Diverted profits tax may merge with corporation tax

The government is considering tightening the rules to make it more difficult for multinationals to avoid paying the diverted profits tax and bring it into the corporation tax regime

Sara White, Editor, Accountancy Daily

This is part of a review of international tax rules including transfer pricing rules, which have not been significantly updated since they were introduced in 2004, and the use of permanent establishment.

It is reviewing the anti-avoidance measures for countering arrangements designed to divert profits from the UK with a view to simplifying the current guidance and legislation.

The core issue which the government is considering is whether to remove diverted profits tax’s status as a separate tax and bring it into corporation tax. Since it was introduced in 2015, the tax has raised £8bn for the Exchequer.

‘This would clarify the relationship between diverted profits tax and transfer pricing, and provide access to treaty benefits while maintaining key features of the regime,’ stated the HMRC consultation document.

The government also wants to use this opportunity to carry out a wider review of the diverted profits regime to ensure that it continues to achieve the wider aims, specifically with respect to the following aspects:

the Effective Tax Mismatch Outcome (ETMO) identifies where contrived arrangements lead to a tax advantage. It is intended to apply whether the arrangements increase expenses or reduce income (even if some income is still reported). The government is of the view that the rule applies in all of these circumstances, but is considering amending the rule under sections 107–108 Finance Act 2015 (FA15) to make this clearer.

One of the objectives is designed to ensure that it is clear that diverted profits tax applies to scenarios where contrived arrangements have led to the creation, or increase, of a loss as well as to scenarios where they have led to a reduction of profit (ss84–85 FA15).

The government is also considering whether to amend or replace the wording of the relevant alternative provision (RAP) to ensure that this part of the legislation is aligned more closely with the UK’s tax treaties (s82 FA15).

It is also evaluating the transfer pricing rules and the use of permanent establishments by non-UK resident companies, which are used by the largest international businesses as part of their standard tax planning.

The government is considering whether, and how, to update UK domestic legislation on permanent establishments (PEs) to maximise clarity and maintain alignment with bilateral treaties and the OECD Model as they develop further. It also believes that improvement in this area could deliver a simplified regime for multinational businesses, increasing tax certainty for non-resident entities trading in the UK.

‘We aim to clarify and modernise the legislation, and ensure it achieves its objectives, while developing simpler, legislation that is easier to understand, and supports growth by improving tax certainty,’ stated the HMRC consultation document.

HMRC will be holding a series of consultation events on 27 and 30 June, and 6 and 10 July. Pre-registration is required.

The consultation closes at 11:45pm on 14 August 2023.