The Government’s new Diverted Profits Tax – the so-called Google Tax – occupies 26 pages of closely drafted legislation. These are my immediate thoughts, a matter of an hour or so later.
The measures tackles two particular types of ‘diversion’ of profits being:
- first, where an economic entity avoids establishing a UK presence (known to tax practitioners as a Permanent Establishment) so that the profits from sales of goods and services to UK consumers fall outside the charge to UK corporation tax (call it the “Amazon diversion”) and
- second, where an economic entity which has profitable activities in the UK diverts those profits to lower tax jurisdictions abroad (call it the “Starbucks diversion”).
There are a number of important economic concepts embedded in the legislation but the important ones look to me (on an initial reading) to be
- that the arrangements happen in concert (or as I have put it for shorthand within a single economic entity). This concept is defined in clause 5 “The participation condition”
- that the arrangements generate a tax saving. This concept is defined in clause 6 “Effective tax mismatch outcome”. Clause 6 contains a key value judgment made by the drafters of the regime. Arrangements offend against the regime if they (broadly) lead to profits being diverted to another country where those profits give rise to a tax charge of less than 80% of that which would arise in the UK and
- that they lack economic substance. This concept is defined in clause 7 (“Insufficient economic substance condition”) which requires (broadly) that the tax benefits of the arrangements are greater than the non-tax benefits. Putting the matter another way, that the arrangements were effected for tax reasons.
Standing back from the detail, a few observations
- diverted profits tax looks to me to be a foothold – only a foothold but a meaningful one – in a new and more fiscally satisfactory world in which tax better reflects the economic substance of transactions
- the higher rate at which the diverted profits tax is to be charged (compared with corporation tax) may well reflect a policy preference that economic entities bring themselves with the normal domestic corporation tax regime
- there are signs – quite understandable, given the radical nature of these measures – of caution on the part of the draftsman: the tax liability is fixed following an iterative process of discussion between putative taxpayer and an officer of HMRC. Even after it is fixed, there remains scope for later adjustment
- the Green Book shows the yield growing from £270m in 2016-17 to £360m in 2017-18. Speculating, I wonder whether built in to these forecasts is an expectation that the measures might adapt as business behaviour adapts. But whether or not that expectation is built into the forecasts, it is my expectation that these measures will have to adapt and change.
- a big question is how other countries will respond to this unilateral measure. For myself, instinctively I doubt that these measures will come to be regarded as contrary to EU law. The bigger question is, what effect might they have on the propensity of our co-signatories to Double Tax Conventions to continue to observe those Conventions. On this point, I would assume that Government had already taken initial soundings.