New ‘diverted profits’ tax

In the Autumn Statement the Chancellor announced the introduction of a new 25% tax on profits generated by multinational companies from economic activity carried out in the UK which are artificially moved outside of the UK in order to avoid UK tax.

Following the Chancellor’s speech at the Conservative Party conference earlier this year, a new initiative to tackle this kind of behaviour had been expected to be announced in the Autumn Statement. However, it was hoped that more details on how the tax would operate would be announced at the same time.

The new diverted profits tax has been widely labelled in the press as the 'Google tax'. In recent years large multinationals such as Google, Amazon and Starbucks have come under pressure in the media as the levels of tax paid in the UK appear to be small compared to turnover or perceived profitability. Whilst there has been outcry in the newspapers that these large companies have paid little or no tax, none of these companies appear to have been using artificial or abusive tax avoidance schemes to achieve this result; the low tax liability is simply the result of applying internationally agreed rules to the structures they have adopted.

Without further guidance as to how the new tax will apply and what arrangements will fall within it is difficult to comment on the effect this tax may have. There are already existing rules in place, such as the transfer pricing legislation, which ensures that transactions between connected parties take place at arm’s length. At this stage we do not have any information about how the new diverted profits tax will interact with the existing UK rules, treaty provisions or EU laws on the free movement of capital. It is also not clear how the diverted profits are to be quantified.

It is possible that the tax would be levied by means of a withholding tax on the relevant payments. Considerably more detail will be needed before the full effect of this announcement can begin to be understood.

The new diverted profits tax will take effect from 1 April 2015 and is expected to raise over £1 billion in the next five years. Details of how the tax will operate are expected to be published in draft 2015 Finance Bill on 10 December 2014.


Mark Ayres

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