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January 23, 2015

Proposed UK Diverted
Profits Tax (Google Tax)

The UK government has proposed its "diverted profits tax" (often referred to as the "Google tax") in order "to counteract contrived arrangements used by large groups (typically multinational enterprises) that result in the erosion of the UK tax base." There follows a simplified overview of the proposed legislation.

  • It's not aimed at Google (alone). All companies selling goods or services into the UK are within the scope of the tax.

    Historically, a non-resident company has only been subject to tax in the UK if it had a permanent establishment there, or was within the scope of withholding taxes on certain types of passive income paid from the UK.

    Under the proposals, a tax charge will arise on any non-UK company:

    • which is supplying goods or services to customer in the UK which involve a person in the UK; and

    • this is in circumstances where it is reasonable to assume that the UK person's activities are intended to ensure that the non-UK company is not subject to tax in the UK; and

    • it is reasonable to assume that one of two conditions relating to a reduction in UK tax are met.

    Note that it just has to be reasonable to assume these things!

    The tax charge can also apply to UK companies which have arrangements with affiliates which lack economic substance and which result in a reduction in UK tax.

  • Companies will have to notify the UK tax authority of a potential tax charge even if there is no reasonable assumption that there is any reduction in UK tax. The notification must be made within three months of the end of the accounting period for which a potential charge could arise.

    A company has to notify HMRC that there might be a diverted profits tax charge if:

    • the company is not UK resident; and

    • someone carries on any activity in the UK related to supplies of goods or services by the company to UK customers; and

    • it does not have a UK permanent establishment relating to that activity.

    This will catch more or less any company doing business with UK customers.

    A UK company will also have to notify HMRC where it does business with non-UK affiliates which could result in a reduction in UK tax which is larger than the corresponding tax charge in its non-UK affiliate.

  • The diverted profits tax charge has to be paid within thirty days of the UK tax authority issuing a charging notice (plus interest, unless an estimated payment was made when the notification was given).

    This will apply even if the charging notice is appealed.

  • It's more than the UK corporation tax charge.

    The charge is 25 percent of the "diverted profits" – the amount which it is reasonable to assume would have been taxed in the UK if the arrangements had been a reasonable alternative. By comparison, the UK corporation tax rate will be 20 percent from 1 April 2015.

  • This tax proposal is going ahead, despite the UK's general election in May 2015 and the ongoing OECD BEPS project.

    The government has confirmed that it intends to pass the legislation for this tax charge before the election, and the opposition has indicated that it will not challenge the introduction of the tax.

    All that said, this is intended more to persuade companies to overhaul their tax arrangements with the UK, rather than to specifically raise substantial amounts of tax.

Available Material

For further information please contact Anne Fairpo (London).

Quick Takes contain short summaries and highlights of recent tax developments often with links to underlying material and are not intended and cannot be construed as legal or tax advice.

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