The UK is introducing a new tax that is proposed to be effective from 1 April 2015 – the ‘Diverted Profits tax’ (DPT). The DPT represents the UK's domestic measures on BEPS Action 7 (Avoidance of PEs) and BEPS Action 9 (Transfer Pricing issues relating to risks and capital). A number of other countries have indicated that they might look to introduce similar rules. Some of the key aspects of the DPT are as follows:
·
The DPT acts by imposing a tax
charge of 25% on profits diverted from the UK in either of two
situations – (1) avoidance of UK permanent establishment and (2) entities or
transactions lacking substance.
·
Companies are obliged to notify HMRC if they may be
subject to the tax. This is an important and wide-ranging notification
obligation and could be required even if a DPT charge may not ultimately
arise.
·
In many cases the 25% tax has to be paid up front
and cannot be postponed pending determination of any appeal.
·
The legislation permits HMRC to impose the
tax in a wide category of situations and it remains to be seen how HMRC will
exercise that discretion in practice.
·
Existing transfer pricing documentation, including APAs, may not provide
protection from the DPT.
·
Some examples where the DPT provisions would be relevant are where the
group has a branch/subsidiary in the UK that (a) carries out work relating to
contracts with UK customers or (b) carries out marketing & distribution
activities in the UK or (c) retains a small profit in the UK (typically by way
of a cost-plus mark-up).
Given that the introduction of the law is
imminent, Indian MNCs operating in the UK will need to act quickly to determine
if a notification obligation arises and further if a DPT charge could arise.
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