HMRC is taking a unilateral proactive lead in devising measures based on OECD BEPS initiatives that introduce a diverted profits tax, as well as country by country (CbC) reporting for UK headquartered MNE’s. A Tax Journal summary provides a summary of the diverted profits tax, which is linked herein, in addition to the HMRC source articles for application of the diverted profits tax and CbC reporting.
Diverted Profits Tax:
This measure will introduce a new 25% tax (regular tax rate plus a punitive component) on diverted profits. The diverted profits tax will operate through two basic rules. The first rule counteracts arrangements by which foreign companies exploit the permanent establishment rules. The second rule prevents companies from creating tax advantages by using transactions or entities that lack economic substance. The proposal will be effective as of 01 April 2015.
The main objective of the diverted profits tax is to counteract contrived arrangements used by large groups (typically multinational enterprises) that result in the erosion of the UK tax base.
The publication allows regulations to be issued re: CbC reporting for UK-based companies after the OECD publishes guidance on how the reports should be filed and how the information in them may be shared between relevant countries, and after a period of consultation in the UK.
After issuance of the hybrid mismatch rules (post of 7 December 2014) that patiently await the final OECD guidelines for consensus in its guidelines, the diverted profits tax mechanism will be in effect next year prior to final OECD guidelines and subject to other countries following a similar early unilateral lead as incentivized by the BEPS initiatives.
The CbC reporting is addressed at UK-based MNE’s, while presumably non-UK based MNE guidance for such reporting will be also be issued in the near future.
These initiatives may target legal mechanisms that the taxpayer will need to defend aggressively, while advancing preparation for timely compliance for CbC reporting. Additionally, other countries may use this information via automatic exchange of information to assist in transfer pricing risk assessment. The initiatives should be reviewed in detail to better understand the rules, and trends, for these proposals.