Announcing the Diverted Profits Tax (the Google Tax to you and me) at last year’s Conservative Party Conference George Osborne quite reasonably observed that the quid pro quo of our low rates of business tax is that businesses should actually pay that tax. Picking up on his theme, when the detail of the measures was announced last year, I wrote that there was a case for action to secure a “new and more fiscally satisfactory world in which tax better reflects the economic substance of transactions.” Too often in the old world it did not.
Those opposed to the Google Tax have argued that such a new and better world is best brought about by the OECD’s Base Erosion and Profit Shifting (“BEPS”) project – one which has broad international support – rather than by individual countries going it alone. This is a compelling proposition. Logically one can only resist it by arguing that the BEPS project might fail, that there’s a compelling need to act now rather than wait, or that the scope of the BEPS project is too narrow. Unfortunately the Coalition – which should be roundly applauded for the vigour with which it has set about tackling tax avoidance – hasn’t conspicuously sought to engage with those arguments (I mean no criticism by this). And although I would like to examine them, beyond noting that an oft-cited criticism of the BEPS project is its breadth, I sadly lack the expertise.
But what I can do is ask how well the Google Tax succeeds on its own terms. Does it impose a liability to UK tax on transactions that ought to be subject to UK tax? And does it only impose a liability where a liability should be imposed?
The starting point is, perhaps, this. The Google Tax is intended to be punitive. In that sense it’s like a number of other recent (and contemplated) moves in the tax avoidance sphere. It marks out territory on the fiscal map which is susceptible to tax avoidance – and then sets a series of landmines. Step on a mine and you face a penalty tax rate (of 25% more than the general corporation tax rate). Enter the territory and you’ll also face a long period of uncertainty as to whether HMRC will impose a penalty rate along with a hugely complex and uncertain compliance regime
You don’t like that? Well then don’t enter that territory.
And it’s absolutely the case that the Government would rather you didn’t. We have decided to pursue a strategy of a low corporation tax rate with an expected increase in the tax base through increased investment. A lower rate applied to greater receipts is the logic. And that it’s Government’s purpose that the Google Tax shouldn’t disrupt this strategy can be seen in the low anticipated direct yield from the tax. The real tax benefits will, presumably, be felt in the form of higher receipts from the corporation tax.
All of this seems (to me at least) sensible in principle. But in practice I do have one particular concern.
The language used by the draftsman to mark out the ‘bad’ territory on the fiscal map is, as the Treasury Select Committee noted, “long and highly complex… and likely to be a source of uncertainty.” I’d go further. At times it has the precision of those cartographers of old who shrugged their shoulders with a “there be dragons.”
This creates very considerable practical difficulties for technicians, HMRC, taxpayers and the courts. It will also roll back, and substantially, conventional notions of what ‘bad’ corporate tax behaviour looks like. Many ‘vanilla’ transactions – to use a once convenient signifier now regrettably oxidised by Lord Fink – will attract the tax.
Given the speed with which the Google Tax was introduced, and the lack of consultation, can we be certain that all of these consequences are intended? Reader, we can not.
But it’s worse than that. The Google tax does not simply tax those transactions: it applies to them a penal rate.
In other areas of the tax code where we have adopted penal anti-avoidance measures, we have been careful to confine those measures to transactions which are clearly abusive. The draftsman of this regime, on the other hand, recognises quite explicitly (in draft section 19(1)(a), for any technicians reading) that it will penalise not only activity which avoids UK corporation tax – but also, remarkably, activity which attracts it.
It is not easy to discern why this should be so. If we have a corporation tax rate of 20% and an activity attracts that rate, 20% is (an idealist might think) the rate of tax that should be paid. It may be that a different rate of tax is likely to form an important part of our defence to the contention that the tax does not breach our Double Taxation Convention obligations.
So how do we address these problems? HMRC have been out and about in numbers, whispering sweet nothings into the ears of business: of course we will apply these rules sensibly, they say. Now I’m sure those feelings are ardently felt now, but business has seen enough of the world to know that HMRC might see things differently later on, when the Diverted Profits Tax has been put to bed on the statute books, and Margaret Hodge starts demanding fiscal purity. Business can’t take long term decisions based on sweet nothings.
I try to deal in the art of the possible when I write. Life’s too short to spend it scratching your spots. And the Coalition has invested, politically, too much in the Google Tax to pull it for further consultation just before a General Election: Labour would make electoral hay. And for its part, there is no prospect of Labour presenting the Conservatives with a fiscal open goal by blocking the measure (something the Opposition is uniquely able to do in the final Finance Bill before a General Election). In any event, there is (I continue to think) much that is good about the legislation.
The drafting which will go forward as the final text for enactment will be an improvement on the present version (particularly around the rightly criticised notification requirements) but it is not expected to resolve the problems I have identified above. But I would like to suggest – to both parties – one adoptable measure which might have some positive impact.
We should introduce an ‘overriding objective’ at the start of the legislation. We need a measure that tells HMRC, taxpayers, and (most importantly) the courts (who will have to make sense of all of this) what the purpose of the Google Tax is. We need something that will give to those HMRC whisperings a touch of justiciability, a written promise that what was ardently felt the night before will be acted on the morning after.
I’ve suggested something below.
Clause A1
The Overriding Objective
(1) The objective of the Diverted Profits Tax is to prevent the avoidance of corporation tax by companies with business activities in the UK which enter into contrived arrangements to divert profits from the UK.
(2) The overriding objective shall be given effect to by tribunals and courts in interpreting provisions in this Part.
My thanks to the tax department at Freshfields Bruckhaus Deringer for its help with certain aspects of this post. Blunders – in the unlikely event of doubt about this – are mine and mine alone.
Waiting for Godot 
This suggestion would be helpful to narrow the focus of the DPT, but I suspect HMRC might be concerned that it could import a need to show that arrangements are “contrived”. It is notable that the word “contrived” appears all over the publicity, but does not appear anywhere in the draft legislation.
The mismatch conditions in the December draft have no real motive or purpose test – it is just necessary to show that there is an “effective tax mismatch outcome” (the increase in tax for the recipient of a payment is less than 80% of tax reduction for the payer) and “insufficient economic substance” for the recipient (broadly, a transaction is designed to secure a tax reduction, whether or not it achieves other commercial aims; and the tax reduction exceeds other economic benefits of a transaction).
Subjective elements are taken made easier by widespread use of a “reasonable to assume” test, which it will be very hard for a taxpayer to refute.
We know where the BEPS process is going – the OECD will deliver final proposals this September, and a multilateral instrument will be open for signature by the end of 2016. UK legislation already does quite a lot of what the OECD is suggesting as changes for domestic rules. Why do we have to rush into the DPT? The Treasury is booking DPT receipts from 2015-16, but when will the first £1 of DPT actually be paid?
I agree, politically, the DPT will go ahead, but legislating in haste is rarely sensible.
Legislating in haste is rarely sensible… without a doubt. Was it the house of Lords which called fa 2008 a lesson in how not to legislate?
HMRC may fight shy of the word “contrived”, but if so, then they should have more resolve!
As you say, the publicity refers throughout to “contrived” arrangements. What could be clearer than this one-line explanation of the policy objective: “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”?
Parliament is evidently content that the courts will be able to tell whether something is “contrived” or not: the term already appears as a descriptor of potentially “abusive” arrangements for the GAAR. Admittedly “contrived or abnormal steps” are but an indicator, rather than a necessary condition for “abusive” status. But in a world where legislation increasingly requires the courts explicitly to test consistency with the policy objectives (see the GAAR again, and the new regime anti-avoidance rule in the loan relationships and derivative contracts codes), why shouldn’t a version of the simple statement above be included in the legislation?
I would have thought ‘contrived’ would be a word best avoided. Because although the overall arrangement across the multinational enterprise may be ‘contrived’, from the perspective of a single legal entity within it (i.e. the company subject to the DPT), such things are not contrived and have real economic and legal substance.
We have already seen that judges are not, generally, willing to look at economic substance more widely than the steps taken by a single entity (i.e. Ramsay style).
Paul: can you suggest examples of reported cases where the courts have had to consider such indications of policy objectives set out in the legislation? I fear they provide cold comfort for taxpayers, and create an unwelcome obstacle for the tax authorities.
Perhaps everyone being unhappy is a mark of success? That said, it is no worse than the current status of our judicial anti-avoidance doctrines, where it is a 50:50 toss-up whether the judges will redefine the facts realistically and construe the legislation purposively to uphold HMRC’s position, or conclude that the legislation just can’t be made to catch the facts and allow the taxpayer’s appeal.
There have been a few cases on the ‘transactions in land’ anti-avoidance rules – most recently Page v Lowther. As you say, they indicate that an explicit policy objective statement will not carry the taxpayer very far; but something would be better than nothing. And it’s not all bad from HMRC’s perspective: it takes the policy objective they have been given and plugs it directly into the legislation (passing the buck to the courts…).
Thanks; I’d forgotten about Page v Lowther (if, indeed, I ever knew. I’ve forgotten that too). But what I’ve suggested might be said to go further than Page v Lowther: my suggested clause contains not merely (i) a purpose statement but (ii) a requirement to interpret the language of the DPT consistently with that purpose. I would guess that this would pull courts rather more strongly in the direction of achieving that purpose than would be the case without (ii).
Not sure how far we really disagree; it might just be I think we’re a little further along the spectrum than you…
Back to the left margin:
[side note: we used to have s.776 ICTA, nice and simple; now we have s.752 to 772 ITA and s.815 to 833 CTA 2010 … thanks to the tax law doubling project]
So, s.776(1) (as was) stated “This section is enacted to prevent the avoidance of tax by persons concerned with land or the development of land.” That looks like a helpful motive test: if I am not up to no good, I won’t be caught.
But Page v Lowther [1983] cut the legs from under that, because s.776(2) gives a clear and objective list of the sorts of things that count as avoidance, irrespective of the motive of the taxpayer. Cold comfort indeed. Consider (for example) the charity that just wants to get the best price it can for its investment land, when the highest bidder is a developer who for good commercial reasons wants to pay some of the price through “overage”.
So, in the case of the DPT, might the court say that the rest of the DPT legislation clearly sets out the sort of circumstances that count as “contrived”?
Isn’t there a similar preamble to ToAA which has been similarly emasculated by the courts – see Mcguckian
Not content with the Budget being on 18 March, just 12 days before Parliament is dissolved, the Finance Bill will be published on Tuesday 24 March, giving just four or possibly five working days to get it through its Parliamentary stages.
“Legislate in haste” is a massive understatement.
They should just reimpose the annual taxes and come back in May.
Oh, it’s much worse than that. They’ve allocated single digit hours (I think I recall three) to get the Bill through the various stages including Committee…
I don’t see the schedule on the Parliament website but if that is right, it is little short of outrageous. Programme motion, presumably? So much for legislative scrutiny!
Presumably there is cross-party support for whatever gets included in the Bill, but I wonder if any back-benchers will complain about tax legislation being rail-roaded through.
I studied housing law at university in the 1990’s and if every piece of legislation we looked had the sort of statement you are advocating here I would have found it very useful!!
For example I found a lot of seemingly oxymoronic language in the law of assured short hold tenancies.
To me – if I may – you are trying to reify the ‘spirit’ of the law in order to act as a limit on interpretation – or, more pointedly – misinterpretation. This is a simple statement of intent meant to guide the overall use of the legislation through no doubt the clever arguments put forward by very capable and expensive counsellors on behalf of their clients.
Bravo – I like it.
I think its a good idea but mostly because I strongly suspect that modern politicians have become very adept at creating legislation to purposefully be seen to be dealing with issues that in practice they do not really want to deal with – especially (perhaps) after consultation with major market players?
Thanks! I particularly welcome the touch of class – so often lacking in blog and comments sections alike – brought by the word “reify”.
I myself don’t think Govt deliberately enacts loopholes. To believe that you’d have to believe that no Govt ever had wanted to shut down avoidance…
Hmmm – I’m not so sure that government legislation is ever immune to the ideology inherent in the politicians who help to create it – whether this be Tory, Labour or whatever.