HMRC is now reviewing diverted profit tax cases in round 2: citing the following EY’s link referenced herein:
There are already 100+ DPT cases ongoing and hundreds more “Large” and “Mid-Sized” cases will now be reviewed and enquiries launched in the next 12 to 18 months. Market intelligence suggests a particular focus on Mid-Sized cases, and on sectors including life sciences, oil and gas, and mining and metals. HMRC is also investigating a number of captive insurance arrangements within large groups.
As a reminder, DPT is aimed at groups that use what HMRC sees as contrived arrangements to circumvent rules on permanent establishment (PE) and transfer pricing. DPT is intended to address two broad situations:
- A UK company (or UK PE of a foreign company) uses entities or transactions that lack economic substance to exploit tax mismatches to reduce effective taxation to below 80% of rate otherwise payable in the UK.
- A person carries on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a PE in the UK.
Note, the UK DPT is not arguable on a tax treaty basis, and it is based on the concept of pay now, to be resolved later. It was also enacted as a deterrent for taxpayers to start paying regular tax, vs. no tax, as a DPT was seen as an avenue to avoid the additional tax and controversy. Thus, it is prudent to review any potential instances of DPT.