New ‘Diverted profits tax’ in the UK & Implications for Indian MNCs

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.