Yet with guidelines only published two days ahead of the legislation coming into effect, are businesses ready for the new regime? With little time for businesses to contemplate, and indeed understand, their next move, we have highlighted key themes that businesses should consider.
The main area corporates should be aware of when considering the guidance is transfer-pricing.
It is important to be clear on whether you will be taxed under this new regime. Companies can rest assured that, provided there is no re-characterisation of transactions, if a group’s transfer pricing is correct, there will be no DPT charge.
Even if HMRC considers the transfer-pricing is not at arm’s length, there is no DPT charge on the “excessive” amounts if companies adjust transfer pricing in the tax return during the DPT review period.
If a company believes it is in DPT territory but there is no ultimate DPT charge, there is no need to panic. In these instances you are exempt from being required to notify HMRC that you are potentially within the DPT charge. On the other hand, corporates must be careful to notify HMRC in certain circumstances. Even if you ultimately change your model and make a transfer-pricing adjustment so that no DPT charge applies, you will still have to notify HMRC before this change is made if you are currently liable for the tax.
Moreover, if it’s clear that a transaction would not have taken place at all without a tax motive, you will face a DPT charge. For example, if you transfer intangibles from the UK to a tax haven and the transaction appears to be solely for tax avoidance purposes. If there was no tax deduction for ensuing royalty payments in this instance, it is reasonable to assume the transaction would not have occurred at all. It is then necessary to calculate the DPT by reference to the re-characterised transaction which is not to have a royalty payment at all.
HMRC suggests DPT will not fall within the scope of the UK's tax treaties with other countries. Yet some of the UK’s tax treaties apply to corporation tax and similar taxes, which arguably should include DPT. Things are not so straightforward here, as multinational companies would need a provision in UK tax law for the treaties to apply to DPT. An area which is much more likely to see litigation is on EU principles where profits are diverted from the UK to EU tax resident companies.
Finally it is worth noting that one area which HMRC has not addressed is fiscal unities, where multiple companies within the same international group that are resident in one country, pay tax on a consolidated basis. The company paying tax in this country may not necessarily be the one transacting with the relevant company in the UK. This complicates matters.
In the past, fiscal unities have caused difficulties in other areas of corporation tax, including controlled foreign companies and double tax relief. There are complications around allocating which members of the consolidated group pay what tax. HMRC has missed an opportunity to explain better how this will work in practice with their recent guidelines for DPT.
The new changes may have been introduced quickly following the publication of the guidance but there is still time for companies to assess their situation. Companies should consider whether they will fall within the DPT regime and there is a host of support available from HMRC, particularly in this initial period of change, for companies seeking certainty of treatment.
Once companies have a clear understanding of where they are placed, they will be able to consider restructuring their operations to comply. This is likely to save tax for multinational companies in the long run as the 25% rate that applies to DPT is greater than the 20% rate that applies to corporation tax.
Kevin Hindley, managing director at Alvarez & Marsal and Claire Lambert, senior director at Alvarez & Marsal