U.K. Tax Official: Diverted Profits Tax is ‘Game Changer’

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By Ben Stupples

The U.K.’s diverted profits tax on multinational companies has been a “game changer” in forcing them to adopt less aggressive tax planning, according to a senior government official.

The diverted profits tax (DPT) “has caused companies to look again at their transfer pricing structures,” Jim Harra, the U.K. tax agency’s director general for customer strategy, said in a Nov. 6 parliamentary evidence session with the Public Accounts Committee. “It’s really a game changer.”

The comments come amid concern from large businesses that the U.K. tax agency is wielding its DPT more aggressively than expected.

They also follow official data, released July 13, that showed the DPT yielding 281 million pounds ($369 million) in the latest financial year. When it introduced the measure, the government predicted a yield of 275 million pounds for the period.

Offshore Havens

Nicknamed the “Google tax,” the U.K. introduced its DPT in 2015 amid concern that Google parent Alphabet Inc. and other global tech companies were cutting their tax bills by shifting profits to offshore havens. It allows a 25 percent levy—higher than the country’s 19 percent corporate tax rate—on profits that the government decides have improperly avoided U.K. tax.

At the time, the DPT sparked controversy, as the U.K. took individual action amid the OECD’s project to rewrite tax policy for big companies. This year, however, Australia enforced a measure similar to the U.K.’s DPT, with higher penalties.

Multinationals Hit

In the past year, London Stock Exchange Group Plc, U.K.-based drinks company Diageo Plc, and U.S.-based WiFi product-maker Netgear Inc. have all faced DPT charges from the U.K.'s tax agency, Her Majesty’s Revenue and Customs.

Last week, meanwhile, Switzerland-based mining conglomerate Glencore Plc lost its legal battle to challenge HMRC’s decision-making over a 21.3 million-pound DPT charge on its 2015 accounts.

The DPT “is being applied much more widely than was anticipated when the rules were first introduced,” Ian Hyde, a London-based tax partner at global law firm Pinsent Masons, said in an Oct. 24 news release.

“It’s fair to say that the large business sector is unhappy about the level of attention that they’re receiving through the DPT and find that it creates uncertainty,” Harra, who also oversees HMRC’s governance of large tax settlements, said Nov. 6. “But I would say that, over time, as we work through the technical notifications, it will settle down from their point of view.”

Tight Deadlines

Transfer pricing, the price at which different divisions of a business transact with each other, is a key issue for the U.K.’s DPT. Bloomberg Tax revealed last month that the U.K. tax agency is widening its DPT investigations to scrutinize multinational companies’ transfer pricing.

Under the U.K. DPT laws, companies must notify HMRC if they have arrangements that may fall within the penalty’s scope. If HMRC believes a DPT is due, it first issues a preliminary notice. A charging notice then sets out its demands for the tax, giving companies just 30 days to pay.

Since 2015, HMRC has issued 16 preliminary notices and 14 charging notices, according to official data published Sept. 13.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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