UK to modify proposed diverted profits tax notification rule, exclusion for loans

The UK government is working on modifications to the proposed diverted profits tax rules that would limit the notification requirements and broaden the exclusion for loan relationships, Mike Williams, Director, Business and International Tax, HM Treasury said January 13.

The proposed 25 percent tax on diverted profits, announced in the UK Autumn statement and released as a draft law December 10, targets large MNEs that exploit permanent establishment rules or that reduce their tax liability through transactions or entities that lack economic substance.

Under the proposed law, a company must notify HMRC within three months after the end of an accounting period if it potentially owes diverted profits tax for the period. Special rules apply for purposes of the notification provision, requiring notification in some cases where the tax will not apply.

Speaking at a conference sponsored by the Centre for Business Taxation held at the British Academy in London, Williams said that it is clear that the notification provisions were drafted too broadly. “There is no advantage in businesses putting together a lot of information which is sent to HMRC, [and] for HMRC look at [the information] and then decide there isn’t an issue,” he said.

Williams added that the notification provisions were not intended to operate as “some sort of parallel” Disclosure of Tax Avoidance Schemes (DOTAS) rules or as enhanced transparency rules, as some taxpayers have assumed.  Rather, the provisions are intended merely to provide information to assist with levying of the diverted profits tax, he said.

It would be helpful for stakeholders to comment on how to narrow the provision before the February 4 deadline for comments on draft Finance Bill 2015, Williams said. There is still time for changes to be made to clarify the legislation before it is submitted to Parliament, he said.

Williams also said that the exception to the diverted profit tax for loan relationships probably does not go far enough. The government is interested in hearing views on how to extend the exception in ways that will not invite abuse, he said. He added that the government decided to exclude interest from the diverted profits tax because it is waiting for the completion of OECD work on preventing base erosion profit shifting (BEPS) through interest deductions.

The government will also consider modifying diverted profit tax provisions so double tax is avoided in situations “where some other country’s [controlled foreign corporation] rules operate higher up the chain than the company we are looking at,” Williams said. The government is keen to keep its commitment to avoid double taxation, he said.

Williams said he disagreed with critics that say that the UK should wait for the outcome of the BEPS project before undertaking efforts to counteract tax avoidance. Other counties are currently better able to combat BEPS than the UK because they have more effective existing domestic tax laws, he said.

He also said that it is appropriate for the UK to try combat tax avoidance through unilateral action before it tries to get others to help. “By doing that, perhaps you put yourself in a better position to justify asking others to work with you to solve your problem,” he said.

He also stressed that the UK is seeking to only tax activities carried on in the UK.  We are not, for example, trying to tax activities carried on in California, nor is the UK trying to tax profits that are diverted from other countries, he said.

 

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