Diverted Profits Tax: Frequently asked questions
Published on 14th Jan 2015
1. Is it really called the “Google Tax”?
No – the new tax will be known as the “Diverted Profits Tax” or “DPT“.
2. My company is a US company, so I do not need to worry, right?
No – the new tax can apply to any non-UK company with UK based customers or to international groups with UK subsidiaries.
3. Thanks but my company is not a technology business so that means we are OK?
Sorry no – the rules can apply to all type of businesses – those selling goods or services to UK customers, leasing companies, technology companies possibly even real estate development companies.
4. You are starting to worry me – in what circumstances will the rules apply?
The DPT will apply either if the overseas company has avoided a UK taxable presence (a “Permanent Establishment” or “PE“, in tax jargon) or a UK company it has reduced its UK tax bill by means of intra-group arrangements which lack economic substance.
5. That sounds complicated – what does it really mean?
Overseas companies may now have to pay DPT on sales to UK customers where previously they had no UK tax liability or their UK tax bill may be greater.
6. My arrangements have been in place for a number of years- these rules can’t be aimed at me, can they?
Unfortunately yes – the rules could cover a number of structures which up to now have been regarded as legitimate tax planning – such as having only a local sales and marketing function with all customer contracts being signed by the head office.
7. Is paying DPT the same as paying “normal” UK corporation tax?
No – the rate is 25%, i.e. 4% higher than the standard rate of UK corporation tax (it will be 5% higher if, as expected, standard rate drops to 20% from 1 April 2015).
8. Is there any good news?
A little bit – DPT will only apply to an overseas company with no UK PE if its sales to UK customers exceed £10,000,000. There will also be no charge for DPT if the entities involved are small or medium-sized companies. An SME is a company which has less than 250 employees turnover of less than €50m per annum and a gross balance sheet of less than €43m
There may be some protection from the impact of the rules if you operate through an independent third party agent.
9. My company books all its profits outside the UK, so I do not need to worry, right?
No – if DPT applies, HMRC will be able to raise an assessment to DPT calculated on a “just and reasonable basis“, assuming either you had a UK PE or on the basis of the arrangements that would have been put in place had no tax benefit been obtained from the arrangements.
10. Is it me or does that sound complicated?
You are right – it is very complicated, working out what profits could be assessed to DPT – is going to keep a lot of companies awake from now until the rules come in.
11. So I should just sit around and wait to see if I get assessed to DPT?
No – there are things you can do to manage your risk, e.g. can you make sure your company is an SME? If the rules will apply, there may be scope to restructure to take the benefit of the standard UK tax rate of 21%. There is also an argument that the rules cannot apply to transactions between EU affiliates.
12. When will the rules apply?
They are expected to come into force on 1 April 2015.
13. So this is an April Fool’s Joke?
I really wish it was…. But no.