The Treasurer has recently foreshadowed the introduction of specific tax arrangements modelled on the UK’s recently announced Diverted Profits Tax (DPT) which has been referred to as the Google Tax.
Recently a number of countries, including Australia, have focused their tax policy on tax avoidance by multinational companies operating in their territory. This follows substantial work undertaken by the Organisation for Economic Cooperation and Development (OECD) in this area, several inquiries by national Parliaments, a non-government organisation report on Australian companies’ use of tax havens and increased amounts of public comment stemming from the work undertaken by the International Consortium of Investigative Journalists.
In his recent Autumn Statement the UK Chancellor announced several measures in response to profit shifting by multinational companies operating in that jurisdiction:
- the Diverted Profits Tax, to commence 1 April 2015 (see below for more details)
- implementing country by country reporting of profits in line with OECD recommendations
- consultation on the introduction of the new rule governing the use of financial arrangements that have the characteristics of both debt and equity (i.e. hybrids) agreed during the G20-OECD negotiations and
- changes to the Value Added Tax (VAT) place of supply rules for broadcasting, e-services and telecommunications that were announced in the UK 2013 Budget. From 1 January 2015, VAT on these services will be payable where the customer is located (that is, in the UK), instead of where the supplier is located (possibly in a low or no tax country).
Diverted Profits Tax – more details
Legislation to implement this new tax will be in the forthcoming UK Finance Bill 2015. The tax will be at a rate of 25 per cent of diverted profits relating to UK activity. The normal UK company tax rate is 21 per cent, soon to be 20 per cent.
The tax will apply:
- where a person in the UK carries on a business connected with the supply of goods and services sourced from overseas, but that person does not have a permanent establishment in the UK (subject to some detailed conditions), or
- where arrangements have been entered into that lack economic substance by entities that are subject to UK tax arrangements (again subject to some detailed conditions).
The new tax is not aimed at small or medium sized enterprises (to be defined as having total sales revenue of less than £10 million for a twelve month accounting period). Nor will the DPT apply to profits relating only to loans. The DPT will operate on a ‘pay now and argue later’ basis, as follows:
- UK Revenue and Customs issues a preliminary notice explaining why DPT applies, the amount to be collected, how that was calculated, who is liable for this tax and when it must be paid
- following this the company has 30 days to make representations to Revenue and Customs
- following the end of the 30-day representation period, Revenue and Customs has 30 days to issue a charging notice or confirm that no charge arises
- there can be no immediate appeal against the notice but following the charging notice there will be a further 12 month review period within which the group will have the opportunity, amongst other things, to demonstrate that they were not liable for the charge or provide further information and
- a company cannot postpone the payment of DPT, which must be paid in full within 30 days of the issue of a charging notice. If a foreign company fails to pay DPT, Revenue and Customs may collect the tax from related companies.
The operation of these provisions depends on the making of ’reasonable’ assumptions by the UK revenue officials that a transaction was undertaken for the purposes of avoiding tax. No doubt, such reasonable assumptions will provide fertile grounds for legal challenge.
Unsurprisingly, UK business leaders have criticised the draft legislation as too aggressive, conflicting with current OECD efforts to implement a co-ordinated international approach, unneeded in the light of the UK’s own general anti-avoidance provisions, and too far in advance of other countries and the OECD’s own efforts.
In a recent interview the Australian Treasurer maintained his commitment to appropriate and effective action to ensure that the appropriate level of tax is collected from multinational corporations operating in Australia. Apparently, the Government’s white paper on the taxation system is to be released in 2015 or later. It may be the case that a proposal for Australia’s version of the DPT is released at this point.