INTM489948 | Diverted Profits Tax: notification, charging and payment: taxes that can be credited against Diverted Profits Tax

Where a company has paid

• corporation tax; or

• a non-UK tax which corresponds to corporation tax

on profits that are also subject to a DPT charge, a credit for those taxes can be allowed against the DPT liability of that company, or of another company in relation to the same diverted profits, where and to the extent that it is just and reasonable to allow such a credit. But no credit can be given for taxes which are paid after the end of the review period.

Rather than operating through a set of complex rules to try to cover every eventuality the principle behind section 100 is to allow credit to the extent is just and reasonable to do so. For example, it would not be just and reasonable to do so where a company had paid tax on the same profits which was subsequently refunded.

For the purposes of allowing credit, where payments are made subject to withholding tax, the tax withheld is treated as corporation tax paid by the person receiving the payment (provided it has not been refunded, directly or indirectly) and not the person making the payment.

Section 100A (2) and (3) of the DPT legislation sets out that when a company has been charged to DPT in respect of an amount and that amount was not taken into account in an assessment to corporation tax before the end of the review period then the company is not liable to corporation tax in respect of the amount that was charged to DPT. A discovery assessment or determination made by HMRC in relation to profits that have been subject to DPT would not be considered an amount which is taken into account in an assessment to corporation tax which is included in the company’s company tax return.

Example

Company A, a non-resident company supplying services through a UK intermediary in a way designed to avoid the creation of a UK permanent establishment, enters into arrangements that divert profits attributable to the UK activity to a connected company, Company C, resident in a zero tax jurisdiction, by making inflated expense payments to that company through another connected company, Company B, resident in a normal rate jurisdiction with a favourable double tax treaty.

Profits of 100 are diverted from the UK “avoided PE”, but part of these profits “stick” in Company A and Company B. Of the 100, 10 is subject to non-UK tax equivalent to corporation tax at 10% in Company A, and 3 is subject to non-UK tax equivalent to corporation tax at 33% in Company B. These non-UK taxes are paid by Company A and Company B before the end of the review period for the relevant accounting period.

Company A has a DPT liability of 100 x 25% = 25

Company A has paid non-UK taxes on part of the same diverted profit of 10 x 10% = 1

Company B has paid non-UK taxes on part of the same diverted profit of 3 x 33% = 1

The remaining 87 has been diverted to Company C and is untaxed

The maximum just and reasonable credit that can be allowed against Company A’s DPT liability is 2 and Company A must pay DPT of 23.