The UK Government proposes to introduce a new tax called the “Diverted Profits Tax” or “DPT” from 1 April 2015; the new tax has already been dubbed the “Google Tax” in the UK press.
The tax will be chargeable at a rate of 25% (4% above the standard rate of corporation tax) on profits which are treated as “diverted” from the UK under the rules.
Profits can be treated as “diverted” from the UK if:
- An overseas company avoids setting up a permanent establishment in the UK (Situation A); or
- Taxable profits of a UK subsidiary are reduced by means of payments of overseas affiliates which lack economic substance (Situation B).
The rules could potentially hit any US group which has structure its UK operations to avoid a UK permanent establishment by having all contracts made through the US parent with a local UK office or subsidiary which simply provides marketing and sales support.
There are two major exemptions from the rules:
- In Situation A, if all sales of goods and services to UK customers by the group are less than £10,000,000 in any accounting period; or
- In Situations A and B, if the group as a whole is a small or medium sized enterprise or “SME“.
An SME has less than 250 employees; annual turnover of less than €50m and a gross balance sheet of less than €43m.
All US groups where UK customer contracts are made through the US parent should consider the impact of these rules as a matter of urgency.