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By Ben Stupples
The U.K’s diverted profits tax was dubbed the ‘Google Tax’ even before its introduction in April 2015.
Yet instead of netting foreign tech companies engaged in complex tax planning such as California-based Google Inc., only U.K. multinational companies outside the technology sector have issued warnings so far over the tax hit.
Diageo Plc, the London-based alcoholic beverage company behind Johnny Walker and Smirnoff, said May 10 it will give in to the U.K. tax authority’s demand for 107 million pounds ($137.6 million) in tax and interest—for now.
Two months earlier, London Stock Exchange Group Plc, Europe’s second-largest stock exchange by market capitalization, warned in its full-year results it has made an accounting provision of 4.5 million pounds due to “uncertain tax positions” that included the tax.
The DPT is “causing some concern” among U.K. multinationals, Wendy Nicholls, a London-based tax partner at Grant Thornton, told Bloomberg BNA May 12. “We’ve seen a couple of inquiries that started off just related to transfer pricing, but then they will morph into an inquiry on the DPT.”
The U.K.'s DPT was introduced in 2015 amid conerns that Google parent Alphabet Inc. and other global tech companies were engaging in aggressive tax planning to shift profits to offshore tax havens. It allows the U.K. to charge a 25 percent tax—higher than the current standard U.K. corporate rate of 19 percent—on any profits it decides have been improperly moved out of the U.K.
The London Stock Exchange’s March 3 disclosure raised fears that Her Majesty’s Revenue and Customs, the U.K. tax authority, is using it more aggressively than originally planned. However, while the first part targets the corporate structures of foreign multinationals, the second part of the DPT laws focuses on U.K. multinationals as much as their overseas peers.
“Looking at the big picture, it does potentially include a lot of U.K. multinationals,” Malcolm Joy, a London-based tax partner at BDO, told Bloomberg BNA May 12. “People are fearful of DPT, and part of the reason why is that it’s new, and there’s so much room for interpretation on how it would apply.”
The guidance from Her Majesty’s Revenue and Customs, or HMRC, on the DPT says that “many cases” will relate to the tax planning of non-U.K. companies. Yet it also warns that “wholly domestic structures” may also apply if companies secure a U.K. tax deduction.
While the first part of the DPT laws focus on whether foreign companies are avoiding a taxable U.K. presence, the second part targets arrangements or transactions that lack economic substance. These structures deliberately exploit tax mismatches and can reduce companies’ U.K. and overseas taxes.
Any U.K. multinational or a U.K. subsidiary of a foreign multinational suspected of diverting profits through these mis-matched structures will face a test to prove that the arrangements differ in “some material way” to tax planning that doesn’t attempt to avoid taxes, according to HMRC’s guidance.
The DPT’s tests are “very complex” with parts that are “subjective,” according to PwC. The economic substance test “is of particular concern because it narrowly focuses on activities and functions.”
Relating to the first part of the DPT, the U.K.’s efforts to crack down on foreign companies avoiding a taxable presence—known as a permanent establishment—overlaps with efforts from the OECD and Group of 20 countries to combat tax avoidance strategies used by multinationals.
Because it has the DPT, though, the U.K. has chosen not to adopt the OECD's wider definition of a PE, a move that risked upsetting countries that had already signed up for the policy. Since then, Australia has adopted a similar measure based on the U.K.’s diverted profits tax with a higher penalty rate at 40 percent.
According to BDO’s Joy, former Chancellor George Osborne’s move to announce the U.K.’s DPT in December 2014 “raised eyebrows,” as it went against the collaborative nature of the OECD’s 15-point Action Plan on Base Erosion and Profit Shifting from multinational companies.
U.K. multinationals “will be doing a DPT review to see what arrangements they have and what could be attacked” by HMRC, he told Bloomberg BNA. “If the Revenue comes along and says to a company that they will issue a notice” on DPT, “the cards are obviously stacked in their favor.”
Diageo, the world’s biggest distiller, said May 10 it “does not believe” it falls in scope of the DPT. To challenge HMRC’s assessment, the company will have to pay the assessed total and then work with the tax authority to resolve the issue. The company has made “no provision” for the tax, it added.
A spokeswoman for Diageo declined to comment further on the company’s May 10 statement.
A spokeswoman for the London Stock Exchange declined to comment further or provide an update on the company’s March 3 full-year results.
In a May 12 emailed statement, a spokesman for HMRC said DPT is “designed to encourage large companies to change behaviors that are aimed at minimizing their tax liabilities, or they will face paying tax at a higher tax rate.” The DPT “isn’t targeted at specific sectors or companies.”
“When it first came in, HMRC and the Treasury said we don’t want people to pay and we just want companies to change behavior,” Nicholls told Bloomberg BNA. “Now that seems to have changed.”
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