credit for UK or foreign tax).