On January 10, 2019, UK HMRC published guidance on the Profit Diversion Compliance Facility (the “Facility”).
The Diverted Profits Tax (DPT) came into effect for diverted profits arising on or after April 1, 2015. It addresses specific arrangements used by MNEs to erode the tax base in the UK. The DPT aims to ensure that profits taxed in the UK fully reflect the economic activity there.
The DPT addresses two main situations:
- UK company (or UK permanent establishment (PE) of a foreign company) uses entities or transactions that lack economic substance to exploit tax mismatches.
- Person carries on an activity in the UK in connection with supplies by a foreign company, which is designed to ensure that the foreign company is not trading in the UK though a PE, and which is designed to secure a tax advantage or tax mismatch.
Businesses can mitigate their risk of liability to a DPT charge by not entering into tax driven arrangements, having in place appropriate TP policies applied to the actual business operations, and not seeking to artificially avoid a PE in the UK (see BEPS Action 7). UK profits reported for corporation tax purposes will then correctly reflect the economic substance of the activity that is undertaken both in the UK and with the UK.
The Facility is designed to encourage MNEs with arrangements that might fall within its scope to review the design and implementation of their TP policies, change them if appropriate, and use the Facility to submit a report with proposals to pay any additional tax, interest, and potential penalties. The Facility must cover all prior accounting periods for the disclosed arrangements to the extent that HMRC is within the relevant time limits to assess.
If the MNE is not already under investigation by HMRC for profit diversion, then the Facility gives it the opportunity to bring its UK tax affairs up to date by reconsidering TP policies or restructuring, making a full and accurate disclosure of the facts for all relevant accounting periods, and using reasonable endeavors to determine the correct amount of tax payable, based on an application of the arm’s length principle. If HMRC has opened an investigation in relation to matters other than profit diversion, then the Facility will still be available. If an MNE is already under investigation by HMRC for profit diversion, it will need to discuss this with the Customer Compliance Manager (CCM) or other HMRC contact.
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